\
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 December 31, 2022September 30, 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)
________________________________________________________________ | | | | | | | | | | | |
PENNSYLVANIAPennsylvania | | 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 | Nasdaq Global Select Market |
Series A Mandatory Convertible PreferredNew York Stock no par value | IIVIP | Nasdaq Global Select MarketExchange |
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 February 6,November 3, 2023, 138,962,661151,482,324 shares of Common Stock, no par value, of the registrant were outstanding.
COHERENT CORP.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Coherent Corp. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000) | | | December 31, 2022 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
Assets | Assets | | | | Assets | | | |
Current Assets | Current Assets | | Current Assets | |
Cash, cash equivalents, and restricted cash | Cash, cash equivalents, and restricted cash | $ | 913,286 | | | $ | 2,582,371 | | Cash, cash equivalents, and restricted cash | $ | 941,081 | | | $ | 833,333 | |
Accounts receivable - less allowance for doubtful accounts of $7,843 at December 31, 2022 and $4,206 at June 30, 2022 | 956,674 | | | 700,331 | | |
Accounts receivable - less allowance for doubtful accounts of $7,598 at September 30, 2023 and $8,005 at June 30, 2023 | | Accounts receivable - less allowance for doubtful accounts of $7,598 at September 30, 2023 and $8,005 at June 30, 2023 | 795,730 | | | 901,531 | |
Inventories | Inventories | 1,367,375 | | | 902,559 | | Inventories | 1,280,755 | | | 1,272,333 | |
Prepaid and refundable income taxes | Prepaid and refundable income taxes | 25,266 | | | 19,585 | | Prepaid and refundable income taxes | 19,745 | | | 28,271 | |
Prepaid and other current assets | Prepaid and other current assets | 153,799 | | | 100,346 | | Prepaid and other current assets | 206,420 | | | 216,530 | |
Total Current Assets | Total Current Assets | 3,416,400 | | | 4,305,192 | | Total Current Assets | 3,243,731 | | | 3,251,998 | |
Property, plant & equipment, net | Property, plant & equipment, net | 1,875,558 | | | 1,363,195 | | Property, plant & equipment, net | 1,775,384 | | | 1,782,035 | |
Goodwill | Goodwill | 4,426,841 | | | 1,285,759 | | Goodwill | 4,460,144 | | | 4,512,700 | |
Other intangible assets, net | Other intangible assets, net | 4,028,533 | | | 635,404 | | Other intangible assets, net | 3,695,578 | | | 3,814,684 | |
| Deferred income taxes | Deferred income taxes | 30,860 | | | 31,714 | | Deferred income taxes | 39,042 | | | 37,748 | |
Other assets | Other assets | 330,702 | | | 223,582 | | Other assets | 307,419 | | | 311,968 | |
Total Assets | Total Assets | $ | 14,108,894 | | | $ | 7,844,846 | | Total Assets | $ | 13,521,298 | | | $ | 13,711,133 | |
Liabilities, Mezzanine Equity and Shareholders' Equity | Liabilities, Mezzanine Equity and Shareholders' Equity | | | | Liabilities, Mezzanine Equity and Shareholders' Equity | | | |
Current Liabilities | Current Liabilities | | Current Liabilities | |
Current portion of long-term debt | Current portion of long-term debt | $ | 74,927 | | | $ | 403,212 | | Current portion of long-term debt | $ | 74,730 | | | $ | 74,836 | |
Accounts payable | Accounts payable | 428,959 | | | 434,917 | | Accounts payable | 449,134 | | | 405,308 | |
Accrued compensation and benefits | Accrued compensation and benefits | 208,474 | | | 172,109 | | Accrued compensation and benefits | 183,046 | | | 175,564 | |
Operating lease current liabilities | Operating lease current liabilities | 39,101 | | | 27,574 | | Operating lease current liabilities | 37,203 | | | 38,271 | |
Accrued income taxes payable | Accrued income taxes payable | 75,424 | | | 29,317 | | Accrued income taxes payable | 58,233 | | | 74,488 | |
Other accrued liabilities | Other accrued liabilities | 306,031 | | | 199,830 | | Other accrued liabilities | 280,790 | | | 310,281 | |
Total Current Liabilities | Total Current Liabilities | 1,132,916 | | | 1,266,959 | | Total Current Liabilities | 1,083,136 | | | 1,078,748 | |
Long-term debt | Long-term debt | 4,422,817 | | | 1,897,214 | | Long-term debt | 4,219,366 | | | 4,234,962 | |
Deferred income taxes | Deferred income taxes | 825,904 | | | 77,259 | | Deferred income taxes | 742,514 | | | 780,307 | |
Operating lease liabilities | Operating lease liabilities | 146,537 | | | 110,214 | | Operating lease liabilities | 136,558 | | | 140,748 | |
Other liabilities | Other liabilities | 219,459 | | | 109,922 | | Other liabilities | 236,150 | | | 247,402 | |
Total Liabilities | Total Liabilities | 6,747,633 | | | 3,461,568 | | Total Liabilities | 6,417,724 | | | 6,482,167 | |
Mezzanine Equity | Mezzanine Equity | | Mezzanine Equity | |
Series B redeemable convertible preferred stock, no par value, 5% cumulative; issued - 215,000 and 75,000 shares at December 31, 2022 and June 30, 2022, respectively; redemption value - $2,253,479 and $798,181, respectively | 2,182,471 | | | 766,803 | | |
Series B redeemable convertible preferred stock, no par value, 5% cumulative; issued - 215,000 shares at September 30, 2023 and June 30, 2023; redemption value - $2,338,840 and $2,309,966, respectively | | Series B redeemable convertible preferred stock, no par value, 5% cumulative; issued - 215,000 shares at September 30, 2023 and June 30, 2023; redemption value - $2,338,840 and $2,309,966, respectively | 2,271,588 | | | 2,241,415 | |
Shareholders' Equity | Shareholders' Equity | | Shareholders' Equity | |
Series A preferred stock, no par value, 6% cumulative; issued - 2,300,000 shares at December 31, 2022 and June 30, 2022 | 445,319 | | | 445,319 | | |
Common stock, no par value; authorized - 300,000,000 shares; issued - 153,869,047 shares at December 31, 2022; 120,923,171 shares at June 30, 2022 | 3,704,259 | | | 2,064,552 | | |
Accumulated other comprehensive income (loss) | 126,130 | | | (2,167) | | |
Series A preferred stock, no par value, 6% cumulative; issued - 0 and 2,300,000 shares at September 30, 2023 and June 30, 2023, respectively | | Series A preferred stock, no par value, 6% cumulative; issued - 0 and 2,300,000 shares at September 30, 2023 and June 30, 2023, respectively | — | | | 445,319 | |
Common stock, no par value; authorized - 300,000,000 shares; issued - 166,764,680 shares at September 30, 2023; 154,719,413 shares at June 30, 2023 | | Common stock, no par value; authorized - 300,000,000 shares; issued - 166,764,680 shares at September 30, 2023; 154,719,413 shares at June 30, 2023 | 4,287,278 | | | 3,781,211 | |
Accumulated other comprehensive income | | Accumulated other comprehensive income | 5,052 | | | 109,726 | |
Retained earnings | Retained earnings | 1,192,847 | | | 1,348,125 | | Retained earnings | 846,709 | | | 944,416 | |
| | 5,468,555 | | | 3,855,829 | | | 5,139,039 | | | 5,280,672 | |
Treasury stock, at cost; 15,067,831 shares at December 31, 2022 and 13,972,758 shares at June 30, 2022 | (289,765) | | | (239,354) | | |
Treasury stock, at cost; 15,501,849 shares at September 30, 2023 and 15,135,711 shares at June 30, 2023 | | Treasury stock, at cost; 15,501,849 shares at September 30, 2023 and 15,135,711 shares at June 30, 2023 | (307,053) | | | (293,121) | |
Total Shareholders' Equity | Total Shareholders' Equity | 5,178,790 | | | 3,616,475 | | Total Shareholders' Equity | 4,831,986 | | | 4,987,551 | |
Total Liabilities, Mezzanine Equity and Shareholders' Equity | Total Liabilities, Mezzanine Equity and Shareholders' Equity | $ | 14,108,894 | | | $ | 7,844,846 | | Total Liabilities, Mezzanine Equity and Shareholders' Equity | $ | 13,521,298 | | | $ | 13,711,133 | |
See notesNotes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
($000, except per share data)
| | | Three Months Ended December 31, | | Three Months Ended September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Revenues | Revenues | $ | 1,370,285 | | | $ | 806,819 | | Revenues | $ | 1,053,083 | | | $ | 1,344,570 | |
| Costs, Expenses, and Other Expense (Income) | Costs, Expenses, and Other Expense (Income) | | Costs, Expenses, and Other Expense (Income) | |
Cost of goods sold | Cost of goods sold | 959,097 | | | 495,652 | | Cost of goods sold | 746,188 | | | 900,996 | |
Internal research and development | Internal research and development | 128,791 | | | 95,328 | | Internal research and development | 113,488 | | | 121,084 | |
Selling, general and administrative | Selling, general and administrative | 274,151 | | | 117,617 | | Selling, general and administrative | 211,697 | | | 280,014 | |
Restructuring charges | | Restructuring charges | 3,018 | | | — | |
Interest expense | Interest expense | 70,904 | | | 17,062 | | Interest expense | 73,258 | | | 61,889 | |
Other expense (income), net | Other expense (income), net | 3,696 | | | 1,806 | | Other expense (income), net | (6,269) | | | 31,605 | |
Total Costs, Expenses, & Other Expense (Income) | 1,436,639 | | | 727,465 | | |
Total Costs, Expenses, & Other Expense | | Total Costs, Expenses, & Other Expense | 1,141,380 | | | 1,395,588 | |
| Earnings (Loss) Before Income Taxes | (66,354) | | | 79,354 | | |
Loss Before Income Taxes | | Loss Before Income Taxes | (88,297) | | | (51,018) | |
| Income Tax Expense (Benefit) | (21,282) | | | 11,697 | | |
Income Tax Benefit | | Income Tax Benefit | (20,763) | | | (12,320) | |
| Net Earnings (Loss) | $ | (45,072) | | | $ | 67,657 | | |
| | Net Loss | | Net Loss | $ | (67,534) | | | $ | (38,698) | |
| Less: Dividends on Preferred Stock | Less: Dividends on Preferred Stock | $ | 35,889 | | | $ | 16,703 | | Less: Dividends on Preferred Stock | $ | 30,173 | | | $ | 35,577 | |
Net Earnings (Loss) available to the Common Shareholders | $ | (80,961) | | | $ | 50,954 | | |
Net Loss available to the Common Shareholders | | Net Loss available to the Common Shareholders | $ | (97,707) | | | $ | (74,275) | |
| Basic Earnings (Loss) Per Share | $ | (0.58) | | | $ | 0.48 | | |
Basic Loss Per Share | | Basic Loss Per Share | $ | (0.65) | | | $ | (0.56) | |
| Diluted Earnings (Loss) Per Share | $ | (0.58) | | | $ | 0.44 | | |
Diluted Loss Per Share | | Diluted Loss Per Share | $ | (0.65) | | | $ | (0.56) | |
See notesNotes to condensed consolidated financial statements.
Condensed Consolidated Financial Statements.
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
($000, except per share data)
| | | | | | | | | | | |
| Six Months Ended December 31, |
| 2022 | | 2021 |
Revenues | $ | 2,714,855 | | | $ | 1,601,930 | |
| | | |
Costs, Expenses, and Other Expense (Income) | | | |
Cost of goods sold | 1,860,093 | | | 984,139 | |
Internal research and development | 249,875 | | | 184,294 | |
Selling, general and administrative | 554,165 | | | 240,225 | |
Interest expense | 132,793 | | | 29,253 | |
Other expense (income), net | 35,301 | | | (5,776) | |
Total Costs, Expenses, & Other Expense (Income) | 2,832,227 | | | 1,432,135 | |
| | | |
Earnings (Loss) Before Income Taxes | (117,372) | | | 169,795 | |
| | | |
Income Tax Expense (Benefit) | (33,602) | | | 27,674 | |
| | | |
Net Earnings (Loss) | $ | (83,770) | | | $ | 142,121 | |
| | | |
| | | |
| | | |
| | | |
Less: Dividends on Preferred Stock | $ | 71,466 | | | $ | 33,785 | |
Net Earnings (Loss) available to the Common Shareholders | $ | (155,236) | | | $ | 108,336 | |
| | | |
Basic Earnings (Loss) Per Share | $ | (1.14) | | | $ | 1.02 | |
| | | |
Diluted Earnings (Loss) Per Share | $ | (1.14) | | | $ | 0.94 | |
See notes to condensed consolidated financial statements.
