Coherent 10-Q 2023-03-31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2023

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 May 8, 2023, 139,377,779 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)

($000)

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)

See Notes to Condensed Consolidated Financial Statements.

Coherent Corp. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

*($000)

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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 eight sections:

• Forward-Looking Statements

• Overview

• Acquisition and Background of Coherent, Inc.

• Critical Accounting Estimates

• Transfer to the New York Stock Exchange

• Subsequent Events

• Results of Operations

• Liquidity and Capital Resources

Forward-looking statements in Item 2 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to Part II Item 1A for discussion of these risks and uncertainties).

Forward-Looking Statements

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

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

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

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

Overview

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

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

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

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

Acquisition and Background of Coherent, Inc.

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

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

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

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

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

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

Legacy Coherent's products are manufactured at sites in California, Oregon, Michigan, New Jersey, and Connecticut in the United States; Germany, Scotland, Finland, Sweden, Switzerland, and Spain in Europe; and South Korea, Singapore, and Malaysia in Asia. In addition, Legacy Coherent uses contract manufacturers in southeast Asia, Eastern Europe and the United States for the production of certain assemblies and turnkey solutions.

Critical Accounting Estimates

The preparation of financial statements and related disclosures are in conformity with accounting principles generally accepted in the United States of America and the Company’s discussion and analysis of its financial condition and results of operations require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes.

Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K dated August 29, 2022 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Starting in the three months ended September 30, 2022, we assessed business combinations to be one of our critical accounting policies.

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

New Accounting Standards

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

Transfer to New York Stock Exchange

On February 8, 2023, the Company announced the voluntary transfer of the listing of its common stock, no par value ("Coherent Common Stock") and Series A Mandatory Convertible Preferred Stock. no par value ("Mandatory Convertible Preferred Stock") from the NASDAQ Global Select Market to the New York Stock Exchange (the “NYSE”), effective as of the close of trading on February 22, 2023. The Coherent Common Stock and Mandatory Convertible Preferred Stock began trading on the NYSE February 23, 2023, under the ticker symbols “COHR” and “IIVI”, respectively.

Subsequent Events

On May 10, 2023, the Company announced that it plans to take certain additional restructuring actions that will run through the end of fiscal year 2025 (the "Plan") in light of the macro conditions and its ongoing efforts to make the Company more efficient. The Plan includes certain restructuring actions including workforce reductions to reduce costs and expenses as well as site consolidations, including the relocation of certain manufacturing facilities, to increase its resiliency and lower its costs. We anticipate incurring approximately $150 million to $200 million of restructuring and other non-recurring costs to reduce the workforce and relocate facilities, among others, in connection with the Plan.

On May 10, 2023, the Company announced that it has commenced a review of strategic alternatives for its Silicon Carbide “SiC” business. The Company expects to consider a range of strategic alternatives including a minority investment in the SiC business by a strategic or financial partner, joint venture, and/or a sale of the SiC business.

Results of Operations ($ in millions, except per share data)

The following tables set forth select items from our Condensed Consolidated Statements of Earnings (Loss) for the three and nine months ended March 31, 2023 and 2022 ($ in millions):

Consolidated

Revenues. Revenues for the three months ended March 31, 2023 increased 50% to $1,240 million, compared to $828 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2023 increased 63% to $3,955 million, compared to $2,430 million for the same period last fiscal year. The majority of the increase in revenue for both the three and nine months ended March 31, 2023 is driven by the Lasers segment, which was acquired in our acquisition of Legacy Coherent. The remaining contributions to the increased revenues were from the Materials segment in the three months ended March 31, 2023 and from both the Materials and Networking segments in the nine months ended March 31, 2023. Lasers revenue for the three months ended March 31, 2023 was $365 million, of which 72% was in the industrial end market and 28% in the instrumentation end market. Lasers revenue for the nine months ended March 31, 2023 was $1,137 million, of which 74% was in the industrial end market and 26% in the instrumentation end market.

