Coherent 10-Q 2023-12-31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 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 February 2, 2024, 151,813,356 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)

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 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 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

• Restructuring and Site Consolidation

• Silicon Carbide Investment

• Critical Accounting Estimates

• 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 MD&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, 2023 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, communications, electronics, and 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 externally-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, electronics, and instrumentation markets.

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 player in all of our highly competitive markets. We may elect to change the way in which we operate or are organized in the future to enable the most efficient implementation of our strategy.

Restructuring and Site Consolidation

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. In the three and six months ended December 31, 2023, these activities resulted in a net recovery of $2 million and charges of $1 million, respectively, primarily for employee termination costs and accelerated 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. See Note 18. 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 three and six months ended December 31, 2023, the acceleration of these activities resulted in $9 million and $16 million, respectively, 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 $9 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 18. 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.

Silicon Carbide Investment

On May 10, 2023, the Company announced that it has commenced a review of strategic alternatives for its Silicon Carbide business. On December 4, 2023, Silicon Carbide LLC (“Silicon Carbide”), one of the Company’s subsidiaries, completed the sale of Class A Common Units to Denso Corporation (“Denso”) and Mitsubishi Electric Corporation (“MELCO”), under which they collectively invested an aggregate of $1 billion in Silicon Carbide LLC (collectively, the “Equity Investments”). As a consequence of the Equity Investments, the Company’s ownership interest in the Class A Common Units of Silicon Carbide LLC was reduced to approximately 75%. Denso and MELCO each, individually, own approximately 12.5% of the Class A Common Units of Silicon Carbide LLC. The Equity Investments in Silicon Carbide will enable Coherent to increase its available free cash flow to provide greater financial and operational flexibility to execute its capital allocation priorities, as the aggregate $1 billion investment will be used to fund future capital expansion of Silicon Carbide. See Note 11. Noncontrolling Interests included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the noncontrolling interests in our Silicon Carbide LLC (“Silicon Carbide”) subsidiary.

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 18, 2023 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.

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.

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, 2023 and 2022 ($ in millions):

Consolidated

Revenues. Revenues for the three months ended December 31, 2023 decreased 17% to $1,131 million, compared to $1,370 million for the same period last fiscal year. Revenues decreased in all four markets, with the largest declines of $111 million (56%) in the electronics market, primarily in the consumer electronics vertical, and $80 million (13%) in the communications market, primarily due to decreased demand in the telecom vertical. In addition, revenues decreased in the industrial market by $27 million, or 6%, due to decreases in the precision manufacturing and semiconductor capital equipment vertical and by $21 million, or 18%, in the instrumentation market due to decreases in the scientific instrumentation vertical. Materials decreased $129 million year-over-year, primarily due to lower demand for sensing products and other consumer applications in the consumer electronics vertical within the electronics market. Networking revenues decreased $84 million year-over-year, with decreases from the telecom vertical in our communications market. Lasers revenue for the three months ended December 31, 2023 decreased $26 million, due to lower demand from the scientific instrumentation vertical in the instrumentation market and semiconductor and display capital equipment and precision manufacturing vertical in the industrial end market.

Revenues for the six months ended December 31, 2023 decreased 20% to $2,185 million, compared to $2,715 million for the same period last fiscal year. Revenues decreased in all four markets, with the largest decline, $206 million (17%), in the communications market, primarily due to decreased demand in the telecom vertical. Electronics market revenues decreased $202 million (53%), primarily in the consumer electronics vertical. In addition, revenues decreased in the industrial market by $84 million, or 9%, due to decreases in precision manufacturing and semiconductor capital equipment verticals and by $39 million, or 17%, in the instrumentation market due to decreases in the life sciences vertical. Materials decreased $240 million year-over-year, primarily due to lower demand for sensing products and other consumer applications in the consumer electronics vertical within the electronics market. Networking revenues decreased $208 million year-over-year, with decreases from the telecom vertical in our communications market. Lasers revenue for the six months ended December 31, 2023 decreased $82 million, due to lower demand in the semiconductor and display capital equipment and precision manufacturing verticals in the industrial end market and the life sciences vertical in the instrumentation market.

Gross margin. Gross margin for the three months ended December 31, 2023 was $351 million, or 31% of total revenues, compared to $411 million, or 30% of total revenues, for the same period last fiscal year, an increase of 100 basis points. The increase as a percent of revenue for the three months ended December 31, 2023 included the favorable impact of $112 million lower expense related to the fair value adjustment on acquired inventory from the acquisition of Coherent, Inc, (“Merger”) and the unfavorable impact of $16 million higher amortization expense related to technology acquired in the Merger. Gross margins, excluding the lower fair value adjustment on acquired inventory and higher amortization, decreased 570 basis points for the three months ended December 31, 2023 compared to the prior year period primarily due to lower revenues, higher cost product built and capitalized in prior periods being expensed, less favorable sales mix especially in the datacom vertical 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.