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
($000)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, | |
| 2022 | | 2021 | | 2022 | | 2021 | | | |
Net earnings (loss) | $ | (45,072) | | | $ | 67,657 | | | $ | (83,770) | | | $ | 142,121 | | | | |
Other comprehensive income (loss): | | | | | | | | | | |
Foreign currency translation adjustments | 232,035 | | | 2,593 | | | 99,664 | | | (11,788) | | | | |
Change in fair value of interest rate swap, net of taxes of $(92) and $3,360 for the three and six months ended December 31, 2022, respectively, and $2,714 and $3,448 for the three and six months ended December 31, 2021, respectively | (334) | | | 9,910 | | | 12,270 | | | 12,591 | | | | |
Change in fair value of interest rate cap, net of taxes of $(1,208) and $4,232 for the three and six months ended December 31, 2022, respectively, and $0 for the three and six months ended December 31, 2021 | (4,543) | | | — | | | 15,921 | | | — | | | | |
Pension adjustment, net of taxes of $0 for the three and six months ended December 31, 2022, and $0 for the three and six months ended December 31, 2021 | 403 | | | — | | | 442 | | | — | | | | |
Comprehensive income (loss) | $ | 182,489 | | | $ | 80,160 | | | $ | 44,527 | | | $ | 142,924 | | | | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | | | 2023 | | 2022 |
Net loss | | | | | $ | (67,534) | | | $ | (38,698) | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | | | | | (107,903) | | | (132,371) | |
Change in fair value of interest rate swap, net of taxes of $(1,277) and $3,452 for the three months ended September 30, 2023 and September 30, 2022, respectively | | | | | (4,662) | | | 12,604 | |
Change in fair value of interest rate cap, net of taxes of $2,145 and $9,258 for the three months ended September 30, 2023 and September 30, 2022, respectively | | | | | 7,600 | | | 20,464 | |
Pension adjustment, net of taxes of $0 for the three months ended September 30, 2023 and September 30, 2022 | | | | | 291 | | | 39 | |
Comprehensive loss | | | | | $ | (172,208) | | | $ | (137,962) | |
See notesNotes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
Coherent Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000) | | | | | | | | | | | |
| Six Months Ended December 31, |
| 2022 | | 2021 |
Cash Flows from Operating Activities | | | |
Net earnings (loss) | $ | (83,770) | | | $ | 142,121 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation | 129,227 | | | 100,392 | |
Amortization | 187,968 | | | 40,327 | |
Share-based compensation expense | 88,952 | | | 40,709 | |
Amortization of discount on convertible debt and debt issuance costs | 8,276 | | | 4,557 | |
| | | |
Unrealized losses (gains) on foreign currency remeasurements and transactions | 3,988 | | | (1,880) | |
Loss from equity investments | (740) | | | (1,393) | |
Deferred income taxes | (86,232) | | | 3,218 | |
| | | |
Loss on debt extinguishment | 6,835 | | | — | |
Increase (decrease) in cash from changes in (net of effect of acquisitions): | | | |
Accounts receivable | 12,647 | | | 55,548 | |
Inventories | 96,084 | | | (123,748) | |
Accounts payable | (82,042) | | | 12,752 | |
Contract liabilities | 12,078 | | | 25,096 | |
Income taxes | 24,098 | | | 2,598 | |
Accrued compensation and benefits | (24,231) | | | (35,288) | |
| | | |
Other operating net assets (liabilities) | 6,930 | | | (24,924) | |
Net cash provided by operating activities | 300,068 | | | 240,085 | |
Cash Flows from Investing Activities | | | |
Additions to property, plant & equipment | (245,854) | | | (101,689) | |
Purchases of businesses, net of cash acquired | (5,488,556) | | | — | |
| | | |
| | | |
| | | |
| | | |
Other investing activities | (2,261) | | | — | |
Net cash used in investing activities | (5,736,671) | | | (101,689) | |
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 | (1,065,217) | | | (31,025) | |
Payments on convertible notes | (3,561) | | | — | |
Payments on borrowings under Revolving Credit Facility | (65,000) | | | — | |
Debt issuance costs | (126,516) | | | (5,639) | |
Equity issuance costs | (42,000) | | | — | |
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 7,749 | | | 8,370 | |
| | | |
Payments in satisfaction of employees' minimum tax obligations | (50,516) | | | (13,823) | |
Payment of dividends | (13,800) | | | (20,708) | |
Other financing activities | (582) | | | (1,415) | |
Net cash provided by financing activities | 3,755,557 | | | 910,872 | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 16,769 | | | 8,556 | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | (1,664,277) | | | 1,057,824 | |
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 | $ | 918,094 | | | $ | 2,649,716 | |
Cash paid for interest | $ | 127,039 | | | $ | 16,104 | |
Cash paid for income taxes | $ | 31,853 | | | $ | 22,933 | |
Additions to property, plant & equipment included in accounts payable | $ | 47,060 | | | $ | 64,098 | |
See notes to condensed consolidated financial statements. | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Cash Flows from Operating Activities | | | |
Net loss | $ | (67,534) | | | $ | (38,698) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation | 65,698 | | | 64,669 | |
Amortization | 72,661 | | | 82,617 | |
Share-based compensation expense | 45,957 | | | 54,185 | |
Amortization of discount on convertible debt and debt issuance costs | 3,567 | | | 4,466 | |
Non-cash restructuring charges | 319 | | | — | |
Gains on disposal of property, plant and equipment | (101) | | | — | |
Unrealized gains on foreign currency remeasurements and transactions | (14,462) | | | (22,273) | |
Loss (earnings) from equity investments | 243 | | | (613) | |
Deferred income taxes | (39,627) | | | (14,479) | |
| | | |
Loss on debt extinguishment | — | | | 6,835 | |
Increase (decrease) in cash from changes in (net of effect of acquisitions): | | | |
Accounts receivable | 116,295 | | | (1,326) | |
Inventories | (16,709) | | | 7,514 | |
Accounts payable | 41,985 | | | (42,865) | |
Contract liabilities | (9,769) | | | 44,419 | |
Income taxes | (2,806) | | | (8,633) | |
Accrued compensation and benefits | 7,482 | | | (44,910) | |
Other operating net liabilities | (4,396) | | | (11,330) | |
Net cash provided by operating activities | 198,803 | | | 79,577 | |
Cash Flows from Investing Activities | | | |
Additions to property, plant & equipment | (62,197) | | | (138,990) | |
Purchases of businesses, net of cash acquired | — | | | (5,488,556) | |
| | | |
| | | |
| | | |
| | | |
Other investing activities | (1,978) | | | (711) | |
Net cash used in investing activities | (64,175) | | | (5,628,257) | |
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 | |
| | | |
| | | |
Payments on existing debt | (18,683) | | | (996,429) | |
| | | |
Payments on convertible notes | — | | | (3,561) | |
Debt issuance costs | — | | | (126,516) | |
Equity issuance costs | — | | | (42,000) | |
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 14,947 | | | 7,425 | |
| | | |
Payments in satisfaction of employees' minimum tax obligations | (13,876) | | | (40,885) | |
| | | |
Other financing activities | (268) | | | (292) | |
Net cash provided by (used in) financing activities | (17,880) | | | 3,912,742 | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (9,458) | | | (42,273) | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | 107,290 | | | (1,678,211) | |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 837,566 | | | 2,582,371 | |
Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | 944,856 | | | $ | 904,160 | |
| | | | | | | | | | | |
Supplemental Information | | | |
Cash paid for interest | $ | 67,320 | | | $ | 45,963 | |
Cash paid for income taxes | $ | 14,810 | | | $ | 14,920 | |
Additions to property, plant & equipment included in accounts payable | $ | 39,264 | | | $ | 71,035 | |
Non-Cash Investing and Financing Activities | | | |
Conversion of Series A preferred stock to common stock | $ | 445,319 | | | $ | — | |
See Notes to Condensed Consolidated Financial Statements.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheetsCondensed Consolidated Balance Sheets that sum to the total of the same amounts shown in the condensed consolidated statementsCondensed Consolidated Statements of cash flows.Cash Flows. Restricted cash, non-current is included in the condensed consolidated balance sheetsCondensed Consolidated Balance Sheets under 'Other Assets'. At December 31, 2022,September 30, 2023, we had $21$10 million of restricted cash.
| | | Six Months Ended December 31, | | Three Months Ended September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash, cash equivalents, and restricted cash | Cash, cash equivalents, and restricted cash | $ | 913,286 | | | $ | 2,649,716 | | Cash, cash equivalents, and restricted cash | $ | 941,081 | | | $ | 898,501 | |
Restricted cash, non-current | Restricted cash, non-current | 4,808 | | | — | | Restricted cash, non-current | 3,775 | | | 5,659 | |
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 918,094 | | | $ | 2,649,716 | | |
Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | | Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 944,856 | | | $ | 904,160 | |
See notes to condensed consolidated financial statements.
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 | | 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 | | 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 | | |
Balance - June 30, 2023 | | Balance - June 30, 2023 | | 154,721 | | | $ | 3,781,211 | | | 2,300 | | | $ | 445,319 | | | $ | 109,726 | | | $ | 944,416 | | | (15,137) | | | $ | (293,121) | | | $ | 4,987,551 | | | 215 | | | $ | 2,241,415 | |
Share-based and deferred compensation activities | Share-based and deferred compensation activities | | 2,398 | | | 61,431 | | | — | | | — | | | — | | | — | | | (830) | | | (40,860) | | | 20,571 | | | — | | | — | | Share-based and deferred compensation activities | | 1,804 | | | 60,748 | | | — | | | — | | | — | | | — | | | (366) | | | (13,932) | | | 46,816 | | | — | | | — | |
Coherent Acquisition | | 22,588 | | | 1,207,591 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,207,591 | | | — | | | — | | |
Convertible debt conversions | | 7,181 | | | 337,940 | | | — | | | — | | | — | | | — | | | — | | | — | | | 337,940 | | | — | | | — | | |
Conversion of Series A preferred stock | | Conversion of Series A preferred stock | | 10,240 | | | 445,319 | | | (2,300) | | | (445,319) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net Loss | Net Loss | | — | | | — | | | — | | | — | | | — | | | (38,698) | | | — | | | — | | | (38,698) | | | — | | | — | | Net Loss | | — | | | — | | | — | | | — | | | — | | | (67,534) | | | — | | | — | | | (67,534) | | | — | | | — | |
Foreign currency translation adjustments | Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | (132,371) | | | — | | | — | | | — | | | (132,371) | | | — | | | — | | Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | (107,903) | | | — | | | — | | | — | | | (107,903) | | | — | | | — | |
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 | | |
Change in fair value of interest rate swap, net of taxes of $(1,277) | | Change in fair value of interest rate swap, net of taxes of $(1,277) | | — | | | — | | | — | | | — | | | (4,662) | | | — | | | — | | | — | | | (4,662) | | | — | | | — | |
Change in fair value of interest rate cap, net of taxes of $2,145 | | Change in fair value of interest rate cap, net of taxes of $2,145 | | — | | | — | | | — | | | — | | | 7,600 | | | — | | | — | | | — | | | 7,600 | | | — | | | — | |
Pension adjustment, net of taxes of $0 | Pension adjustment, net of taxes of $0 | | — | | | — | | | — | | | — | | | 39 | | | — | | | — | | | — | | | 39 | | | — | | | — | | Pension adjustment, net of taxes of $0 | | — | | | — | | | — | | | — | | | 291 | | | — | | | — | | | — | | | 291 | | | — | | | — | |
Dividends | Dividends | | — | | | — | | | — | | | — | | | — | | | (35,577) | | | — | | | — | | | (35,577) | | | — | | | 28,677 | | Dividends | | — | | | — | | | — | | | — | | | — | | | (30,173) | | | — | | | — | | | (30,173) | | | — | | | 30,173 | |
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 | | |
Balance - September 30, 2023 | | Balance - September 30, 2023 | | 166,765 | | | $ | 4,287,278 | | | — | | | $ | — | | | $ | 5,052 | | | $ | 846,709 | | | (15,503) | | | $ | (307,053) | | | $ | 4,831,986 | | | 215 | | | $ | 2,271,588 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 $9,258 | | — | | | — | | | — | | | — | | | 20,464 | | | — | | | — | | | — | | | 20,464 | | | — | | | — | |
Pension adjustment, net of taxes $0 | | — | | | — | | | — | | | — | | | 39 | | | — | | | — | | | — | | | 39 | | | — | | | — | |
Issuance of Series B shares | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 140 | | | 1,358,000 | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | — | | | — | | | — | | | — | | | — | | | (2,082) | | | — | | | — | | | (2,082) | | | — | | | 10,182 | | |
Adjustment for ASU 2020-06 | | — | | | (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 | | | — | | | — | | |
Pension adjustment, net of taxes | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
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 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements.
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 six months ended December 31,September 30, 2023 and 2022 and 2021 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, 2022.18, 2023. The condensed consolidated results of operations for the three and six months ended December 31, 2022September 30, 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, 20222023 was derived from the Company’s audited consolidated financial statements.
The Company is closely monitoring the ongoing impact of the COVID-19 pandemic and related factors on all aspects of our business, including the impact to our employees, suppliers and customers, as well as the impact to our supply chain and the countries and markets in which Coherent operates. In particular, the Company is continuing to focus intensely on mitigating any resulting adverse impacts on our foreign and domestic operations, starting by prioritizing the safety of our employees, suppliers and customers.
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, theFinancial 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, which 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 is in the process of evaluating the impact of the pronouncement on its consolidated financial statements relative to our floating rate debt, our interest rate swapreviewed all recently issued accounting pronouncements and our interest rate cap.
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's common stock, no par value (“Coherent Common Stock”).
Following the completion of the Legacy Coherent acquisition, the Company announced a new brand identity, including a corporate name change to Coherent Corp. (Nasdaq: 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 additional information 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 $10 million and $72 million of acquisition related costs in the three and six months ended December 31, 2022, 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 aggregateconcluded that they 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 finalizedeither not applicable 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. We expect to finalize pushdown accounting as soon as practicable, but no later than twelve months from the Closing Date.
Our preliminary allocation of the 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 |
| | 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 | | | | | 66,581 | | | 563,926 | |
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 | | | | | 64,989 | | | 1,276,922 | |
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 | | | | | (910,633) | | | 3,095,094 | |
Total Assets | | $ | 8,171,183 | | | | | $ | 249,813 | | | $ | 8,420,996 | |
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 | | | | | 249,674 | | | 813,498 | |
Operating lease liabilities | | 43,313 | | | | | — | | | 43,313 | |
Other liabilities (vi) | | 97,438 | | | | | (563) | | | 96,875 | |
Total Liabilities | | $ | 1,075,400 | | | | | $ | 249,813 | | | $ | 1,325,213 | |
| | | | | | | | |
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 six months ended December 31, 2022 includes cost of goods sold of approximately $112 million and $158 million, respectively, related to the increased basis in the preliminary fair value compared to the carrying value. The $112 million cost of goods sold recognized in the three months ended December 31, 2022 includes an increase of $33 million due to the measurement period adjustment which relates to a previous reporting period. The costs are being amortized over the expected period during which the acquired inventory is sold, the six months ended December 31, 2022, 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 December 31, 2022, to $7 million, $0 million and $813 million, respectively, as a result of measurement period adjustments.
(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 six months ended December 31, 2022 was $6 million and $43 million, respectively, and included a reduction in the current quarter of $16 million due to the measurement period adjustment which relates to a previous reporting period. Intangibles amortization recorded in selling, general and administrative expenses for the three and six months ended December 31, 2022 was $80 million and $105 million, respectively, and included an increase in the current quarter of $27 million due to the measurement period adjustment which relates to a previous reporting period.