Organic revenue growth was $47 million, or 6%, year-over-year for the three months ended March 31, 2023. Materials contributed $56 million of this organic growth year-over-year, with $76 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the communications, industrial and instrumentation end markets. Networking decreased $8 million year-over-year, with decreases from our communications end market.

Organic revenue growth was $388 million, or 16%, year-over-year for the nine months ended March 31, 2023. Materials contributed $239 million of this organic growth year-over-year, with $289 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the industrial end market. Networking increased $149 million year-over-year, with growth in both telecom and datacom.

Gross margin. Gross margin for the three months ended March 31, 2023 was $420 million, or 34% of total revenues, compared to $322 million, or 39% of total revenues, for the same period last fiscal year, a decrease of 500 basis points. The decrease as a percent of revenue for the three months ended March 31, 2023 included $21 million of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the incremental amortization decreased 327 basis points for the three months ended March 31, 2023 compared to the prior year period primarily due to lower revenues, less favorable mix of revenues, underutilized operating capacity in several plants, and the unfavorable foreign exchange rates.

Gross margin for the nine months ended March 31, 2023 increased to $1,275 million, or 32% of total revenues, compared to $940 million, or 39% of total revenues, for the same period last fiscal year, and decreased as a percent of revenue year-over-year by 650 basis points. The decrease as a percent of revenue for the nine months ended March 31, 2023 was driven by $158 million of additional expense related to the preliminary fair value adjustment on acquired inventory from the acquisition of Legacy Coherent (“Merger”), as well as $64 million of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the fair value adjustment on acquired inventory and incremental amortization decreased 82 basis points for the nine months ended March 31, 2023 compared to the prior year period.

Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended March 31, 2023 were $126 million, or 10% of revenues, compared to $97 million, or 12% of revenues, for the same period last fiscal year. IR&D for the nine months ended March 31, 2023 increased 34% to $376 million, or 10% of revenues, compared to $281 million, or 12% of revenues, for the same period last fiscal year. The increase for the three and nine months ended March 31, 2023 was driven by an additional $34 million and $96 million, respectively, of IR&D expenses from the Lasers segment. As a percent of sales, IR&D spend in the Materials segment decreased 5% for each of the three and nine month periods ended March 31, 2023 compared to the prior year periods due to the launch of new products.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2023 were $226 million, or 18% of revenues, compared to $118 million, or 14% of revenues, for the same period last fiscal year. SG&A expenses for the nine months ended March 31, 2023 were $781 million, or 20% of revenues, compared to $358 million, or 15% of revenues, for the same period last fiscal year. The increase in SG&A as a percentage of revenue for the three months ended March 31, 2023 compared to the same period last fiscal year was the result of the comparatively larger sales and administrative efforts required to sell an entire laser system versus components and subsystems, as well as incremental amortization expense of $52 million. The increase in SG&A as a percentage of revenue for the nine months ended March 31, 2023 compared to the same period last fiscal year was the result of the comparatively larger sales and administrative efforts required to sell an entire laser system versus components and subsystems, incremental amortization expense of $156 million and higher one time-charges related to the Merger of $79 million for integration, share-based compensation, and transaction fees.

Interest and other, net. Interest and other, net for the three months ended March 31, 2023 was expense of $72 million, compared to expense of $44 million for the same period last fiscal year, an increase of $28 million. Included in interest and other, net, were interest expense on borrowings, equity gains and losses from unconsolidated investments, foreign currency gains and losses, amortization of debt issuance costs, and interest income on excess cash balances. For the three months ended March 31, 2023, the increase of $28 million in comparison to the same period last fiscal year was driven by $32 million of incremental interest expense due to the new debt assumed in the financing of the Merger partially offset by $2 million incremental interest income. Interest and other, net for the nine months ended March 31, 2023 was expense of $240 million, compared to expense of $67 million for the same period last fiscal year, an increase of $173 million. The increase of $173 million in comparison to the same period last fiscal year was driven by $135 million incremental interest expense due to the new debt assumed in the financing of the Merger, $35 million incurred in the current year related to financing of the Merger and $9 million incremental net foreign currency losses, with a foreign currency loss of $4 million for the nine months ended March 31, 2022 as compared to a foreign currency gain of $5 million for the current nine-month period. The increases were partially offset by $4 million of incremental interest income.