Gross margin for the six months ended December 31, 2023 decreased to $658 million, or 30% of total revenues, compared to $855 million, or 31% of total revenues, for the same period last fiscal year, and decreased as a percent of revenue year-over-year by 140 basis points. The decrease as a percent of revenue for the six months ended December 31, 2023 included the favorable impact of $158 million lower expense related to the fair value adjustment on acquired inventory from the Merger. Gross margins, excluding the lower fair value adjustment on acquired inventory, decreased 719 basis points for the six months ended December 31, 2023 compared to the prior year period primarily due to lower revenues, higher cost product built and capitalized in prior periods being expensed, less favorable sales mix especially in the datacom vertical 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, 2023 were $111 million, or 10% of revenues, compared to $129 million, or 9% of revenues, for the same period last fiscal year. IR&D for the six months ended December 31, 2023 decreased 10% to $225 million, or 10% of revenues, compared to $250 million, or 9% of revenues, for the same period last fiscal year. The decrease for the three and six months ended December 31, 2023 was in all three segments and was driven by lower costs due to the consolidation of sites and our efforts to control costs. The IR&D expenses are primarily related to our continued investment in new products and manufacturing processes across all of our businesses, including significant investments in indium phosphide semiconductor lasers, silicon carbide materials, devices for both power electronics and wireless devices, and lasers for display processing and semiconductor capital equipment.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2023 were $209 million, or 18% of revenues, compared to $274 million, or 20% of revenues, for the same period last fiscal year. SG&A expenses for the six months ended December 31, 2023 were $421 million, or 19% of revenues, compared to $554 million, or 20% of revenues, for the same period last fiscal year. The decrease in SG&A as a percentage of revenue for the three months ended December 31, 2023 compared to the same period last fiscal year was the result of lower amortization expense of $50 million resulting both from the Merger and lower amortization for tradenames impaired in the fourth quarter of fiscal 2023, and $6 million lower share-based compensation as well as lower costs due to the consolidation of sites and our efforts to control costs, partially offset by the impact of lower revenues. The decrease in SG&A as a percentage of revenue for the six months ended December 31, 2023 compared to the same period last fiscal year was the result of lower amortization expense of $43 million resulting from both the Merger and lower amortization for tradenames impaired in the fourth quarter of fiscal 2023, lower charges related to the Merger, including $39 million lower transaction fees and financing, lower one-time expense of $18 million related to share-based compensation resulting from the Merger, and $12 million lower severance and integration consulting costs as well as lower costs due to the consolidation of sites and our efforts to control costs, partially offset by the impact of lower revenues.

Restructuring charges. Restructuring charges related to our Restructuring Plan for the three and six months ended December 31, 2023 were a net recovery of $2 million and net charges of $1 million, respectively, and consist of severance (including cumulative adjustments resulting in a current period recovery), move costs, equipment write-offs and accelerated depreciation due to the consolidation of certain manufacturing sites. See Note 18. Restructuring and Synergy and Site Consolidation Plan included in Item 1 of this Quarterly Report on Form 10-Q for further information.

Interest and other, net. Interest and other, net for the three months ended December 31, 2023 was expense of $69 million, compared to expense of $75 million for the same period last fiscal year, a decrease of $6 million. Included in interest and other, net, were interest expense on borrowings, foreign currency gains and losses, amortization of debt issuance costs, equity gains and losses from unconsolidated investments, and interest income on excess cash balances. For the three months ended December 31, 2023, the decrease of $6 million in comparison to the same period last fiscal year was driven by $7 million incremental interest income due to increases in interest rates earned on investments as well as the increase in restricted cash balances, and lower foreign exchange losses partially offset by $4 million incremental interest expense due to higher interest rates on our Term facilities. Interest and other, net for the six months ended December 31, 2023 was expense of $136 million, compared to expense of $168 million for the same period last fiscal year, a decrease of $32 million. The decrease of $32 million in comparison to the same period last fiscal year was driven by $35 million incurred in the prior year related to financing of the Merger and $10 million incremental interest income due to increases in interest rates earned on investments as well as the increase in restricted cash balances. The decreases were partially offset by $15 million incremental interest expense due to higher interest rates on our Term facilities.

Income taxes. The Company’s year-to-date effective income tax rate at December 31, 2023 was 24% compared to an effective tax rate of 29% 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 tax rate differentials between U.S. and foreign jurisdictions.

Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests for the three and six months ended December 31, 2023 was $1 million and represents the noncontrolling interest holders’ shares of losses of Silicon Carbide LLC after the close of the transaction on December 4, 2023. See Note 11. Noncontrolling Interests included in Item 1 of this Quarterly Report on Form 10-Q for further information.