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 $1 million of decreases 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 December 31, 2022 were $379 million and $171 million, respectively. Revenues and net loss for the Lasers segment for the six months ended December 31, 2022 were $772 million and $299 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 formahave a significant impact on its unaudited condensed consolidated 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 following supplemental pro forma information presents the combined results of operations for the three and six months ended December 31, 2022 and December 31, 2021, 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 December 31, 2022 | | Three Months Ended December 31, 2021 |
Revenue | $ | 1,370,285 | | | $ | 1,191,326 | |
Net Earnings (Loss) | 101,349 | | | (65,115) | |
| | | | | | | | | | | |
| Six Months Ended December 31, 2022 | | Six Months Ended December 31, 2021 |
Revenue | $ | 2,714,855 | | | $ | 2,378,111 | |
Net Earnings (Loss) | 211,420 | | | (241,375) | |
statements.Note 4.3. Revenue from Contracts with Customers
The Company believesWe believe 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 details.
The following tables summarize disaggregated revenue for the three and six months ended December 31, 2022 and 2021by market ($000):
| | | Three Months Ended December 31, 2022 | | Six Months Ended December 31, 2022 | | Three Months Ended September 30, 2023 | |
| | Networking | | Materials | | Lasers | | Total | | Networking | | Materials | | Lasers | | Total | | Networking | | Materials | | Lasers | | Total | |
Industrial | Industrial | $ | 15,926 | | | $ | 149,454 | | | $ | 284,851 | | | $ | 450,231 | | | 34,619 | | | 293,537 | | | 583,092 | | | 911,248 | | Industrial | $ | 15,965 | | | $ | 133,203 | | | $ | 255,166 | | | $ | 404,334 | | |
Communications | Communications | 579,393 | | | 20,662 | | | — | | | 600,055 | | | 1,142,914 | | | 42,539 | | | — | | | 1,185,453 | | Communications | 446,274 | | | 13,252 | | | — | | | 459,526 | | |
Electronics | Electronics | 3,003 | | | 196,952 | | | — | | | 199,955 | | | 6,825 | | | 373,574 | | | — | | | 380,399 | | Electronics | 1,724 | | | 88,065 | | | — | | | 89,789 | | |
Instrumentation | Instrumentation | 10,358 | | | 15,328 | | | 94,358 | | | 120,044 | | | 20,870 | | | 28,390 | | | 188,495 | | | 237,755 | | Instrumentation | 8,886 | | | 10,120 | | | 80,428 | | | 99,434 | | |
Total Revenues | Total Revenues | $ | 608,680 | | | $ | 382,396 | | | $ | 379,209 | | | $ | 1,370,285 | | | $ | 1,205,228 | | | $ | 738,040 | | | $ | 771,587 | | | $ | 2,714,855 | | Total Revenues | $ | 472,849 | | | $ | 244,640 | | | $ | 335,594 | | | $ | 1,053,083 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
| Networking | | Materials | | Total | | Networking | | Materials | | Total |
Industrial | $ | 19,996 | | | $ | 166,864 | | | $ | 186,860 | | | 41,725 | | | 321,748 | | | 363,473 | |
Communications | 483,640 | | | 23,562 | | | 507,202 | | | 982,271 | | | 43,437 | | | 1,025,708 | |
Electronics | 3,360 | | | 83,423 | | | 86,783 | | | 6,328 | | | 160,443 | | | 166,771 | |
Instrumentation | 9,545 | | | 16,429 | | | 25,974 | | | 17,230 | | | 28,748 | | | 45,978 | |
Total Revenues | $ | 516,541 | | | $ | 290,278 | | | $ | 806,819 | | | $ | 1,047,554 | | | $ | 554,376 | | | $ | 1,601,930 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | |
| Networking | | Materials | | Lasers | | Total | | | | | | | | |
Industrial | $ | 18,693 | | | $ | 144,083 | | | $ | 298,241 | | | $ | 461,017 | | | | | | | | | |
Communications | 563,521 | | | 21,877 | | | — | | | 585,398 | | | | | | | | | |
Electronics | 3,822 | | | 176,622 | | | — | | | 180,444 | | | | | | | | | |
Instrumentation | 10,512 | | | 13,062 | | | 94,137 | | | 117,711 | | | | | | | | | |
Total Revenues | $ | 596,548 | | | $ | 355,644 | | | $ | 392,378 | | | $ | 1,344,570 | | | | | | | | | |
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 hasobligations have been performed.satisfied. During the sixthree months ended December 31, 2022, the CompanySeptember 30, 2023, we recognized revenue of $9$35 million related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2022. The Company2023. We had $181$137 million of contract liabilities recorded in the Condensed Consolidated Balance Sheet as of December 31, 2022. Contract liabilities acquired from the Merger totaled $77 million.September 30, 2023. As of December 31, 2022, $114September 30, 2023, $94 million of deferred revenue is included within other accrued liabilities, and $67$43 million is included within other liabilities on the Condensed Consolidated Balance Sheet.
Note 5.4. Inventories
The components of inventories were as follows ($000): | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
Raw materials | $ | 486,649 | | | $ | 318,758 | |
Work in progress | 608,777 | | | 408,405 | |
Finished goods | 271,949 | | | 175,396 | |
| $ | 1,367,375 | | | $ | 902,559 | |
During the six months ended December 31, 2022, 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 will be amortized to cost of goods sold over the expected period during which the acquired inventory is sold. Refer to Note 3. Coherent Acquisition for additional 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. | | | | | | | | | | | |
| September 30, 2023 | | June 30, 2023 |
Raw materials | $ | 447,512 | | | $ | 462,436 | |
Work in progress | 576,202 | | | 549,992 | |
Finished goods | 257,041 | | | 259,905 | |
Total inventories | $ | 1,280,755 | | | $ | 1,272,333 | |
Note 6.5. Property, Plant and Equipment
Property, plant and equipment consists of the following ($000): | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
Land and improvements | $ | 73,887 | | | $ | 19,368 | |
Buildings and improvements | 646,228 | | | 415,530 | |
Machinery and equipment | 1,960,765 | | | 1,651,762 | |
Construction in progress | 315,965 | | | 271,605 | |
Finance lease right-of-use asset | 24,999 | | | 25,000 | |
| 3,021,844 | | | 2,383,265 | |
Less accumulated depreciation | (1,146,286) | | | (1,020,070) | |
| $ | 1,875,558 | | | $ | 1,363,195 | |
During the six months ended December 31, 2022, 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 additional information.
| | | | | | | | | | | |
| September 30, 2023 | | June 30, 2023 |
Land and improvements | $ | 68,957 | | | $ | 69,639 | |
Buildings and improvements | 777,613 | | | 780,204 | |
Machinery and equipment | 1,895,208 | | | 1,879,136 | |
Construction in progress | 322,783 | | | 287,990 | |
Finance lease right-of-use asset | 25,000 | | | 25,000 | |
| 3,089,561 | | | 3,041,969 | |
Less accumulated depreciation | (1,314,177) | | | (1,259,934) | |
Property, plant, and equipment, net | $ | 1,775,384 | | | $ | 1,782,035 | |
Note 7.6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill were as follows ($000):
| | | Six Months Ended December 31, 2022 | | Three Months Ended September 30, 2023 |
| | Networking | | Materials | | Lasers | | Total | | Networking | | Materials | | Lasers | | Total |
Balance-beginning of period | Balance-beginning of period | $ | 1,048,743 | | | $ | 237,016 | | | $ | — | | | $ | 1,285,759 | | Balance-beginning of period | $ | 1,036,204 | | | $ | 247,695 | | | $ | 3,228,801 | | | $ | 4,512,700 | |
Transfer between segments1 | (35,466) | | | 35,466 | | | — | | | — | | |
Goodwill acquired | — | | | — | | | 3,095,094 | | | 3,095,094 | | |
| | Foreign currency translation | Foreign currency translation | (1,633) | | | 786 | | | 46,835 | | | 45,988 | | Foreign currency translation | (553) | | | (646) | | | (51,357) | | | (52,556) | |
Balance-end of period | Balance-end of period | $ | 1,011,644 | | | $ | 273,268 | | | $ | 3,141,929 | | | $ | 4,426,841 | | Balance-end of period | $ | 1,035,651 | | | $ | 247,049 | | | $ | 3,177,444 | | | $ | 4,460,144 | |
1
Refer to Note 13. Segment Reporting
We test goodwill for information regardingimpairment annually during the segment transferfourth quarter, or more frequently when events or changes in circumstances indicate that fair value is below carrying value.
As part of our annual assessment in the fourth quarter of fiscal 2023, we determined that the estimated fair value of our Lasers reporting unit exceeded its carrying value by approximately 10%. As of September 30, 2023, the carrying amount of goodwill between segments.within this reporting unit was $3.2 billion. The reporting unit’s estimated fair value is sensitive to changes in the significant assumptions used in the analysis including forecasted revenues and related gross margins. If the reporting unit does not perform to expected levels and realize the expected benefit from the multi-year synergy and site consolidation plans, or there are adverse changes in certain macroeconomic factors, the related goodwill may be at risk for impairment in the future.
The gross carrying amount and accumulated amortization of the Company’sour intangible assets other than goodwill as of December 31, 2022 and June 30, 2022 were as follows ($000):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Technology | $ | 1,658,893 | | | $ | (206,723) | | | $ | 1,452,170 | | | $ | 473,845 | | | $ | (144,409) | | | $ | 329,436 | |
Trade Names | 452,419 | | | (7,866) | | | 444,553 | | | 22,536 | | | (7,454) | | | 15,082 | |
Customer Lists | 2,341,807 | | | (255,047) | | | 2,086,760 | | | 464,880 | | | (173,994) | | | 290,886 | |
Backlog and Other | 90,366 | | | (45,316) | | | 45,050 | | | 1,563 | | | (1,563) | | | — | |
Total | $ | 4,543,485 | | | $ | (514,952) | | | $ | 4,028,533 | | | $ | 962,824 | | | $ | (327,420) | | | $ | 635,404 | |
Refer to Note 3. Coherent Acquisition for additional information on intangibles acquired in the six months ended December 31, 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | June 30, 2023 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Technology | $ | 1,644,917 | | | $ | (300,638) | | | $ | 1,344,279 | | | $ | 1,661,263 | | | $ | (270,786) | | | $ | 1,390,477 | |
Trade Names | 438,471 | | | (8,471) | | | 430,000 | | | 438,470 | | | (8,279) | | | 430,191 | |
Customer Lists | 2,298,091 | | | (376,792) | | | 1,921,299 | | | 2,333,360 | | | (339,344) | | | 1,994,016 | |
| | | | | | | | | | | |
Total | $ | 4,381,479 | | | $ | (685,901) | | | $ | 3,695,578 | | | $ | 4,433,093 | | | $ | (618,409) | | | $ | 3,814,684 | |
Note 8.7. Debt
The components of debt as of the dates indicated were as follows ($000): | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
New Term A Facility, interest at LIBOR, as defined, plus 2.00% | $ | 839,375 | | | $ | — | |
| | | |
Debt issuance costs, New Term A Facility and New Revolving Credit Facility | (20,453) | | | — | |
New Term B Facility, interest at LIBOR, as defined, plus 2.75% | 2,743,000 | | | — | |
Debt issuance costs, New Term B Facility | (72,802) | | | — | |
1.30% Term loan due 2024 | 163 | | | — | |
1.00% State of Connecticut term loan due 2023 | 2,336 | | | — | |
Facility construction loan in Germany due 2030 | 23,433 | | | — | |
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 | (7,308) | | | (7,703) | |
0.25% Convertible Senior Notes | — | | | 341,501 | |
Debt issuance costs and discount, 0.25% Convertible Senior Notes | — | | | (339) | |
| | | |
Total debt | 4,497,744 | | | 2,300,426 | |
Current portion of long-term debt | (74,927) | | | (403,212) | |
Long-term debt, less current portion | $ | 4,422,817 | | | $ | 1,897,214 | |
| | | | | | | | | | | |
| September 30, 2023 | | June 30, 2023 |
Term A Facility, interest at adjusted SOFR, as defined, plus 1.750% | $ | 807,500 | | | $ | 818,125 | |
| | | |
Debt issuance costs, Term A Facility and Revolving Credit Facility | (17,008) | | | (18,149) | |
Term B Facility, interest at adjusted SOFR, as defined, plus 2.750% | 2,559,626 | | | 2,566,625 | |
Debt issuance costs, Term B Facility | (61,779) | | | (63,977) | |
1.30% Term loan | 1,324 | | | 1,697 | |
| | | |
Facility construction loan in Germany | 21,069 | | | 22,340 | |
| | | |
| | | |
| | | |
| | | |
| | | |
5.000% Senior Notes | 990,000 | | | 990,000 | |
Debt issuance costs and discount, Senior Notes | (6,636) | | | (6,863) | |
| | | |
Total debt | 4,294,096 | | | 4,309,798 | |
Current portion of long-term debt | (74,730) | | | (74,836) | |
Long-term debt, less current portion | $ | 4,219,366 | | | $ | 4,234,962 | |
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(the “Term A Facility”), with an aggregate principal amount of $850 million, a term loan B credit facility (“the Term(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. TheOn 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 LIBORan adjusted SOFR rate subject to a 0.00%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 LIBORadjusted SOFR plus 2.00%1.75% as of December 31, 2022. TheSeptember 30, 2023. As amended, the Term B Facility bears interest at LIBORan 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 and the benefit of $61the interest rate cap and swap, of $60 million and $114$48 million in the three and six months ended December 31,September 30, 2023 and September 30, 2022, respectively, which is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss). On July 1, 2023, our interest rate cap became effective, which together with our interest rate swap, reduced interest expense by $11 million and $2 million during the three months ended September 30, 2023 and September 30, 2022, respectively. The amortization of debt issuance costs included in interest expense was $3 million and $4 million in the three months ended September 30, 2023 and September 30, 2022, respectively. Debt issuance costs are presented as contra-debt within the long-term debt caption in the Condensed Consolidated Balance Sheets.
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 all 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 six months ended December 31, 2022. 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 six months ended December 31, 2022 totaled $5 million and $9 million, respectively, and is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss). As of December 31, 2022,September 30, 2023, the Company was in compliance with all covenants under the New TermSenior Credit Facilities.