Income taxes. The Company’s year-to-date effective income tax rate at March 31, 2023 was 33% compared to an effective tax rate of 18% for the same period in 2022. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were due to nondeductible expenses and tax rate differentials between U.S. and foreign jurisdictions.

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 March 31, 2023 decreased 2% to $551 million, compared to $560 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2023 increased 9% to $1,756 million, compared to $1,607 million for the same period last fiscal year. The decrease in revenue of $8 million during the three months ended March 31, 2023 was primarily due to decreases in the communications market driven by decreased revenues in the communications end market. The increase in revenues of $149 million during the nine months ended March 31, 2023 was primarily due to increased revenue year-over-year in the communications market.

Operating income for the three months ended March 31, 2023 decreased 9% to $49 million, compared to operating income of $55 million for the same period last fiscal year. Operating income for the nine months ended March 31, 2023 increased 40% to $230 million, compared to operating income of $164 million for the same period last fiscal year. The decrease in operating income for the three months ended months ended March 31, 2023 was driven by lower sales and the unfavorable impact of foreign exchange rates partially offset by lower variable compensation costs and the leveraging of corporate resources across each of our three segments. The increase in operating income for the nine months ended March 31, 2023 was driven by strong sales, lower variable compensation costs and the leveraging of corporate resources across each of our three segments.

Materials ($ in millions)

Revenues for the three months ended March 31, 2023 increased 21% to $324 million, compared to revenues of $268 million for the same period last fiscal year. Compared to the three months ended March 31, 2022, Materials contributed an additional $56 million year-over-year, with $76 million growth in the electronics end market for consumer products and electric vehicles as well as in semiconductor equipment. The growth was partially offset by softer revenues in datacom and precision manufacturing markets. Revenues for the nine months ended March 31, 2023 increased 29% to $1,062 million, compared to revenues of $823 million for the same period last fiscal year. The increase in revenues of $239 million during the nine months ended March 31, 2023 was primarily related to the increase in demand in the electronics end market from innovations in sensing products.

Operating income for the three months ended March 31, 2023 increased 10% to $68 million, compared to operating income of $62 million for the same period last fiscal year, primarily driven by strong sales in electronics markets and lower costs for reliance on corporate resources for some services. The margin percentage was lower than the three months ended March 31, 2022 due to mix and variations in demand across the operations. Operating income for the nine months ended March 31, 2023 increased 36% to $225 million, compared to $165 million of operating income for the same period last fiscal year. The increase in operating income for the nine months ended March 31, 2023 was driven by strong sales in electronics markets, partially offset by slower sales in industrial markets. The margin percentage was lower than the nine months ended March 31, 2022 due to mix and variations in demand across the operations.

Lasers ($ in millions)

Revenues for the three months ended March 31, 2023 were $365 million, with 72% of revenues from the industrial end market and 28% from the instrumentation end market. Revenues for the nine months ended March 31, 2023 were $1,137 million, with 74% of revenues from the industrial end market and 26% from the instrumentation end market.

Operating loss for the three months ended March 31, 2023 was $50 million. The loss was driven by $73 million of amortization expense related to the preliminary fair value of intangible assets acquired, and $13 million of integration costs. Operating loss for the nine months ended March 31, 2023 was $337 million. The loss was driven by $222 million of amortization expense related to the preliminary fair value of intangible assets acquired, $158 million of amortization of the preliminary fair value step-up on acquired inventory, one-time charges of $39 million for transaction fees and financing, $48 million of integration costs, and $18 million of nonrecurring share based compensation.

