Coherent 10-Q 2022-12-31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2022

for the transition period from to .

Commission File Number: 001-39375

COHERENT CORP.

(Exact name of registrant as specified in its charter)

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:

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.

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, 2023, 138,962,661 shares of Common Stock, no par value, of the registrant were outstanding.

COHERENT CORP.

INDEX

PART I - FINANCIAL INFORMATION

Coherent Corp. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

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See notes to condensed consolidated financial statements.

Table of Contents`

Coherent Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)

($000, except per share data)

See notes to condensed consolidated financial statements.

Coherent Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)

($000, except per share data)

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of Coherent’s financial statements with a narrative from the perspective of management. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included under Item 1 of this quarterly report. Coherent’s MD&A is presented in seven sections:

• Forward-Looking Statements

• Overview

• Acquisition and Background of Coherent, Inc.

• 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 Operations are forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “intends,” “believes,” “plans,” “projects” or similar expressions.

Although our management considers the expectations and assumptions on which the forward-looking statements in this Quarterly Report on Form 10-Q are based to have a reasonable basis, there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to: (i) the failure of any one or more of the expectations or assumptions on which such forward-looking statements are based to prove to be correct; and (ii) the risks relating to forward-looking statements and other “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022 and in the Company's other reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or developments, or otherwise.

In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not possible for management to anticipate all such risk factors, or to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date of this Report. We do not assume any obligation, and do not intend, to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.

Investors should also be aware that, while the Company does communicate with securities analysts from time to time, such communications are conducted in accordance with applicable securities laws. Investors should not assume that the Company agrees with any statement, conclusion of any analysis, or report issued by any analyst irrespective of the content of the statement or report.

Overview

Coherent Corp. (“Coherent”, the “Company,” “we,” “us” or “our”), a global leader in materials, networking and lasers, is a vertically integrated manufacturing company that develops, manufactures and markets engineered materials, optoelectronic components and devices, and lasers for use in industrial materials processing, optical communications, aerospace and defense, consumer electronics, semiconductor capital equipment, medical diagnostics and life sciences, automotive applications, machine tools, consumer goods and medical device manufacturing. Headquartered in Saxonburg, Pennsylvania, Coherent has research and development, manufacturing, sales, service, and distribution facilities worldwide. Coherent produces a wide variety of lasers, along with application-specific photonic and electronic materials and components, and deploys them in various forms, including integrated with advanced software to enable its customers.

The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products for our end markets. We also generate revenue, earnings and cash flows from government-funded research and development contracts relating to the development and manufacture of new technologies, materials and products.

Our customer base includes original equipment manufacturers, laser end users, system integrators of high-power lasers, manufacturers of equipment and devices for industrial, optical communications, consumer electronics, security and monitoring applications, U.S. government prime contractors, and various U.S. government agencies.

As we grow, we are focused on scaling our Company and deriving the continued benefits of vertical integration as we strive to be a best in class competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company operates or is organized in the future to enable the most efficient implementation of our strategy.

Acquisition and Background of Coherent, Inc.

The acquisition of Coherent, Inc. (“Legacy Coherent”), one of the world's leading providers of laser and optics-based product solutions, closed on July 1, 2022. For the full fiscal year 2023, Legacy Coherent will be included in the combined company and rebranded as the Lasers Segment. Legacy Coherent’s lasers and optics products serve industrial customers in semiconductor and display capital equipment, precision manufacturing and aerospace & defense, as well as instrumentation customers in life science and scientific instrumentation.

Legacy Coherent delivers systems to the world's leading brands, innovators, and researchers, all backed with a global service and support network. Since inception in 1966, Legacy Coherent has grown through internal organic expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes, and product offerings.

The word "laser" is an acronym for "light amplification by stimulated emission of radiation." Lasers emit an intense output of light with unique and highly useful properties, of which its near perfect collimation (beam like property) is the most commonly known, as well usually being highly monochromatic at a precise wavelength (color). The name Coherent originates from another key property which is related to the synchronization of the phase of the light oscillations, known as Coherence. Therefore, lasers are many orders of magnitude brighter than any other optical source. Lasers also have the ability to be pulsed at almost any repetition rate, even beyond a billion times per second, and are the technology which underpins the global fiber optic communications network, as well as producing the shortest man-made pulses of any technology known.

As a result of their highly collimated beams, the light can be focused to a very small and intense spot or line, useful for applications requiring enough power to modify the target material, with very high precision through processes such as heat treating (annealing), welding or cutting almost any material. The laser's high spatial resolution is also useful for microscopic imaging and inspection applications, where the laser light is essentially a highly precise illumination source. These applications typically operate at lower powers, so as not to alter the physical property of the target material.

Lasers can produce the lasing action in the form of a gas, liquid, semiconductor, solid state crystal or fiber. Lasers can also be classified by their output wavelength: ultraviolet, visible, infrared or wavelength tunable. Legacy Coherent manufactures all of these laser types, in various options such as continuous wave, pulse duration, output power, and beam dimensions. Each application has its own specific requirements in terms of laser performance.