Prior Senior Credit Facilities
Through June 30, 2022, the Company had senior credit facilities (the “Prior Senior Credit Facilities”Agreement”) 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.
thereunder. 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 sixthree months ended December 31,September 30, 2022.
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 to complete its acquisition of Coherent, Inc. (the “Merger”), 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“Bridge Loan Commitment"Commitment”). As a result of the issuance and sale of the Senior Notes, the Bridge Loan Commitment was terminated. During the sixthree months ended December 31,September 30, 2022, 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 StatementsStatement of Earnings (Loss). There will be no additional expense related to the Bridge Loan Commitment going forward.
Debt Assumed through Acquisition
The CompanyWe assumed the remaining balances of three term loans with the closing of the Merger. The aggregate principal amount outstanding is $26$22 million as of December 31, 2022.September 30, 2023. The termsterm loans assumed consisted of the following: (i) 1.3% Term Loan due 2024, (ii) 1.0% State of Connecticut Term Loan due 2023 (and repaid prior to June 30, 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"“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.
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 $25$13 million in the three and six months ended December 31,September 30, 2023 and September 30, 2022, 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 December 31, 2022,September 30, 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 six months ended December 31, 2022 and December 31, 2021.
Aggregate Availability
The Company had aggregate availability of $350$346 million under its Revolving Credit Facility as of December 31, 2022.September 30, 2023.
Note 9.8. Income Taxes
The Company’s year-to-date effective income tax rate was 24% at December 31, 2022 was 29% compared to an effective tax rate of 16% for the same period in 2021.both September 30, 2023 and September 30, 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 December 31, 2022September 30, 2023 and June 30, 2022,2023, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $71 million and $37 million, respectively.$115 million. 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, $32$91 million of the gross unrecognized tax benefits at December 31, 2022September 30, 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 December 31, 2022September 30, 2023 and June 30, 2022, respectively. 2023.
Fiscal years 20192018 and 2020 to 20222023 remain open to examination by the Internal Revenue Service, fiscal years 20182019 to 20222023 remain open to examination by certain state jurisdictions, and fiscal years 2011 to 20222023 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for certain subsidiary companies in CaliforniaPennsylvania for the yearsyear ended SeptemberJune 30, 2018 through September 30, 2019; Colorado for the years ended September 30, 2018 through September 30, 2021;2020; Vietnam for the years ended SeptemberJune 30, 20182017 through September 30, 2021; India for the year ended March 31, 2016; Singapore for the year ended September 30, 2020; Korea for the year ended September 30, 2021; Italy for the year ended September 30, 2019; Spain for the years ended September 30, 2020 through September 30, 2022; and Germany for the years ended September 30, 2011 through June 30, 2012 through September 30, 2020.2022. The Company believes its income tax reserves for these tax matters are adequate.
Note 10.9. 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’sour Condensed Consolidated Balance Sheets. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.
The Company’sOur 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 considerswe consider 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 accountsWe account for non-lease components, such as common area maintenance, as a component of the lease, and includes it in the initial measurement of our leased assets and corresponding liabilities. The Company’sOur lease terms and conditions may include options to extend or terminate. An option is recognized when it is reasonably certain that Coherentwe will exercise that option.
The Company’sOur 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.
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 December 31, 2022 | | Six Months Ended December 31, 2022 |
Finance lease cost | | | |
Amortization of right-of-use assets | $ | 417 | | | $ | 833 | |
Interest on lease liabilities | 284 | | | 572 | |
Total finance lease cost | 701 | | | 1,405 | |
Operating lease cost | 13,045 | | | 26,311 | |
| | | |
Total lease cost | $ | 13,746 | | | $ | 27,716 | |
| | | |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | |
Operating cash flows from finance leases | $ | 284 | | | $ | 572 | |
Operating cash flows from operating leases | 12,354 | | | 25,052 | |
Financing cash flows from finance leases | 346 | | | 688 | |
| | | |
Weighted-Average Remaining Lease Term (in Years) | | | |
Finance leases | 9.0 | | |
Operating leases | 6.8 | | |
| | | |
Weighted-Average Discount Rate | | | |
Finance leases | 5.6 | % | | |
Operating leases | 5.3 | % | | |
| | | Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 | | Three Months Ended September 30, 2023 | | | Three Months Ended September 30, 2022 |
Finance Lease Cost | | | | |
Finance lease cost | | Finance lease cost | | | | |
Amortization of right-of-use assets | Amortization of right-of-use assets | $ | 418 | | | $ | 838 | | Amortization of right-of-use assets | $ | 417 | | | | $ | 417 | |
Interest on lease liabilities | Interest on lease liabilities | 302 | | | 609 | | Interest on lease liabilities | 268 | | | | 288 | |
Total finance lease cost | Total finance lease cost | $ | 720 | | | $ | 1,447 | | Total finance lease cost | 685 | | | | 705 | |
Operating lease cost | Operating lease cost | 9,176 | | | 18,395 | | Operating lease cost | 12,937 | | | | 12,848 | |
Sublease income | 143 | | | 507 | | |
Total lease cost | Total lease cost | $ | 9,753 | | | $ | 19,335 | | Total lease cost | $ | 13,622 | | | | $ | 13,553 | |
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities | Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | |
Operating cash flows from finance leases | Operating cash flows from finance leases | $ | 302 | | | $ | 609 | | Operating cash flows from finance leases | $ | 268 | | | | $ | 288 | |
Operating cash flows from operating leases | Operating cash flows from operating leases | 8,850 | | | 17,665 | | Operating cash flows from operating leases | 12,268 | | | | 12,679 | |
Financing cash flows from finance leases | Financing cash flows from finance leases | 312 | | | 622 | | Financing cash flows from finance leases | 379 | | | | 341 | |
| Weighted-Average Remaining Lease Term (in Years) | | Weighted-Average Remaining Lease Term (in Years) | | | |
Finance leases | | Finance leases | 8.3 | | | 9.3 |
Operating leases | | Operating leases | 7.2 | | | 6.2 |
| Weighted-Average Discount Rate | | Weighted-Average Discount Rate | | | |
Finance leases | | Finance leases | 5.6 | % | | | 5.6 | % |
Operating leases | | Operating leases | 5.8 | % | | | 5.3 | % |
Note 11.10. Equity and Redeemable Preferred Stock
As of September 30, 2023, the Company’s amended and restated articles of incorporation authorize our board of directors, without the approval of our shareholders, to issue 5 million shares of our preferred stock. As of September 30, 2023, 2.3 million shares of mandatory preferred convertible shares have been authorized, none are outstanding; 75,000 shares of Series B-1 convertible preferred stock, no par value, have been issued and are outstanding; and 140,000 shares of Series B-2 convertible preferred stock, no par value, have been issued and are outstanding.
Mandatory Convertible Preferred Stock
In July 2020, the Company issued 2.3 million shares of 6.00% Series A Mandatory Convertible Preferred no par value per share (“Mandatory Convertible Preferred Stock”).Stock.
Unless previously converted, eachAll 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.
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, intowere converted to 10,240,290 shares of CoherentCompany Common Stock on July 3, 2023, at thea conversion rate determined in accordance with the termsratio of the4.4523, and no shares of Mandatory Convertible Preferred Stock during the period beginning on,are currently issued 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 outstanding.
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 $14 million of preferred stock dividends for the three and six months ended December 31, 2022, respectively, associated with the Mandatory Convertible Preferred Stock. The Company recognized $7 million and $14 million of preferred stock dividends for the three and six months ended December 31, 2021, respectively, associated with the Mandatory Convertible Preferred Stock. The preferred dividends wereare presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of December 31, 2022.Sheets.
The following table presents dividends per share and dividends recognized for the three and six months ended December 31, 2022 and December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Dividends per share | $ | 3.00 | | | $ | 3.00 | | | $ | 6.00 | | | $ | 6.00 | |
Mandatory Convertible Preferred Stock dividends ($000) | 6,900 | | | 6,900 | | | 13,800 | | | 13,800 | |
recognized: | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2023 | | 2022 | | | | |
Dividends per share | $ | — | | | $ | 3.00 | | | | | |
Mandatory Convertible Preferred Stock dividends ($000) | — | | | 6,900 | | | | | |
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"Stock”)., for $10,000 per share, resulting in an aggregate purchase price of $750 million.
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.
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 (Loss) 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”)., for $10,000 per share and an aggregate purchase price of $1.4 billion.
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.
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 (Loss) Available to Common Shareholders.
The Company recognized $29 million and $58 million of preferredPreferred stock dividends related to the Series B Preferred Stock for the three and six months ended December 31, 2022, respectively. The Company recognized $10 million and $20 million of preferred stock dividends related to the Series B Preferred Stock for the three and six months ended December 31, 2021, respectively. The preferred stock dividends wereare presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of December 31, 2022.Sheets.
The following table presents dividends per share and dividends recognized for the three and six months ended December 31, 2022 and December 31, 2021:recognized:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | | Three Months Ended September 30, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | |
Dividends per share | Dividends per share | $ | 134.83 | | | $ | 130.71 | | | $ | 268.21 | | | $ | 266.47 | | | Dividends per share | $ | 140 | | | $ | 133 | | |
Dividends ($000) | Dividends ($000) | 27,821 | | | 9,307 | | | 55,298 | | | 19,011 | | | Dividends ($000) | 28,874 | | | 27,477 | | |
Deemed dividends ($000) | Deemed dividends ($000) | 1,168 | | | 496 | | | 2,368 | | | 974 | | | Deemed dividends ($000) | 1,299 | | | 1,200 | | |
Note 12.11. 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 six months ended December 31,September 30, 2023 and September 30, 2022, as the Company was in a net loss position, there were no dilution was included in the calculation of earnings (loss) per share.dilutive shares.
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 six months ended December 31, 2022,September 30, 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 Series A Mandatory Convertible Preferred Stock and the Series B Convertible Preferred Stock (under the If-Converted method), as their effects were anti-dilutive.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations for the three and six months ended December 31, 2022 and December 31, 2021 ($000)(000, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | | 2021 | | 2022 | | 2021 |
Numerator | | | | | | | | |
Net earnings (loss) | $ | (45,072) | | | | $ | 67,657 | | | $ | (83,770) | | | $ | 142,121 | |
Deduct Series A preferred stock dividends | (6,900) | | | | (6,900) | | | (13,800) | | | (13,800) | |
Deduct Series B dividends and deemed dividends | (28,989) | | | | (9,803) | | | (57,666) | | | (19,985) | |
Basic earnings (loss) available to common shareholders | $ | (80,961) | | | | $ | 50,954 | | | $ | (155,236) | | | $ | 108,336 | |
| | | | | | | | |
Effect of dilutive securities: | | | | | | | | |
Add back interest on Convertible Notes (net of tax) | $ | — | | | | $ | 577 | | | $ | — | | | $ | 1,079 | |
| | | | | | | | |
Diluted earnings (loss) available to common shareholders | $ | (80,961) | | | | $ | 51,531 | | | $ | (155,236) | | | $ | 109,415 | |
| | | | | | | | |
Denominator | | | | | | | | |
Weighted average shares | 138,623 | | | | 106,158 | | | 135,951 | | | 105,960 | |
Effect of dilutive securities: | | | | | | | | |
Common stock equivalents | — | | | | 2,952 | | | — | | | 2,854 | |
Convertible Notes | — | | | | 7,330 | | | — | | | 7,330 | |
| | | | | | | | |
| | | | | | | | |
Diluted weighted average common shares | 138,623 | | | | 116,440 | | | 135,951 | | | 116,144 | |
| | | | | | | | |
Basic earnings (loss) per common share | $ | (0.58) | | | | $ | 0.48 | | | $ | (1.14) | | | $ | 1.02 | |
| | | | | | | | |
Diluted earnings (loss) per common share | $ | (0.58) | | | | $ | 0.44 | | | $ | (1.14) | | | $ | 0.94 | |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2023 | | 2022 | | | | |
Numerator | | | | | | | |
Net loss | $ | (67,534) | | | $ | (38,698) | | | | | |
Deduct Series A preferred stock dividends | — | | | (6,900) | | | | | |
Deduct Series B dividends and deemed dividends | (30,173) | | | (28,677) | | | | | |
Basic loss available to common shareholders | $ | (97,707) | | | $ | (74,275) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted loss available to common shareholders | $ | (97,707) | | | $ | (74,275) | | | | | |
| | | | | | | |
Denominator | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted weighted average common shares | 150,328 | | | 133,280 | | | | | |
| | | | | | | |
Basic loss per common share | $ | (0.65) | | | $ | (0.56) | | | | | |
| | | | | | | |
Diluted loss per common share | $ | (0.65) | | | $ | (0.56) | | | | | |
The following table presents potential shares of Coherent Common Stockcommon stock excluded from the calculation of diluted net earnings (loss) per share, as their effect would have been anti-dilutive for the three and six months ended December 31, 2022 and December 31, 2021 ($000)(000):
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended September 30, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Common stock equivalents | Common stock equivalents | 2,827 | | | 2 | | | 2,295 | | | 16 | | Common stock equivalents | 2,337 | | | 1,762 | | |
Convertible Notes | Convertible Notes | — | | | — | | | 2,237 | | | — | | Convertible Notes | — | | | 4,474 | | |
Series A Mandatory Convertible Preferred Stock | Series A Mandatory Convertible Preferred Stock | 10,697 | | | 8,915 | | | 10,149 | | | 8,915 | | Series A Mandatory Convertible Preferred Stock | — | | | 9,604 | | |
| Series B Convertible Preferred Stock | Series B Convertible Preferred Stock | 26,184 | | | 9,105 | | | 26,022 | | | 9,049 | | Series B Convertible Preferred Stock | 27,176 | | | 25,861 | | |
Total anti-dilutive shares | Total anti-dilutive shares | 39,708 | | | 18,022 | | | 40,703 | | | 17,980 | | Total anti-dilutive shares | 29,513 | | | 41,701 | | |
Note 13.12. Segment Reporting
The Company reports its business segments using the “management approach” model for segment reporting. This means that the Company determines itswe determine our 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 itsWe report our 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.