Liquidity and Capital Resources

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

Sources (uses) of cash (millions):

Operating activities:

Net cash provided by operating activities was $452 million for the nine months ended March 31, 2023 compared to $276 million of net cash provided by operating activities for the same period last fiscal year. The increase in cash flows provided by operating activities during the nine months ended March 31, 2023 compared to the same period last fiscal year was primarily due to improved management of working capital accounts.

Investing activities:

Net cash used by investing activities was $5.8 billion for the nine months ended March 31, 2023, compared to net cash used of $202 million for the same period last fiscal year. In the three months ended September 30, 2022, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures increased by $147 million year-over-year, to continue to increase capacity to meet the growing demand for the Company’s product portfolio.

Financing activities:

Net cash provided by financing activities was $3.7 billion for the nine months ended March 31, 2023, compared to net cash provided by financing activities of $891 million for the same period last fiscal year. Cash inflow for the current year-to-date period was from borrowings under the New Term Facilities, defined below, as well the net proceeds from the issuance of Coherent's Series B-2 Convertible Preferred Stock. Financing outflows included payments to settle the Company's existing senior credit facilities.

Senior Credit Facilities as of June 30, 2022

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

New Senior Credit Facilities

On July 1, 2022, Coherent entered into a Credit Agreement by and among the Company, the lenders, and other parties thereto, and JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, which provides for senior secured financing of $4.0 billion, consisting of a term loan A credit facility (the “Term A Facility”), with an aggregate principal amount of $850 million, a term loan B credit facility (the “Term B Facility” and, together with the Term A Facility, the “Term Facilities”), with an aggregate principal amount of $2,800 million, and a revolving credit facility (the “Revolving Credit Facility” and, together with the Term Facilities, the “Senior Credit Facilities”), in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. On March 31, 2023, Coherent entered into Amendment No. 1 to the Credit Agreement, which replaced the adjusted LIBOR-based rate of interest therein with an adjusted SOFR-based rate of interest. As amended, the Term A Facility and the Revolving Credit Facility each bear interest at an adjusted SOFR rate subject to a 0.10% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The Term A Facility and the Revolving Credit Facility borrowings bear interest at adjusted SOFR plus 1.75% as of March 31, 2023. As amended, the Term B Facility bears interest at an adjusted SOFR rate (subject to a 0.50% floor) plus 2.75%. In relation to the Term Facilities, the Company incurred expense of $69 million and $183 million for the three and nine months ended March 31, 2023, respectively, which is included in interest expense in the Consolidated Statements of Earnings (Loss).

During the nine months ended March 31, 2023, the Company made payments of $145 million for the Term Facilities, including voluntary prepayments of $110 million.

As of March 31, 2023, the Company had no borrowings outstanding under the Revolving Credit Facility. In the three months ended December 31, 2022, we repaid the $65 million that was borrowed in the three months ended September 30, 2022.

Our cash position, borrowing capacity and debt obligations are as follows (in millions):

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

The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of March 31, 2023, the Company held approximately $649 million of cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the United States.

At March 31, 2023, we had $21 million of restricted cash.

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 March 31, 2023. We believe that we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this integration. Other than the impact of this business acquisition, no changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) were implemented during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Legacy Coherent’s operations are included in the Company’s unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for the entire period from July 1, 2022 to March 31, 2023 and represented 60% of the Company’s consolidated total assets as of March 31, 2023 and 29% of the Company’s consolidated total revenues for the three months ended March 31, 2023.

MARKET RISKS

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

Interest Rate Risks

As of March 31, 2023, the Company’s total borrowings include variable rate borrowings, which expose the Company to changes in interest rates. On November 24, 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable interest rate debt by effectively converting it to fixed interest rate debt. On March 20, 2023, the Company amended the swap contract. If the Company had not effectively hedged its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $12 million and $36 million for the three and nine months ended March 31, 2023, respectively.

On February 23, 2022, the Company entered into an interest rate cap (the "Cap"), with an effective date of July 1, 2023. On March 20, 2023, the Company amended the swap contract. As the Cap is not effective until July 2023, there is no impact on variable rate borrowings from the Cap for the three and nine months ended March 31, 2023.

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.