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. We report our financial results in the following three designated segments: (i) Networking, (ii) Materials, and (iii) Lasers.

Networking ($ in millions)

Revenues for the three months ended December 31, 2023 decreased 14% to $524 million, compared to $609 million for the same period last fiscal year. Revenues for the six months ended December 31, 2023 decreased 17% to $997 million, compared to $1,205 million for the same period last fiscal year. The decrease in revenue of $84 million during the three months ended December 31, 2023 was primarily due to decreases in the communications market driven by decreased revenues in the telecom vertical. The decrease in revenues of $208 million during the six months ended December 31, 2023 was primarily due to decreased revenue year-over-year in the telecom vertical within the communications market.

Operating income for the three months ended December 31, 2023 decreased 47% to $47 million, compared to operating income of $90 million for the same period last fiscal year. Operating income for the six months ended December 31, 2023 decreased 65% to $64 million, compared to operating income of $181 million for the same period last fiscal year. The decrease in operating income for the three months ended months ended December 31, 2023 was driven by $84 million lower revenues as well as lower margin percentage. The margin percentage was lower than the three months ended months ended December 31, 2022 due to less favorable sales mix in datacom applications, the impact of fixed manufacturing costs as a percentage of revenues on lower revenues and higher costs related to products that are being exited. The decrease in operating income for the six months ended December 31, 2023 was driven by $208 million lower revenues as well as lower margin percentage. The margin percentage was lower than the six months ended months ended December 31, 2022 due to less favorable sales mix in the datacom vertical, the impact of fixed manufacturing costs as a percentage of revenues on lower revenues and higher costs related to products that are being exited.

Materials ($ in millions)

Revenues for the three months ended December 31, 2023 decreased 34% to $254 million, compared to revenues of $382 million for the same period last fiscal year. Compared to the three months ended December 31, 2022, Materials decreased $129 million year-over-year, with a decrease of $110 million in the electronics market due to lower demand in our consumer electronics vertical, partially offset by higher demand in our automotive vertical driven by electric vehicles, as well as a decrease of $12 million in the industrial market. Demand in the instrumentation market also decreased, but to a lesser extent. Revenues for the six months ended December 31, 2023 decreased 32% to $498 million, compared to revenues of $738 million for the same period last fiscal year. The decrease in revenues of $240 million during the six months ended December 31, 2023 was primarily related to a decrease of $198 million in the electronics market mostly due to lower demand in our consumer electronics vertical, partially offset by higher demand in our automotive vertical driven by electric vehicles, as well as decreases in demand to a lesser extent in our precision manufacturing vertical in the industrial market.

Operating income for the three months ended December 31, 2023 decreased 88% to $10 million, compared to operating income of $81 million for the same period last fiscal year, primarily driven by $129 million lower revenues and lower margin percentage as well as lower IR&D and SG&A costs due to the consolidation of sites and our efforts to control costs. The margin percentage was lower than the three months ended December 31, 2022 due to the unfavorable impact of fixed manufacturing costs with lower revenues, higher cost product built and capitalized in prior periods being expensed, underutilized operating capacity in several plants and shut down costs related to site consolidations. Operating income for the six months ended December 31, 2023 decreased 89% to $17 million, compared to $157 million of operating income for the same period last fiscal year. The decrease in operating income for the six months ended December 31, 2023 was driven by $240 million lower revenues and lower margin percentage. The margin percentage was lower than the six months ended December 31, 2022 due to unfavorable impact of fixed manufacturing costs with lower revenues, higher cost product built and capitalized in prior periods being expensed, underutilized operating capacity in several plants and shut down costs related to site consolidations.

Lasers ($ in millions)

Revenues for the three months ended December 31, 2023 decreased 7% to $354 million, compared to revenues of $379 million for the same period last fiscal year. The decrease was primarily due to a $13 million drop in the industrial market due to lower demand in our semiconductor and display capital equipment and precision manufacturing verticals, as well as $12 million lower shipments to the instrumentation market. Revenues for the six months ended December 31, 2023 decreased 11% to $689 million, compared to revenues of $772 million for the same period last fiscal year. The decrease was primarily due to a $56 million drop in the industrial market due to lower demand in our semiconductor and display capital equipment and precision manufacturing verticals, as well as $26 million lower shipments to the instrumentation market.