The Company’sOur chief operating decision maker receives and reviews financial information based on these three segments. The Company evaluatesWe evaluate 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’sour corporate expenses and assets are allocated to the segments. The expenses associated with the Legacy Coherent acquisition for the three and six months ended December 31, 2022 are wholly allocated to the Lasers segment. For the three and six months ended December 31, 2021, the expenses associated with the acquisition
The following tables summarize selected financial information of the Company’sour operations by segment ($000):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| Networking | | Materials | | Lasers | | Unallocated & Other | | Total |
Revenues | $ | 472,849 | | | $ | 244,640 | | | $ | 335,594 | | | $ | — | | | $ | 1,053,083 | |
Inter-segment revenues | 12,887 | | | 87,742 | | | 639 | | | (101,268) | | | — | |
Operating income (loss) | 16,317 | | | 7,182 | | | (44,807) | | | — | | | (21,308) | |
Interest expense | — | | | — | | | — | | | — | | | (73,258) | |
Other income (expense), net | — | | | — | | | — | | | — | | | 6,269 | |
Income tax benefit | — | | | — | | | — | | | — | | | 20,763 | |
Net loss | — | | | — | | | — | | | — | | | (67,534) | |
Depreciation and amortization | 40,436 | | | 25,287 | | | 72,636 | | | — | | | 138,359 | |
Expenditures for property, plant & equipment | 17,493 | | | 40,512 | | | 4,192 | | | — | | | 62,197 | |
Segment assets | 3,329,101 | | | 2,100,915 | | | 8,091,282 | | | — | | | 13,521,298 | |
Goodwill | 1,035,651 | | | 247,049 | | | 3,177,444 | | | — | | | 4,460,144 | |
| | | Three Months Ended December 31, 2022 | | Three Months Ended September 30, 2022 |
| | Networking | | Materials | | Lasers | | Unallocated & Other | | Total | | Networking | | Materials | | Lasers | | Unallocated & Other | | Total |
Revenues | Revenues | $ | 608,680 | | | $ | 382,396 | | | $ | 379,209 | | | $ | — | | | $ | 1,370,285 | | Revenues | $ | 596,548 | | | $ | 355,644 | | | $ | 392,378 | | | $ | — | | | $ | 1,344,570 | |
Inter-segment revenues | Inter-segment revenues | 17,630 | | | 85,844 | | | 917 | | | (104,391) | | | — | | Inter-segment revenues | 18,740 | | | 95,054 | | | 166 | | | (113,960) | | | — | |
Operating income (loss) | Operating income (loss) | 90,039 | | | 81,472 | | | (163,265) | | | — | | | 8,246 | | Operating income (loss) | 90,982 | | | 75,335 | | | (123,841) | | | — | | | 42,476 | |
Interest expense | Interest expense | — | | | — | | | — | | | — | | | (70,904) | | Interest expense | — | | | — | | | — | | | — | | | (61,889) | |
Other income (expense), net | Other income (expense), net | — | | | — | | | — | | | — | | | (3,696) | | Other income (expense), net | — | | | — | | | — | | | — | | | (31,605) | |
Income taxes | — | | | — | | | — | | | — | | | 21,282 | | |
Income tax benefit | | Income tax benefit | — | | | — | | | — | | | — | | | 12,320 | |
Net loss | Net loss | — | | | — | | | — | | | — | | | (45,072) | | Net loss | — | | | — | | | — | | | — | | | (38,698) | |
Depreciation and amortization | Depreciation and amortization | 40,241 | | | 28,035 | | | 101,633 | | | — | | | 169,909 | | Depreciation and amortization | 42,774 | | | 26,527 | | | 77,985 | | | — | | | 147,286 | |
Expenditures for property, plant & equipment | Expenditures for property, plant & equipment | 30,383 | | | 61,474 | | | 15,007 | | | — | | | 106,864 | | Expenditures for property, plant & equipment | 43,830 | | | 74,898 | | | 20,262 | | | — | | | 138,990 | |
Segment assets | 3,518,319 | | | 2,248,600 | | | 8,341,975 | | | — | | | 14,108,894 | | |
Goodwill | 1,011,644 | | | 273,268 | | | 3,141,929 | | | — | | | 4,426,841 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 |
| Networking | | Materials | | | | Unallocated & Other | | Total |
Revenues | $ | 516,541 | | | $ | 290,278 | | | | | $ | — | | | $ | 806,819 | |
Inter-segment revenues | 24,552 | | | 77,094 | | | | | (101,646) | | | — | |
Operating income (loss) | 50,424 | | | 56,538 | | | | | (8,740) | | | 98,222 | |
Interest expense | — | | | — | | | | | — | | | (17,062) | |
Other income (expense), net | — | | | — | | | | | — | | | (1,806) | |
Income taxes | — | | | — | | | | | — | | | (11,697) | |
Net earnings | — | | | — | | | | | — | | | 67,657 | |
Depreciation and amortization | 42,545 | | | 28,481 | | | | | — | | | 71,026 | |
Expenditures for property, plant & equipment | 10,620 | | | 43,502 | | | | | — | | | 54,122 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2022 |
| Networking | | Materials | | Lasers | | Unallocated & Other | | Total |
Revenues | $ | 1,205,228 | | | $ | 738,040 | | | $ | 771,587 | | | $ | — | | | $ | 2,714,855 | |
Inter-segment revenues | 36,370 | | | 180,898 | | | 1,083 | | | (218,351) | | | — | |
Operating income (loss) | 181,021 | | | 156,807 | | | (287,106) | | | — | | | 50,722 | |
Interest expense | — | | | — | | | — | | | — | | | (132,793) | |
Other income (expense), net | — | | | — | | | — | | | — | | | (35,301) | |
Income taxes | — | | | — | | | — | | | — | | | 33,602 | |
Net earnings | — | | | — | | | — | | | — | | | (83,770) | |
Depreciation and amortization | 83,015 | | | 54,562 | | | 179,618 | | | — | | | 317,195 | |
Expenditures for property, plant & equipment | 74,213 | | | 136,372 | | | 35,269 | | | — | | | 245,854 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2021 |
| Networking | | Materials | | | | Unallocated & Other | | Total |
Revenues | $ | 1,047,554 | | | $ | 554,376 | | | | | $ | — | | | $ | 1,601,930 | |
Inter-segment revenues | 56,721 | | | 139,857 | | | | | (196,578) | | | — | |
Operating income (loss) | 109,863 | | | 103,316 | | | | | (19,907) | | | 193,272 | |
Interest expense | — | | | — | | | | | — | | | (29,253) | |
Other income (expense), net | — | | | — | | | | | — | | | 5,776 | |
Income taxes | — | | | — | | | | | — | | | (27,674) | |
Net earnings | — | | | — | | | | | — | | | 142,121 | |
Depreciation and amortization | 84,379 | | | 56,340 | | | | | — | | | 140,719 | |
Expenditures for property, plant & equipment | 35,416 | | | 66,273 | | | | | — | | | 101,689 | |
| | | | | | | | | |
| | | | | | | | | |
Note 14.13. 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"“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 December 31, | | Six Months Ended December 31, | | Three Months Ended September 30, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Stock Options and Cash-Based Stock Appreciation Rights | Stock Options and Cash-Based Stock Appreciation Rights | | $ | 601 | | | $ | 1,924 | | | $ | 160 | | | $ | 2,472 | | Stock Options and Cash-Based Stock Appreciation Rights | | $ | (1,057) | | | $ | (441) | | |
Restricted Share Awards and Cash-Based Restricted Share Unit Awards | Restricted Share Awards and Cash-Based Restricted Share Unit Awards | | 28,818 | | | 13,760 | | | 73,470 | | | 31,132 | | Restricted Share Awards and Cash-Based Restricted Share Unit Awards | | 31,065 | | | 44,652 | | |
Performance Share Awards and Cash-Based Performance Share Unit Awards | Performance Share Awards and Cash-Based Performance Share Unit Awards | | 3,242 | | | 2,058 | | | 10,331 | | | 5,766 | | Performance Share Awards and Cash-Based Performance Share Unit Awards | | 10,845 | | | 7,089 | | |
Employee Stock Purchase Plan | | Employee Stock Purchase Plan | | 3,671 | | | 1,903 | | |
| | | $ | 44,524 | | | $ | 53,203 | | |
| $ | 32,661 | | | $ | 17,742 | | | $ | 83,961 | | | $ | 39,370 | | |
Note 15.14. 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 estimatesWe estimate fair value of itsour 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– Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.
•Level 2 –Valuation– 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– 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 CompanyWe entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to itsour variable interest rate debt by effectively converting it to a fixed interest rate. The Company receivesThrough February 28, 2023, we received payments based on the one-month LIBOR and makesmade payments based on a fixed rate of 1.52%. The Company receivesWe received payments with a floor of 0.00%. The interest rate swap agreement hashad 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. The CompanyOn March 20, 2023, we amended our $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 Amendment No. 1 to the Credit Agreement. See Note 7. Debt for further information. Under the Amended Swap, we receive payments based on the one-month SOFR and make payments based on a fixed rate of 1.42%. We receive payments with a floor of 0.10%. We designated this instrument as a cash flow hedge, and deemed the hedge relationship effective at inception of the contract and the amended contract.
The fair value of the interest rate swap of $43$31 million and $37 million is recognized in the Condensed Consolidated Balance Sheet within prepaid and other current assets and other assets as of December 31, 2022.September 30, 2023 and June 30, 2023, respectively. Changes in fair value are recorded within accumulated other comprehensive lossincome (loss) on the Condensed Consolidated Balance SheetSheets 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 Companywe entered into an interest rate cap ("the Cap"(the “Cap”) with an effective date of July 1, 2023. On March 20, 2023, we amended the Cap to replace the current reference rate (LIBOR) with SOFR, to be consistent with Amendment No. 1 to the Credit Agreement. See Note 7. Debt for further information. The Cap manages the Company'sour exposure to interest rate movements on a portion of the Company'sour floating rate debt. The Cap provides the Companyus with the right to receive payment if one-month LIBORSOFR exceeds 1.85%1.92%. Beginning in July 2023, the Company will beginwe began 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 $38$57 million and $46 million is recognized in the Condensed Consolidated Balance Sheet within prepaid and other current assets and other assets as of December 31, 2022.September 30, 2023 and June 30, 2023, respectively.
The Cap, as amended, is designed to mirror the terms of the Credit Agreement as of the effective date, or its direct replacement. The Companyamended on March 31, 2023. We designated the Cap as a cash flow hedge of the variability of the LIBOR-basedSOFR 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 beare 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 fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The Cap is classified as a Level 2 item within the fair value hierarchy.
The CompanyWe estimated the fair value of the Senior Notes based on quoted market prices as of the last trading day prior to December 31, 2022;September 30, 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 CompanyWe 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 8.7. Debt for details on the Company’sour debt facilities.
The fair value and carrying value of the Convertible Notes and Senior Notes were as followedfollows ($000):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Convertible Notes | $ | — | | | $ | — | | | $ | 382,601 | | | $ | 341,162 | |
Senior Notes | $ | 857,142 | | | $ | 982,692 | | | $ | 865,527 | | | $ | 982,297 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | June 30, 2023 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| | | | | | | |
Senior Notes | $ | 859,726 | | | $ | 983,364 | | | $ | 895,950 | | | $ | 983,137 | |
The fair values of cashCash 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’svalue. Our borrowings, including itsour lease obligations and the Senior Notes, are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value.
The Company,We, from time to time, purchasespurchase foreign currency forward exchange contracts that permit itus to transactsell 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'sour earnings, on the revaluation of itsour aggregate net assets or liabilities in respective currencies, to foreign currency risk. At December 31, 2022, the CompanySeptember 30, 2023, we 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 gainslosses related to these contracts for the three and six months ended December 31,September 30, 2023 and September 30, 2022 were $28$11 million and $5$23 million, respectively, and were included in other expense (income), net in the Condensed Consolidated Statements of Earnings (Loss).
Note 16.15. Share Repurchase Programs
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of Coherent Common Stockits 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 CompanyWe did not repurchase any shares pursuant to this Program during the quarter ended December 31, 2022.September 30, 2023. As of December 31, 2022, the Company hasSeptember 30, 2023, we have cumulatively purchased 1,416,587 shares of Coherent Common Stockcommon stock pursuant to the Program for approximately $22 million. The dollar value of shares as of December 31, 2022 that may yet be purchased under the Program is approximately $28 million.
Note 17.16. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss) (“AOCI”) by component, net of tax, for the sixthree months ended December 31, 2022September 30, 2023 were as follows ($000): | | | Foreign Currency Translation Adjustment | | Interest Rate Swap | | Interest Rate Cap | | Defined Benefit Pension Plan | | Total Accumulated Other Comprehensive Income | | Foreign Currency Translation Adjustment | | Interest Rate Swap | | Interest Rate Cap | | Defined Benefit Pension Plan | | Total Accumulated Other Comprehensive Income (Loss) |
AOCI - June 30, 2022 | $ | (34,572) | | | $ | 11,735 | | | $ | 14,306 | | | $ | 6,364 | | | $ | (2,167) | | |
AOCI - June 30, 2023 | | AOCI - June 30, 2023 | $ | 53,355 | | | $ | 19,484 | | | $ | 36,628 | | | $ | 259 | | | $ | 109,726 | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | 99,664 | | | 17,973 | | | 15,921 | | | 442 | | | 134,000 | | Other comprehensive income (loss) before reclassifications | (107,903) | | | 3,314 | | | 10,636 | | | 291 | | | (93,663) | |
Amounts reclassified from AOCI | Amounts reclassified from AOCI | — | | | (5,703) | | | — | | | — | | | (5,703) | | Amounts reclassified from AOCI | — | | | (7,976) | | | (3,036) | | | — | | | (11,011) | |
Net current-period other comprehensive income (loss) | Net current-period other comprehensive income (loss) | 99,664 | | | 12,270 | | | 15,921 | | | 442 | | | 128,297 | | Net current-period other comprehensive income (loss) | (107,903) | | | (4,662) | | | 7,600 | | | 291 | | | (104,674) | |
AOCI - December 31, 2022 | $ | 65,092 | | | $ | 24,005 | | | $ | 30,227 | | | $ | 6,806 | | | $ | 126,130 | | |
AOCI - September 30, 2023 | | AOCI - September 30, 2023 | $ | (54,548) | | | $ | 14,822 | | | $ | 44,228 | | | $ | 550 | | | $ | 5,052 | |
Note 17. Restructuring and Synergy and Site Consolidation Plans
Restructuring Plan
On May 23, 2023, the Board of Directors approved the Company���s May 2023 Restructuring Plan which includes site consolidations, facilities moves and closures, as well as the relocation and requalification of certain manufacturing facilities. These restructuring actions are expected to be accompanied by other cost reductions, and are intended to realign our cost structure as part of a transformation to a simpler, more streamlined, resilient and sustainable business model. We evaluate restructuring charges in accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420), and ASC 712, Compensation-Nonretirement Post-Employment Benefits (ASC 712).