Legacy Coherent's key laser applications include: semiconductor wafer inspection; manufacturing of advanced printed circuit boards; flat panel display manufacturing; metal cutting and welding, including welding of electric vehicle batteries; manufacturing of medical devices; marking; medical; bio-instrumentation and imaging; and research and development. For example, UV lasers are enabling the continuous move towards miniaturization, which drives innovation and growth in many markets. In addition, the advent of industrial grade ultrafast lasers continues to open up new applications for laser processing.

Legacy Coherent's products are manufactured at sites in California, Oregon, Michigan, New Jersey, and Connecticut in the United States; Germany, Scotland, Finland, Sweden, Switzerland, and Spain in Europe; and South Korea, 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, 2022 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Starting in the three months ended September 30, 2022, we assessed business combinations to be one of our critical accounting policies.

Business Combinations. Business combinations are accounted for using the purchase method of accounting. As such, assets acquired, including identified intangible assets, and liabilities assumed are recorded at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective.

New Accounting Standards

See Note 2. Recently Issued Financial Accounting Standards to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

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, 2022 and 2021 ($ in millions):

Consolidated

Revenues. Revenues for the three months ended December 31, 2022 increased 70% to $1,370 million, compared to $807 million for the same period last fiscal year. Revenues for the six months ended December 31, 2022 increased 69% to $2,715 million, compared to $1,602 million for the same period last fiscal year. The majority of the increase in revenue for both the three and six months ended December 31, 2022 is driven by the Lasers segment, which was acquired in our acquisition of Legacy Coherent, with the remaining contributions from both the Materials and Networking segments. Lasers revenue for the three months ended December 31, 2022 was $379 million, of which 75% was in the industrial end market and 25% in 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, 2022 was $411 million, or 30% of total revenues, compared to $311 million, or 39% 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 710 basis points. The decrease as a percent of revenue for the three and six months ended December 31, 2022 was driven by $112 million and $158 million, respectively, of additional expense related to the preliminary fair value adjustment on acquired inventory from the acquisition of Legacy Coherent (“Merger”), as well as $6 million and $43 million, respectively, of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the fair value adjustment on acquired inventory and incremental amortization were flat for both the three and six months ended December 31, 2022 compared to the prior year periods.

Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended December 31, 2022 were $129 million, or 9% of revenues, compared to $95 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 increase for the three and six months ended December 31, 2022 was driven by an additional $32 million and $62 million, respectively, of IR&D expenses from the Lasers segment. As a percent of sales, IR&D spend in the Materials segment decreased 4% and 5% for the three and six months ended December 31, 2022, respectively, compared to the prior year periods due to the launch of new products.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2022 were $274 million, or 20% of revenues, compared to $118 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% of revenues, for the same period last fiscal year. The increase in SG&A as a percentage of revenue for the three months ended December 31, 2022 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-charges related to the Merger, including $38 million additional integration and restructuring, $19 million additional transaction fees and financing, and a one-time expense of $18 million related to share-based compensation resulting from the Merger.

Interest and other, net. Interest and other, net for the three months ended December 31, 2022 was expense of $75 million, compared to expense of $19 million for the same period last fiscal year, an increase of $56 million. Included in interest and other, net, was interest expense on borrowings, equity losses from unconsolidated investments, foreign currency gains and losses, amortization of debt issuance costs, and interest income on excess cash balances. For the three months ended December 31, 2022, the increase of $56 million in comparison to the same period last fiscal year was driven by $54 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 incremental 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.

Income taxes. The Company’s year-to-date effective income tax rate at December 31, 2022 was 29% compared to an effective tax rate of 16% for the same period in 2021. 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’s reportable segments are discussed below. Operating income differs from net earnings in that operating income excludes certain operational expenses included in other expense (income) – net as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See Note 13. Segment Reporting, to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s reportable segments and for the reconciliation of the Company’s operating income to net earnings, which is incorporated herein by reference. Effective July 1, 2022, the Company is reporting its financial results in the following three designated segments: (i) Materials, (ii) Networking, and (iii) Lasers. Financial results in prior years had been reported in the following two segments: (i) Compound Semiconductors, and (ii) Photonic Solutions. The Materials segment represents the former Compound Semiconductors segment and the Networking segment represents the former Photonic Solutions segment. The Lasers segment represents Legacy Coherent. In addition, prior year numbers were recast to reflect the transfer of two entities between the Networking and Materials segments.

Networking ($ in millions)

Revenues for the three months ended December 31, 2022 increased 18% to $609 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 million for the same period last fiscal year. The increases in revenue of $92 million and $158 million during the three and six months ended December 31, 2022, respectively, were primarily due to increased revenue year-over-year in the communications market driven by increased revenue in both telecom and datacom.

Operating income for the three months ended December 31, 2022 increased 79% to $90 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 million for the same period last fiscal year. The increase in operating income for the three and six months ended December 31, 2022 was driven by strong sales, improved mix and the favorable impact of foreign currency.