Operating loss for the three months ended December 31, 2023 decreased 84% to $25 million, compared to an operating loss of $163 million for the same period last fiscal year. The lower operating loss was driven by $141 million lower costs in the current year quarter compared to the prior year quarter related to the Merger, including $112 million lower amortization of the preliminary fair value step-up on acquired inventory and $33 million lower amortization expense related to the fair value of intangible assets acquired partially offset by $4 million lower integration costs. Excluding the lower Merger related costs, operating income for the three months ended December 31, 2023 decreased $3 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 fixed manufacturing costs with lower revenues. Operating loss for the six months ended December 31, 2023 decreased 76% to $70 million, compared to an operating loss of $287 million for the same period last fiscal year. The lower operating loss was driven by $262 million lower costs in the current year compared to the prior year related to the Merger, including $158 million lower amortization of the preliminary fair value step-up on acquired inventory, $41 million lower amortization expense related to the fair value of intangible assets acquired, $39 million lower transaction fees and financing, $18 million lower nonrecurring share based compensation and $6 million lower integration costs. Excluding the lower Merger related costs, operating income for the six months ended December 31, 2023 decreased $45 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 fixed manufacturing costs 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):

Operating activities:

Net cash provided by operating activities was $266 million for the six months ended December 31, 2023 compared to $300 million of net cash provided by operating activities for the same period last fiscal year. The decrease in cash flows provided by operating activities during the six months ended December 31, 2023 compared to the same period last fiscal year was primarily due to higher losses net of non-cash adjustments and was partially offset by improved management of working capital accounts, in particular accounts payable and accounts receivable.

Investing activities:

Net cash used in investing activities was $156 million for the six months ended December 31, 2023, compared to net cash used of $5.7 billion 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 decreased by $92 million year-over-year.

Financing activities:

Net cash provided by financing activities was $859 million for the six months ended December 31, 2023, compared to net cash provided by financing activities of $3.8 billion for the same period last fiscal year. Financing inflows in the current year period included the $1.0 billion contribution from noncontrolling interests, partially offset by payments on existing debt and equity issuance costs related to the contribution from noncontrolling interests. Cash inflow for the prior year-to-date period was from borrowings under the Term Facilities, defined below, as well the net proceeds from the issuance of Coherent’s Series B-2 Convertible Preferred Stock. Financing outflows for the prior year-to-date period included payments to settle the Company’s existing senior credit facilities.

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 Secured Overnight Financing Rate (“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 December 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 $62 million and $122 million, respectively, for the three and six months ended December 31, 2023, 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 $12 million and $23 million, respectively, during the three and six months ended December 31, 2023.

During the six months ended December 31, 2023, the Company made payments of $105 million for the Term Facilities, including a voluntary payment of $70 million. We expect aggregate debt repayment of $225 million to $275 million for all of fiscal 2024.

As of December 31, 2023, the Company had no borrowings outstanding under the Revolving Credit Facility.

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

Other Liquidity

On December 4, 2023, the Company consummated two investment agreements under which Silicon Carbide LLC, a Company subsidiary received $1.0 billion cash in exchange for 25% of the equity of that entity. Such funds will be used primarily to fund future capital expansion, including the previously-announced capital that Coherent 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. See Note 11. Noncontrolling Interests included in Item 1 of this Quarterly Report on Form 10-Q 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 IR&D, and internal and external growth objectives at least through the next twelve months.

Our 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, 2023, the Company held approximately $725 million of cash, cash equivalents and restricted cash outside of the United States. Generally, cash balances held outside the United States could be repatriated to the United States.

At December 31, 2023, we had $964 million of restricted cash, which includes $959 million at our Silicon Carbide LLC that is restricted for use by only that subsidiary.

MARKET RISKS

We are exposed to market risks arising from adverse changes in foreign currency exchange rates and interest rates. In the normal course of business, we use a variety of techniques and derivative financial instruments as part of our 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 Malaysian Ringgit. No significant changes have occurred in the techniques and instruments used.

Interest Rate Risks

As of December 31, 2023, our total borrowings include variable rate borrowings, which expose us to changes in interest rates. In November 2019, we entered into an interest rate swap contract, amended on March 20, 2023, to limit the exposure of our variable interest rate debt by effectively converting a 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 we had not effectively hedged our 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 $8 million and $17 million, respectively, for the three and six months ended December 31, 2023.

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

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.

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 risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 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.

On December 7, 2023, Vincent D. Mattera, Jr., the Company’s Chief Executive Officer, adopted a written plan intended to satisfy the affirmative defense of Rule 10b5-1(c) with a duration through December 31, 2024 with respect to (x) the exercise of stock options and sale of up to 128,620 shares of underlying Company stock and (y) the additional sale of up to 65,000 Company shares.

On December 14, 2023, Walter R. Bashaw II, the Company’s President, adopted a written plan intended to satisfy the affirmative defense of Rule 10b5-1(c) with a duration through September 5, 2024 with respect to (x) the exercise of stock options and sale of up to 3,620 shares of underlying Company stock and (y) the additional sale of up to 6,000 Company shares.

• 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.