In the first quarter of fiscal 2024, these activities resulted in $3 million of charges primarily for employee termination costs as well as site move costs, write-off of property and equipment and acceleration of depreciation. In fiscal 2023, these activities resulted in $119 million of charges primarily for employee termination costs and the write-off of property and equipment, net of $65 million from reimbursement arrangements. We expect the restructuring actions to be substantially completed by the end of fiscal 2025. However, the actual timing and costs associated with these restructuring actions may differ from our current expectations and estimates and such differences may be material.
The following table presents our current and non-current liability as accrued for restructuring charges on our Condensed Consolidated Balance Sheets. The table sets forth an analysis of the components of the restructuring charges and payments and other deductions made against the accrual for the three months ended September 30, 2023 ($000):
| | | | | | | | | | | | | | | | | | | | | | | |
| Severance | | Asset Write-Offs | | Other | | Total Accrual |
Balance - June 30, 2023 | $ | 64,379 | | | $ | — | | | $ | — | | | $ | 64,379 | |
Restructuring accruals | 2,050 | | | 269 | | | 699 | | | 3,018 | |
| | | | | | | |
| | | | | | | |
Payments | (7,930) | | | — | | | — | | | (7,930) | |
Asset write-offs and other | — | | | (269) | | | $ | (699) | | | (968) | |
Balance - September 30, 2023 | $ | 58,499 | | | $ | — | | | $ | — | | | $ | 58,499 | |
At September 30, 2023, $21 million and $37 million of accrued severance related costs were included in other accrued liabilities and other liabilities, respectively, and are expected to result in cash expenditures through fiscal 2028. The current year severance related costs are primarily comprised of severance pay for employees being terminated due to the consolidation of certain manufacturing sites, with severance recorded in accordance with ASC 712. At September 30, 2023, a $20 millionreceivable under a reimbursement arrangement is recorded in prepaid and other current assets.
By segment, for the three months ended September 30, 2023, $5 million of restructuring costs were incurred in the Materials segment, partially offset by $2 million of restructuring recoveries in the Networking segment. Restructuring charges and recoveries are recorded in Restructuring Charges in our Condensed Consolidated Statements of Earnings (Loss).
Synergy and Site Consolidation Plan
On May 20, 2023, the Company announced that it has accelerated some of the actions planned as part of its multi-year synergy and site consolidation efforts following the acquisition of Coherent, Inc., including site consolidations and relocations to lower cost sites. These relocations and other actions are expected to result in the Company achieving its previously announced
$250 million synergy plan, which includes savings from supply chain management, internal supply of enabling materials and components, operational efficiencies in all functions due to scale, global functional model efficiencies and consolidation of corporate costs. We evaluate severance and other site consolidation costs in accordance with ASC 420 and ASC 712. In the first quarter of fiscal 2024, the acceleration of these activities resulted in $8 million of charges primarily for employee termination costs, overlapping labor related to transition of manufacturing operations to other sites, shut down costs and accelerated depreciation. In fiscal 2023, the acceleration of these activities resulted in $20 million of charges primarily for employee termination costs, the write-off of inventory for products that are being exited and shut down costs.
At September 30, 2023, $5 million of accrued severance related costs were included in both other accrued liabilities and other liabilities, and are expected to result in cash expenditures through fiscal 2025. The current year severance related costs are primarily comprised of severance pay for employees being terminated due to the exit or consolidation of certain manufacturing sites.
For the three months ended September 30, 2023, the $8 million of synergy and site consolidation costs were incurred in the Lasers segment. Costs related to the synergy and site consolidation efforts are recorded in cost of goods sold ($6 million) and IR&D ($2 million) in our Condensed Consolidated Statements of Earnings (Loss).
Note 18. Subsequent Events
On October 10, 2023, the Company entered into investment agreements with Denso Corporation (“DENSO”) and Mitsubishi Electric Corporation (“Mitsubishi Electric”), under which they will collectively invest an aggregate of $1 billion in Silicon Carbide LLC, a newly formed wholly owned subsidiary (“Silicon Carbide”). Under the terms of the Investment Agreements. DENSO and Mitsubishi Electric will each invest $500 million in exchange for a 12.5% non-controlling ownership interest in Silicon Carbide, with Coherent owning the remaining 75%. In connection with the transaction, Silicon Carbide will supply DENSO and Mitsubishi Electric 150 mm and 200 mm silicon carbide (“SiC”) substrates and epitaxial wafers pursuant to long term agreements. The transaction is expected to allow Coherent to increase its available free cash flow to provide greater financial and operational flexibility to execute its capital allocation priorities. The $1 billion investment will be used to fund future capital expenditure requirements of Silicon Carbide. The transaction is expected to close by or during the first quarter of calendar 2024.
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 Condensed Consolidated Financial Statements and related notes included under Item 1 of this quarterly report. Coherent’s MD&A is presented in seven sections:
•Forward-Looking Statements
•Overview
•AcquisitionRestructuring and Background of Coherent, Inc.Site Consolidation
•SiC Strategy
•Critical Accounting Estimates
•COVID-19 Update
•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 OperationsMD&A 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 Item 1A in this Quarterly Report on Form 10-Q, the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 20222023 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 the industrial, materials processing, optical communications, aerospaceelectronics, and defense, consumer electronics, semiconductor capital equipment, medical diagnostics and life sciences, automotive applications, machine tools, consumer goods and medical device manufacturing.instrumentation markets. 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.
We generate almost all of our revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products and services 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,manufacturers; laser end users,end-users; system integrators of high-power lasers,lasers; manufacturers of equipment and devices for industrial, optical communications, consumer electronics, security and monitoring applications,instrumentation markets; communication end-users including communication service providers, hyperscale and other cloud internet content providers; U.S. government prime contractors,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 competitorbest-in-class player in all of our highly competitive markets. The CompanyWe may elect to change the way in which the Company operateswe operate or isare organized in the future to enable the most efficient implementation of our strategy.
AcquisitionRestructuring and BackgroundSite Consolidation
Restructuring Plan
On May 23, 2023, the Board of Coherent, Inc.Directors approved the Company’s May 2023 Restructuring Plan which includes site consolidations, facilities moves and closures, as well as the relocation and requalification of certain manufacturing facilities. These restructuring actions are expected to be accompanied by other cost reductions and are intended to realign our cost structure as part of a transformation to a simpler, more streamlined, resilient and sustainable business model.
TheIn the first quarter of fiscal 2024, these activities resulted in $3 million of charges primarily for employee termination costs. In fiscal 2023, these activities resulted in $119 million of charges primarily for employee termination costs and the write-off of property and equipment, net of $65 million from reimbursement arrangements. We expect the restructuring actions to be substantially completed by the end of fiscal 2025. However, the actual timing and costs associated with these restructuring actions may differ from our current expectations and estimates and such differences may be material. See Note 17. Restructuring and Synergy and Site Consolidation Plan to the Company’s Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further information.
Synergy and Site Consolidation Plan
On May 20, 2023, the Company announced that it has accelerated some of the actions planned as part of its multi-year synergy and site consolidation efforts following the acquisition of Coherent, Inc., including site consolidations and relocations to lower cost sites. These relocations and other actions are expected to result in the Company achieving its previously announced $250 million synergy plan, which includes savings from supply chain management, internal supply of enabling materials and components, operational efficiencies in all functions due to scale, global functional model efficiencies and consolidation of corporate costs. In the first quarter of fiscal 2024, the acceleration of these activities resulted in $8 million of charges primarily for employee termination, overlapping labor related to transition of manufacturing operations to other sites, shut down costs and accelerated depreciation. In fiscal 2023, the acceleration of these activities resulted in $8 million of charges primarily for employee termination costs, the write-off of inventory for products that are being exited and shut down costs. See Note 17. Restructuring and Synergy and Site Consolidation Plan to the Company’s Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
SiC Strategy
On May 10, 2023, the Company announced that it has commenced a review of strategic alternatives for its Silicon Carbide business. On October 10, 2023, the Company entered into investment agreements with Denso Corporation (“Legacy Coherent”DENSO”) and Mitsubishi Electric Corporation (“Mitsubishi Electric”), oneunder which they will collectively invest an aggregate of $1 billion in Silicon Carbide LLC, a newly formed wholly owned subsidiary (“Silicon Carbide”). Under the terms of the world's leading providers of laserInvestment Agreements, DENSO and optics-based product solutions, closed on July 1, 2022. ForMitsubishi Electric will each invest $500 million in exchange for a 12.5% non-controlling ownership interest in Silicon Carbide, with Coherent owning the full fiscal year 2023, Legacyremaining 75%. In connection with the transaction, Silicon Carbide will supply DENSO and Mitsubishi Electric 150 mm and 200 mm silicon carbide (“SiC”) substrates and epitaxial wafers pursuant to long term agreements. The transaction is expected to allow Coherent to increase its available free cash flow to provide greater financial and operational flexibility to execute its capital allocation priorities. The $1 billion investment 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 displayused to fund future 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 acquisitionsexpenditure requirements 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)Silicon Carbide. The name Coherent originates from another key property whichtransaction is relatedexpected to close by or during the synchronizationfirst quarter 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.calendar 2024.
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, China, 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.
Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K dated August 29, 202218, 2023 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.
COVID-19 Update
Our supply chain continues to show signs of improving after various measures were implemented in response to the COVID-19 pandemic. In certain cases, our suppliers have not had the materials, capacity or capability to supply us with the components necessary for continuing our manufacturing operations or development efforts at our normal levels or on predictable timing. Similarly, our customers have also experienced, and could continue to experience, disruptions in their operations, which may result in reduced, delayed, or canceled orders, and have increased collection risks, which may adversely affect our results of operations.
The full extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial performance is improving. However, continued improvement will depend on many factors outside our control, including, without limitation, the duration and severity of the pandemic, the imposition of new and additional protective public safety measures, and the impact of the pandemic and related factors on the global economy as a whole and, in particular, demand for our products. Due to these uncertainties, we cannot reasonably estimate the related impact on us at this time.
For additional information regarding the risks that we face as a result of the COVID-19 pandemic, please see Item 1A. Risk Factors in Part I of the Annual Report on Form 10-K filed on August 29, 2022. Further, to the extent that the COVID-19 pandemic adversely affects our business and financial results, it also may have the effect of heightening many of the other risks described in the risk factors in Item 1A of the Annual Report on Form 10-K filed on August 29, 2022.
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 six months ended December 31,September 30, 2023 and 2022 and 2021 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2022 | | Three Months Ended December 31, 2021 |
| | | % of Revenues | | | | % of Revenues |
Total revenues | $ | 1,370 | | | 100 | % | | $ | 807 | | | 100 | % |
Cost of goods sold | 959 | | | 70 | | | 496 | | | 61 | |
Gross margin | 411 | | | 30 | | | 311 | | | 39 | |
Operating expenses: | | | | | | | |
Internal research and development | 129 | | | 9 | | | 95 | | | 12 | |
Selling, general and administrative | 274 | | | 20 | | | 118 | | | 15 | |
Interest and other, net | 75 | | | 5 | | | 19 | | | 2 | |
Earnings (loss) before income taxes | (66) | | | (5) | % | | 79 | | | 10 | |
Income taxes | (21) | | | (2) | % | | 12 | | | 1 | |
Net earnings (loss) | $ | (45) | | | (3) | % | | $ | 68 | | | 8 | % |
| | | | | | | |
Diluted earnings (loss) per share | $ | (0.58) | | | | | $ | 0.44 | | | |
| | | Six Months Ended December 31, 2022 | | Six Months Ended December 31, 2021 | | Three Months Ended September 30, 2023 | | Three Months Ended September 30, 2022 |
| | | % of Revenues | | | % of Revenues | | | % of Revenues | | | % of Revenues |
Total revenues | Total revenues | $ | 2,715 | | | 100 | % | | $ | 1,602 | | | 100 | % | Total revenues | $ | 1,053 | | | 100 | % | | $ | 1,345 | | | 100 | % |
Cost of goods sold | Cost of goods sold | 1,860 | | | 69 | | | 984 | | | 61 | | Cost of goods sold | 746 | | | 71 | | | 901 | | | 67 | |
Gross margin | Gross margin | 855 | | | 31 | | | 618 | | | 39 | | Gross margin | 307 | | | 29 | | | 444 | | | 33 | |
Operating expenses: | Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
Internal research and development | Internal research and development | 250 | | | 9 | | | 184 | | | 12 | | Internal research and development | 113 | | | 11 | | | 121 | | | 9 | |
Selling, general and administrative | Selling, general and administrative | 554 | | | 20 | | | 240 | | | 15 | | Selling, general and administrative | 212 | | | 20 | | | 280 | | | 21 | |
Restructuring charges | | Restructuring charges | 3 | | | — | | | — | | | — | |
Interest and other, net | Interest and other, net | 168 | | | 6 | | | 24 | | | 1 | | Interest and other, net | 67 | | | 6 | | | 93 | | | 7 | |
Earnings (loss) before income taxes | (117) | | | (4) | % | | 170 | | | 11 | | |
Loss before income taxes | | Loss before income taxes | (88) | | | (8) | | | (51) | | | (4) | |
Income taxes | Income taxes | (34) | | | (1) | % | | 28 | | | 2 | | Income taxes | (21) | | | (2) | | | (12) | | | (1) | |
Net earnings (loss) | $ | (84) | | | (3) | % | | $ | 142 | | | 9 | % | |
Net loss | | Net loss | $ | (67) | | | (6) | % | | $ | (39) | | | (3) | % |
| Diluted earnings (loss) per share | $ | (1.14) | | | $ | 0.94 | | | |
Diluted loss per share | | Diluted loss per share | $ | (0.65) | | | $ | (0.56) | | |
Consolidated
Revenues. Revenues for the three months ended December 31, 2022 increased 70%September 30, 2023 decreased 22% to $1,370$1,053 million, compared to $807$1,345 million for the same period last fiscal year. Revenues fordecreased in all four markets, with the six months ended December 31, 2022 increased 69%largest decline, $126 million (22%), in the Communications market, primarily due to $2,715decreased demand in telecom applications. Electronics market revenues decreased $91 million compared(50%), primarily in consumer electronics applications. In addition, revenues decreased in the Industrial market by $57 million, or 12%, due to $1,602decreases in semiconductor capital equipment applications and by $18 million, foror 16%, in the same period last fiscal year. The majority of the increaseInstrumentation market due to decreases in revenue for both the three and six months ended December 31, 2022 is driven by the Lasers segment, which was acquiredlife sciences applications.