Materials ($ in millions)

Revenues for the three months ended December 31, 2022 increased 32% to $382 million, compared to revenues of $290 million for the same period last fiscal year. Compared to the three months ended December 31, 2021, Materials contributed an additional $92 million year-over-year, with $114 million growth in the electronics end market from innovations in sensing products. The growth was partially offset by softer sales in aerospace and defense in the United States and slower sales in industrial China. Revenues for the six months ended December 31, 2022 increased 33% 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% to $81 million, compared to operating income of $57 million for the same period last fiscal year, primarily driven by strong sales, and the launch of a new product 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 income for the six months ended December 31, 2022 increased 52% to $157 million, compared to $103 million of operating income for the same period last fiscal year. The increase 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)

Revenues for the three months ended December 31, 2022 were $379 million, with 75% of revenues from the industrial end market and 25% from the instrumentation end market. Revenues for the six months ended December 31, 2022 were $772 million, with 76% of revenues from the industrial end market and 24% from the instrumentation end market.

Operating loss for the three months ended December 31, 2022 was $163 million. The loss was driven by $112 million of amortization of the preliminary fair value step-up on acquired inventory, $86 million of amortization expense related to the preliminary fair value of intangible assets acquired, and $12 million of integration costs. Operating loss for the six months ended December 31, 2022 was $287 million. The loss was driven by $158 million 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 integration costs, and $18 million of nonrecurring share based compensation.

Liquidity and Capital Resources

Historically, our primary sources of cash have been from operations, long-term borrowings, and advance funding from customers. Other sources of cash include proceeds from the issuance of equity, proceeds received from the exercises of stock options, and sale of equity investments and businesses. Our historic uses of cash have been for business acquisitions, capital expenditures, investment in research and development, payments of principal and interest on outstanding debt obligations, payments of debt and equity issuance costs to obtain financing and payments in satisfaction of employees’ minimum tax obligations. Supplemental information pertaining to our sources and uses of cash for the periods indicated is presented as follows:

Sources (uses) of cash (millions):

Operating activities:

Net cash provided by operating activities was $300 million for the six months ended December 31, 2022 compared to $240 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 six months ended December 31, 2022 compared to the same period last fiscal year was primarily due to improved management of working capital accounts.

Investing activities:

Net cash used by investing activities was $5,737 million for the six months ended December 31, 2022, compared to net cash used of $102 million for the same period last fiscal year. In the three months ended September 30, 2022, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures increased by $144 million year-over-year, to continue to increase capacity to meet the growing demand for the Company’s product portfolio.

Financing activities:

Net cash provided by financing activities was $3,756 million for the six months ended December 31, 2022, compared to net cash provided by financing activities of $911 million for the same period last fiscal year. Cash inflow for the current period was from borrowings under the New Term Facilities, defined below, as well the net proceeds from the issuance of Coherent's Series B-2 Convertible Preferred Stock. Financing outflows included payments to settle the Company's existing senior credit facilities.

Senior Credit Facilities as of June 30, 2022

On July 1, 2022, the amounts outstanding under the Company's prior senior credit facilities were repaid in full using proceeds from the New Term Facilities (defined below).

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. The Term A Facility and the Revolving Credit Facility each bear interest at LIBOR subject to a 0.00% 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 LIBOR plus 2.00% as of December 31, 2022. The Term B Facility bears interest at LIBOR (subject to a 0.50% floor) plus 2.75%. In relation to the Term Facilities, the Company incurred expense of $61 million and $114 million for the three and six months ended December 31, 2022, respectively, which is included in interest expense in the Consolidated Statements of Earnings (Loss). The definitive documentation for the Senior Credit Facilities includes customary LIBOR replacement provisions.

During the six months ended December 31, 2022, the Company made payments of $68 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.

As of December 31, 2022, 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):

On July 1, 2022, the Company utilized $2.1 billion of cash, cash equivalents, and restricted cash as part of the funding required to complete the Coherent acquisition. The Company believes existing cash, cash flow from operations, and available borrowing capacity from its Senior Credit Facilities will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and lease obligations, investments in internal research and development, and internal and external growth objectives at least through fiscal year 2023.

The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of December 31, 2022, the Company held approximately $653 million of cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the United States.

At December 31, 2022, we had $21 million of restricted cash.

MARKET RISKS

The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates. In the normal course of business, the Company uses a variety of techniques and derivative financial instruments as part of its overall risk management strategy, which is primarily focused on its exposure in relation to the Chinese Renminbi, Euro, Swiss Franc, Japanese Yen, Singapore Dollar and Korean Won. No significant changes have occurred in the techniques and instruments used.

Interest Rate Risks

As of December 31, 2022, the Company’s total borrowings include variable rate borrowings, which expose the Company to changes in interest rates. On November 24, 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable interest rate debt by effectively converting it to fixed interest rate debt. If the Company had not effectively hedged its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $12 million 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.

Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

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, no changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) were implemented during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Legacy Coherent’s operations are included in the Company’s unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the entire period from July 1, 2022 to 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.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2022, any of which could materially affect our business, financial condition or future results. Those risk factors are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

• 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.