Networking revenues decreased $124 million year-over-year, with decreases from telecom applications in our acquisition of Legacy Coherent, withcommunications end market. Materials decreased $111 million year-over-year, primarily due to lower demand for sensing products and other consumer applications in the remaining contributions from both the Materials and Networking segments.electronics end market. Lasers revenue for the three months ended December 31, 2022 was $379September 30, 2023 decreased $57 million, of which 75% wasdue to lower demand for semiconductor and display capital equipment and precision manufacturing applications in the industrial end market and 25% inas well as lower shipments to the instrumentation end market. Lasers revenue for the six months ended December 31, 2022 was $772 million, of which 76% was in the industrial end market and 24% in the instrumentation end market.
Organic revenue growth was $184 million, or 23%, year-over-year for the three months ended December 31, 2022. Networking increased $92 million year-over-year, with growth in both datacom and telecom. Materials contributed an additional $92 million year-over-year, with $114 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the industrial end market.
Organic revenue growth was $341 million, or 21%, year-over-year for the six months ended December 31, 2022. Networking increased $158 million year-over-year, with growth in both datacom and telecom. Materials contributed an additional $184 million year-over-year, with $213 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the industrial end market.
Gross margin. Gross margin for the three months ended December 31, 2022September 30, 2023 was $411$307 million, or 30%29% of total revenues, compared to $311$444 million, or 39%33% of total revenues, for the same period last fiscal year, a decrease of 860 basis points. Gross margin for the six months ended December 31, 2022 increased to $855 million, or 31% of total revenues, compared to $618 million, or 39% of total revenues, for the same period last fiscal year, and decreased as a percent of revenue year-over-year by 710390 basis points. The decrease as a percent of revenue for the three and six months ended December 31, 2022 was driven by $112September 30, 2023 included the favorable impact of $45 million and $158 million, respectively, of additionallower expense related to the preliminary fair value adjustment on acquired inventory from the acquisition of Legacy Coherent, Inc, (“Merger”), as well as $6 and $16 million and $43 million, respectively, of incrementallower amortization expense related to technology acquired as a result ofin the Merger. Gross margins, excluding the lower amortization and lower fair value adjustment on acquired inventory, and incremental amortization were flatdecreased 790 basis points for both the three and six months ended December 31, 2022September 30, 2023 compared to the prior year periods.period primarily due to lower revenues, higher cost product built and capitalized in prior periods being expensed, less favorable sales mix especially in datacom applications in the communications market, underutilized operating capacity in several plants, shut down costs related to site consolidations, higher costs related to product lines that are being exited, and the unfavorable foreign exchange rates.
Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended December 31, 2022September 30, 2023 were $129$113 million, or 9%11% of revenues, compared to $95$121 million, or 12% of revenues, for the same period last fiscal year. IR&D for the six months ended December 31, 2022 increased 36% to $250 million, or 9% of revenues, compared to $184 million, or 12% of revenues, for the same period last fiscal year. The increasedecrease for the three and six months ended December 31, 2022September 30, 2023 was primarily in the Materials and Networking segments and was driven by an additional $32 millionlower costs due to the consolidation of sites and $62 million, respectively, ofour efforts to control costs. The IR&D expenses from the Lasers segment. As a percentare primarily related to our continued investment in new products and manufacturing processes across all of sales, IR&D spendour businesses, including significant investments in the Materials segment decreased 4%indium phosphide semiconductor lasers, silicon carbide materials, devices for both power electronics and 5%wireless devices, and lasers for the threedisplay processing and six months ended December 31, 2022, respectively, compared to the prior year periods due to the launch of new products.semiconductor capital equipment.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2022September 30, 2023 were $274$212 million, or 20% of revenues, compared to $118$280 million, or 15% of revenues, for the same period last fiscal year. SG&A expenses for the six months ended December 31, 2022 were $554 million, or 20% of revenues, compared to $240 million, or 15%21% of revenues, for the same period last fiscal year. The increasedecrease in SG&A as a percentage of revenue for the three months ended December 31, 2022September 30, 2023 compared to the same period last fiscal year was primarily the result of incremental amortization expense of $80 million. The increase in SG&A as a percentage of revenue for the six months ended December 31, 2022 compared to the same period last fiscal year was primarily the result of incremental amortization expense of $104 million, additional one time-chargeslower charges related to the Merger, including $38$39 million additional integration and restructuring, $19 million additionallower transaction fees and financing, and alower one-time expense of $18 million related to share-based compensation resulting from the Merger.Merger, as well as $13 million lower severance and integration consulting costs partially offset by incremental amortization expense of $6 million.
Restructuring Charges. Restructuring charges related to our Restructuring Plan for the three months ended September 30, 2023 were $3 million and consist of severance, move costs, equipment write-offs and accelerated depreciation due to the consolidation of certain manufacturing sites. See Note 17. Restructuring and Synergy and Site Consolidation Plan for further information.
Interest and other, net. Interest and other, net for the three months ended December 31, 2022September 30, 2023 was expense of $75$67 million, compared to expense of $19$93 million for the same period last fiscal year, an increasea decrease of $56$27 million. Included in interest and other, net, waswere interest expense on borrowings, equity losses from unconsolidated investments, foreign currency gains and losses, amortization of debt issuance costs, equity gains and losses from unconsolidated investments, and interest income on excess cash balances.balances as well as Merger financing fees in the prior year quarter. For the three months ended December 31, 2022,September 30, 2023, the increasedecrease of $56$27 million in comparison to the same period last fiscal year was driven by $54$35 million incurred in the prior year quarter related to financing of the Merger and $3 million incremental interest income partially offset by $11 million of incremental interest expense due to the new debt assumed in the financing of the Merger and $7 million incremental foreign currency losses, partially offset by $2 million incrementalhigher interest income. Interest and other, net for the six months ended December 31, 2022 was expense of $168 million, compared to expense of $24 million for the same period last fiscal year, an increase of $145 million. The increase of $145 million in comparison to the same period last fiscal year was driven by $104 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 gain of $5 million for the six months ended December 31, 2021 as compared to a foreign currency loss of $4 million for the current six-month period. The increases were partially offset by $2 million of incremental interest income.rates on our Term Facilities.
Income taxes. The Company’s year-to-date effective income tax rate was 24% at December 31, 2022 was 29% compared to an effective tax rate of 16% for the same period in 2021.both September 30, 2023 and September 30, 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.
Segment Reporting
Revenues and operating income for the Company’sour 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 13.12. 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’sour reportable segments and for the reconciliation of the Company’sour operating income to net earnings, which is incorporated herein by reference. Effective July 1, 2022, the Company is reporting itsWe report our financial results in the following three designated segments: (i) Materials,Networking, (ii) Networking,Materials, 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 December 31, | | % Increase | | Six Months Ended December 31, | | % Increase | | Three Months Ended September 30, | | % Increase (Decrease) | |
| | 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2023 | | 2022 | | | |
Revenues | Revenues | $ | 609 | | | $ | 517 | | | 18% | | $ | 1,205 | | | $ | 1,048 | | | 15% | Revenues | $ | 473 | | | $ | 597 | | | (21)% | |
Operating income | Operating income | $ | 90 | | | $ | 50 | | | 79% | | $ | 181 | | | $ | 110 | | | 65% | Operating income | $ | 16 | | | $ | 91 | | | (82)% | |
Revenues for the three months ended December 31, 2022 increased 18%September 30, 2023 decreased 21% to $609$473 million, compared to $517 million for the same period last fiscal year. Revenues for the six months ended December 31, 2022 increased 15% to $1,205 million, compared to $1,048$597 million for the same period last fiscal year. The increasesdecrease in revenue of $92 million and $158$124 million during the three and six months ended December 31, 2022, respectively, wereSeptember 30, 2023 was primarily due to increased revenue year-over-yeardecreases in the communications market driven by increased revenuedecreased revenues in both telecom and datacom.applications.
Operating income for the three months ended December 31, 2022 increased 79%September 30, 2023 decreased 82% to $90$16 million, compared to operating income of $50 million for the same period last fiscal year. Operating income for the six months ended December 31, 2022 increased 65% to $181 million, compared to operating income of $110$91 million for the same period last fiscal year. The increasedecrease in operating income for the three and six months ended December 31, 2022September 30, 2023 was driven by strong$124 million lower revenues as well as lower gross margin percentage. The margin percentage was lower than the three months ended September 30, 2022 due to less favorable sales improved mix andin datacom applications, the favorable impact of foreign currency.fixed manufacturing costs on lower revenues as a percentage of revenue and higher costs related to products that are being exited.
Materials ($ in millions)
| | | Three Months Ended December 31, | | % Increase (Decrease) | | Six Months Ended December 31, | | % Increase (Decrease) | | Three Months Ended September 30, | | % Increase (Decrease) | |
| | 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2023 | | 2022 | | | |
Revenues | Revenues | $ | 382 | | | $ | 290 | | | 32% | | $ | 738 | | | $ | 554 | | | 33% | Revenues | $ | 245 | | | $ | 356 | | | (31)% | |
Operating income | Operating income | $ | 81 | | | $ | 57 | | | 44% | | $ | 157 | | | $ | 103 | | | 52% | Operating income | $ | 7 | | | $ | 75 | | | (90)% | |
Revenues for the three months ended December 31, 2022 increased 32%September 30, 2023 decreased 31% to $382$245 million, compared to revenues of $290$356 million for the same period last fiscal year. Compared to the three months ended December 31, 2021,September 30, 2022, Materials contributed an additional $92decreased $111 million year-over-year, with $114a decrease of $89 million growth in the electronics end market from innovations in sensing products. The growth wasfor consumer products, partially offset by softer sales in aerospace and defense in the United States and slower saleshigher demand for electric vehicles, as well as a decrease of $11 million in industrial China. Revenues for the six months ended December 31, 2022 increased 33%market applications. Demand in communications and instrumentation markets also decreased, but to $738 million, compared to revenues of $554 million for the same period last fiscal year. The increase in revenues of $184 million during the six months ended December 31, 2022 was primarily related to the increase in demand in the electronics end market from innovations in sensing products.
Operating income for the three months ended December 31, 2022 increased 44%September 30, 2023 decreased 90% to $81$7 million, compared to operating income of $57$75 million for the same period last fiscal year, primarily driven by strong sales,$111 million lower revenues and lower margin percentage. The margin percentage was lower than the launchthree months ended September 30, 2022 due to the unfavorable impact of a newfixed manufacturing costs with lower revenues, higher cost product built and capitalized in the Consumer market, thereby reducing R&D expense year-over-year. Further, the Company has efficiently used the Corporate Center of Excellence, with corporate resources leveraged across each of our three segments. Operating incomeprior periods being expensed, underutilized operating capacity in several plants and shut down costs related to site consolidations.
Lasers ($ in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | % Increase (Decrease) | | | | |
| 2023 | | 2022 | | | | | | | | |
Revenues | $ | 336 | | | $ | 392 | | | (14)% | | | | | | |
Operating loss | $ | (45) | | | $ | (124) | | | 64% | | | | | | |
Revenues for the sixthree months ended December 31, 2022 increased 52%September 30, 2023 decreased 14% to $157$336 million, compared to $103revenues of $392 million of operating income for the same period last fiscal year. The increasedecrease was primarily due to a $43 million drop in operating income for both the three and six months ended December 31, 2022 was driven by strong sales, the launch of a new product in the Consumer market and improved operating expenses.
Lasers ($ in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | % Increase (Decrease) | | Six Months Ended December 31, | | % Increase (Decrease) |
| 2022 | | 2021 | | | | 2022 | | 2021 | | |
Revenues | $ | 379 | | | $ | — | | | N/A | | $ | 772 | | | $ | — | | | N/A |
Operating income | $ | (163) | | | $ | — | | | N/A | | $ | (287) | | | $ | — | | | N/A |
Revenues for the three months ended December 31, 2022 were $379 million, with 75% of revenues from the industrial end market due to lower demand for semiconductor and 25% from the instrumentation end market. Revenues for the six months ended December 31, 2022 were $772display capital equipment and precision manufacturing applications, as well as $14 million with 76% of revenues from the industrial end market and 24% fromlower shipments to the instrumentation end market.
Operating loss for the three months ended December 31, 2022 was $163 million.September 30, 2023 decreased 64% to $45 million, compared to an operating loss of $124 million for the same period last fiscal year. The lower operating loss was driven by $112$120 million oflower costs in the current year quarter compared to the prior year quarter related to the Merger, including $45 million lower amortization of the preliminary fair value step-up on acquired inventory, $86$39 million oflower transaction fees and financing, $18 million lower nonrecurring share based compensation, $9 million lower integration costs, and $9 million lower amortization expense related to the preliminary fair value of intangible assets acquired, and $12 million of integration costs. Operatingacquired. Excluding the lower Merger related costs, operating loss for the sixthree months ended December 31, 2022 was $287 million. The loss was driven by $158September 30, 2023 increased $41 million primarily due to lower revenues and lower gross margin percentage due to less favorable mix within the industrial market and the unfavorable impact of amortization of the preliminary fair value step-up on acquired inventory, $149 million of amortization expense related to the preliminary fair value of intangible assets acquired, one-time charges of $39 million for transaction fees and financing, $35 million of integrationfixed manufacturing costs and $18 million of nonrecurring share based compensation.with lower revenues.
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:
Sources (uses) of cash (millions): | | | Six Months Ended December 31, | | Three Months Ended September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Net cash provided by operating activities | $ | 300 | | | $ | 240 | | |
Proceeds from long-term borrowings and revolving credit facility | Proceeds from long-term borrowings and revolving credit facility | 3,715 | | | — | | Proceeds from long-term borrowings and revolving credit facility | $ | — | | | $ | 3,715 | |
Net proceeds from debt and equity issuances | Net proceeds from debt and equity issuances | 1,358 | | | 990 | | Net proceeds from debt and equity issuances | — | | 1,358 |
Net cash provided by operating activities | | Net cash provided by operating activities | 199 | | 80 |
Effect of exchange rate changes on cash and cash equivalents and other items | Effect of exchange rate changes on cash and cash equivalents and other items | 17 | | | 9 | | Effect of exchange rate changes on cash and cash equivalents and other items | (10) | | (42) |
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 8 | | | 8 | | Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan | 15 | | 7 |
Other items | (3) | | | (2) | | |
Payments on Convertible Debt | (4) | | | (15) | | |
| Payment of dividends | (14) | | | (21) | | |
Payments in satisfaction of employees' minimum tax obligations | (51) | | | (14) | | |
Other items | | Other items | (2) | | (1) |
Payments on Convertible Debt and Finisar Notes | | Payments on Convertible Debt and Finisar Notes | — | | (4) |
| Payments in satisfaction of employees’ minimum tax obligations | | Payments in satisfaction of employees’ minimum tax obligations | (14) | | (41) |
Debt issuance costs | Debt issuance costs | (127) | | | (6) | | Debt issuance costs | — | | (127) |
Additions to property, plant & equipment | Additions to property, plant & equipment | (246) | | | (102) | | Additions to property, plant & equipment | (62) | | (139) |
Payments on existing debt | Payments on existing debt | (1,130) | | | (31) | | Payments on existing debt | (19) | | (996) |
Purchases of businesses, net of cash acquired | Purchases of businesses, net of cash acquired | (5,489) | | | — | | Purchases of businesses, net of cash acquired | — | | (5,489) |
Operating activities:
Net cash provided by operating activities was $300$199 million for the sixthree months ended December 31, 2022September 30, 2023 compared to $240$80 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 sixthree months ended December 31, 2022September 30, 2023 compared to the same period last fiscal year was primarily due to improved management of working capital accounts.accounts, in particular accounts receivable and accounts payable.
Investing activities:
Net cash used byin investing activities was $5,737$64 million for the sixthree months ended December 31, 2022,September 30, 2023, compared to net cash used of $102$5,628 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 increaseddecreased by $144$77 million year-over-year, to continue to increase capacity to meet the growing demand for the Company’s product portfolio.year-over-year.
Financing activities:
Net cash provided byused in financing activities was $3,756$18 million for the sixthree months ended December 31, 2022,September 30, 2023, compared to net cash provided by financing activities of $911 million$3.9 billion for the same period last fiscal year. Financing outflows in the current year period included payments on existing debt. Cash inflow for the currentprior year-to-date period was from borrowings under the New Term Facilities, defined below, as well the net proceeds from the issuance of Coherent'sCoherent’s Series B-2 Convertible Preferred Stock. Financing outflows for the prior year-to-date period included payments to settle the Company'sCompany’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).
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. TheOn 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 Secured Overnight Financing Rate (“SOFR”) based rate of interest. As amended, the Term A Facility and the Revolving Credit Facility each bear interest at LIBORan adjusted SOFR rate subject to a 0.00%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 LIBORadjusted SOFR plus 2.00%1.75% as of December 31, 2022. TheSeptember 30, 2023. As amended, the Term B Facility bears interest at LIBORan adjusted SOFR rate (subject to a 0.50% floor) plus 2.75%. In relation to the Term Facilities, the Company incurred expense of $61 million and $114$60 million for the three and six months ended December 31, 2022, respectively,September 30, 2023, which is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss). The definitive documentation forOn July 1, 2023, our interest rate cap became effective, which together with our interest rate swap, reduced interest expense by $11 million during the Senior Credit Facilities includes customary LIBOR replacement provisions.three months ended September 30, 2023.
During the sixthree months ended December 31, 2022,September 30, 2023, the Company made payments of $68$18 million for the Term Facilities, including a voluntary prepayment of $50 million, and we expect to pay down another $75 million in total during the rest of this fiscal year.Facilities.
As of December 31, 2022,September 30, 2023, the Company had no borrowings outstanding under the Revolving Credit Facility. 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):
| | | December 31, 2022 | | June 30, 2022 | | | September 30, 2023 | | June 30, 2023 |
Cash, cash equivalents, and restricted cash | Cash, cash equivalents, and restricted cash | | $ | 913 | | | $ | 2,582 | | | Cash, cash equivalents, and restricted cash | | $ | 941 | | | $ | 833 | |
Available borrowing capacity under New Revolving Credit Facility | | 350 | | | 450 | | | |
Available borrowing capacity under Revolving Credit Facility | | Available borrowing capacity under Revolving Credit Facility | | 346 | | | 348 | |
Total debt obligations | Total debt obligations | | 4,498 | | | 2,300 | | | Total debt obligations | | 4,294 | | | 4,310 | |
Other Liquidity
On July 1, 2022,October 10, 2023, the Company utilized $2.1entered into two investment agreements under which Silicon Carbide LLC, a Company subsidiary, will receive, subject to closing, $1.0 billion of cash cash equivalents, and restricted cash as partin exchange for 25% of the funding requiredequity of that entity. Such funds will be used primarily to completefund future capital expansion, including the previously-announced capital that Coherent acquisition. intended to invest in its silicon carbide business. As a result, the transaction will enable Coherent to allocate the capital it had intended to invest in this business unit to other corporate purposes, thus increasing its available free cash flow which will provide greater financial and operational flexibility. The transaction is expected to close by or during the first quarter of calendar 2024. There can be no assurance that the transaction will close as anticipated or at all. See Note 18. Subsequent Events for further information.
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,IR&D, and internal and external growth objectives at least through fiscal year 2023.the next twelve months.
The Company’sOur cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of December 31, 2022September 30, 2023, the Company held approximately $653$788 million of cash and cash equivalents outside of the United States. CashGenerally, cash balances held outside the United States could be repatriated to the United States.
At December 31, 2022,September 30, 2023, we had $21$10 million of restricted cash.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company isWe are exposed to market risks arising from adverse changes in foreign currency exchange rates and interest rates. In the normal course of business, the Company useswe use a variety of techniques and derivative financial instruments as part of itsour overall risk management strategy, which is primarily focused on its exposure in relation to the Chinese Renminbi, Euro, Swiss Franc, Japanese Yen, Singapore Dollar, Korean Won and Korean Won.Malaysian Ringgit. No significant changes have occurred in the techniques and instruments used.
Interest Rate Risks
As of December 31, 2022, the Company’sSeptember 30, 2023, our total borrowings include variable rate borrowings, which expose the Companyus to changes in interest rates. OnIn November 24, 2019, the Companywe entered into an interest rate swap contract, amended on March 20, 2023, to limit the exposure of itsour variable interest rate debt by effectively converting ita portion of interest payments to fixed interest rate debt. On February 23, 2022, we entered into an interest rate cap (the “Cap”), amended on March 20, 2023, with an effective date of July 1, 2023. If the Companywe had not effectively hedged itsour 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$9 million for both the three and six months ended December 31, 2022, respectively.
On February 23, 2022, the Company entered into an interest rate cap (the "Cap"), with an effective date of July 1, 2023. As the Cap is not effective until July 2023, there is no impact on variable rate borrowings from the Cap for the three and six months ended December 31, 2022.September 30, 2023.
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 Interim 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 Interim 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.
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 December 31, 2022. 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, noNo 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 December 31, 2022 and represented 59% of the Company’s consolidated total assets as of December 31, 2022 and 28% of the Company’s consolidated total revenues for the three months ended December 31, 2022.
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, including the additional risk factors set forth below in this Item 1A, carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2022,2023, 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.
Risks Relating to the Announced Transactions Involving Our Silicon Carbide Business
We are subject to a number of risks associated with the possibility that the equity investments contemplated by the respective investment agreements entered into with Denso Corporation and Mitsubishi Electric Corporation and certain related supply arrangements are not consummated, and these risks could adversely impact our operations and our liquidity position.
On October 10, 2023, Silicon Carbide LLC (“Silicon Carbide”), a wholly owned subsidiary of the Company, entered into (i) an investment agreement (the “Denso Investment Agreement”) with Denso Corporation (“Denso”) pursuant to which, subject to the terms and conditions set forth therein, Silicon Carbide has agreed to issue and sell to Denso 16,666,667 Class A Common Units of Silicon Carbide (“Common Units”) for an aggregate purchase price of $500,000,000, and (ii) an investment agreement (together with the Denso Investment Agreement, the “Investment Agreements”) with Mitsubishi Electric Corporation (“MELCO”) pursuant to which, subject to the terms and conditions set forth therein, Silicon Carbide has agreed to issue and sell to MELCO 16,666,667 Common Units for an aggregate purchase price of $500,000,000 (the issuance and sale of the Common Units to Denso and MELCO, collectively the “Equity Investments”). Following the consummation of the Equity Investments, it is expected that the Company will own approximately 75% of Silicon Carbide’s outstanding Common Units, Denso will own approximately 12.5% of the outstanding Common Units and MELCO will own approximately 12.5% of the outstanding Common Units. In connection with the entrance into the Investment Agreements, Silicon Carbide also has agreed to enter into certain supply arrangements with each of MELCO and Denso pursuant to which Silicon Carbide will supply 150 mm and 200 mm silicon carbide substrates (collectively, the “Supply Arrangements”).
We cannot provide any assurance that the transactions contemplated by the Investment Agreement will be consummated on our anticipated timing or at all. In the event that the transactions contemplated by the Investment Agreements are not consummated, we would be subject to a number of risks, including risks associated with:
•not receiving the anticipated benefits of either the $1.0 billion of additional liquidity that we would receive from the aggregate purchase price under the Investment Agreements or the Supply Arrangements;
•disruption to and uncertainty in our silicon carbide business and our relationships with our customers during the pendency of the Equity Investments, including any attempts by our customers to terminate or renegotiate their relationships with us or decisions by our customers to defer or delay purchases from us;
•having operated our silicon carbide business in accordance with the covenants set forth in the Investment Agreements during the pendency of the Equity Investments;
•having incurred significant transaction costs in connection with the transactions contemplated by the Investment Agreements, for which we are responsible regardless of whether the transactions are consummated;
•potential difficulties in hiring, retaining and motivating key personnel during the pendency of the Equity Investments or as a result of uncertainties generated by the transaction process or any developments or actions relating to it; and
•the diversion of our management’s attention away from the operation of the Company’s other businesses during the pendency of the Equity Investments.
Our failure to consummate the Equity Investments and the Supply Arrangements could adversely impact our operations, including the operations of our silicon carbide business, and our liquidity position and could limit our ability to pursue additional strategic transactions in the future.
We also are subject to a number of risks in the event that the transactions contemplated by the Investment Agreements are consummated, and these risks could adversely impact our operations, financial condition and business.
If the transactions contemplated by the Investment Agreements are consummated as expected on the terms set forth in the Investment Agreements, we also would be subject to a number of risks. For example, we would be subject to risks associated with:
•the separation of our silicon carbide business in accordance with the terms of the Investment Agreements;
•unfavorable reaction to the Equity Investments and the Supply Arrangements by our customers, competitors, suppliers and employees;
•the commitments that Silicon Carbide would make under the Supply Arrangements, including the terms of the Supply Arrangements in comparison to the terms that are available under other commercial opportunities that Silicon Carbide may have in the future; and
•the consequences of any disruptions to our silicon carbide business during the pendency of the transactions contemplated by the Investment Agreements, including as a result of factors discussed above under “We are subject to a number of risks associated with the possibility that the equity investments contemplated by the respective investment agreements entered into with Denso Corporation and Mitsubishi Electric Corporation and certain related supply arrangements are not consummated, and these risks could adversely impact our operations and our liquidity position.”
These risks may cause us to be unable to realize the anticipated benefits of the Equity Investments and the Supply Arrangements even if those transactions are consummated on our expected timing. Our failure to realize the anticipated benefits of the Equity Investments and the Supply Arrangements could adversely impact our operations and the operations of Silicon Carbide, as well as our liquidity position, and could limit our ability and the ability of Silicon Carbide to pursue additional strategic transactions in the future.
Item 5. OTHER INFORMATION
On August 18, 2023, Mark Sobey, the former President of the Lasers Segment who retired as an employee of the Company on September 1, 2023, adopted a written plan intended to satisfy the affirmative defense of Rule 10b5-1(c) with a duration through December 27, 2024 with respect to the sale of up to 75,000 Company shares.
Item 6. EXHIBITS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by reference herein |
Exhibit Numbers | | | | Form | | Exhibit No. | | Filing Date | | File No. |
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. | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated herein by reference |
Exhibit No. | | | | Form | | Exhibit No. | | Filing Date | | File No. |
10.01 | | | | 8-K | | 10.1 | | October 10, 2023 | | 001-39375 |
10.02 | | | | 8-K | | 10.2 | | October 10, 2023 | | 001-39375 |
10.03 | | | | 8-K | | 10.1 | | September 15, 2023 | | 001-39375 |
10.04 | | | | 8-K | | 10.2 | | September 15, 2023 | | 001-39375 |
10.05 | | | | 10-K | | 10.29 | | August 18, 2023 | | 001-39375 |
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
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: February 8,November 7, 2023 | By: | /s/ Vincent D. Mattera, Jr. |
| | Vincent D. Mattera, Jr Chief Executive Officer |
| | |
Date: February 8,November 7, 2023 | By: | /s/ Mary Jane Raymond Richard Martucci |
| | Mary Jane RaymondRichard Martucci Interim Chief Financial Officer and Treasurer |