Coherent Corp. Form 10-Q Summary
Business context and reporting period
Coherent Corp. filed its quarterly report for the three and six months ended December 31, 2022, representing fiscal 2023 second quarter and first six months. The company develops and manufactures engineered materials, optoelectronic components and lasers serving communications, industrial, electronics, instrumentation, aerospace and defense, medical, semiconductor and other markets.
On July 1, 2022, Coherent completed its approximately $7.1 billion acquisition of Legacy Coherent, Inc. The acquired business is reported as the Lasers segment and is included in consolidated results from the acquisition date.
Financial performance and position
| Metric | Three months ended December 31, 2022 | Prior year | Six months ended December 31, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $1.370 billion | $807 million | $2.715 billion | $1.602 billion |
| Gross profit | $411 million | $311 million | $855 million | $618 million |
| Gross margin | 30% | 39% | 31% | 39% |
| Net earnings (loss) | $(45) million | $68 million | $(84) million | $142 million |
| Net loss available to common shareholders | $(81) million | $51 million | $(155) million | $108 million |
| Diluted EPS | $(0.58) | $0.44 | $(1.14) | $0.94 |
| Net cash from operating activities | Not separately presented | $300 million | $240 million |
- Organic revenue increased 23% year over year in the quarter and 21% for the six-month period. Reported revenue increased 70% and 69%, respectively, primarily because of the acquisition.
- Networking revenue was $609 million for the quarter and $1.205 billion for the six months; Materials revenue was $382 million and $738 million; Lasers revenue was $379 million and $772 million.
- Quarterly segment operating income was $90 million for Networking, $81 million for Materials and a $163 million loss for Lasers. The Lasers loss included acquisition-related inventory step-up amortization, acquired-intangible amortization and integration costs.
- Cash, cash equivalents and restricted cash were $913 million at December 31, 2022, compared with $2.582 billion at June 30, 2022. Approximately $653 million of cash and cash equivalents was held outside the United States.
- Total debt was $4.498 billion, compared with $2.300 billion at June 30, 2022. The company had $350 million of available revolving-credit capacity and no revolver borrowings at quarter-end.
- Capital expenditures were $246 million for the six months. Cash used for the acquisition was $5.489 billion, while financing activities provided $3.756 billion.
Material changes versus the prior comparable period
- The acquisition added the Lasers segment and materially increased revenue, assets, debt, amortization and operating expenses.
- Gross margin declined 860 basis points in the quarter and 710 basis points year to date. Management attributed the decline primarily to $112 million and $158 million of acquired-inventory fair-value step-up expense and $6 million and $43 million of incremental acquired-technology amortization.
- SG&A increased to 20% of revenue from 15%, primarily due to acquired-intangible amortization and merger-related integration, transaction, financing and share-based compensation charges.
- Interest expense increased to $71 million from $17 million in the quarter and to $133 million from $29 million year to date because of acquisition-related borrowings and financing costs.
- Goodwill increased to $4.427 billion from $1.286 billion and other intangible assets increased to $4.029 billion from $635 million, principally because of the acquisition.
- Inventories increased to $1.367 billion from $903 million, including a $158 million acquisition-related fair-value step-up.
Guidance, outlook, commentary and risks
- Management stated that existing cash, operating cash flow and available borrowing capacity should be sufficient through fiscal 2023 for working capital, capital expenditures, scheduled debt and lease payments, research and development and growth objectives.
- The company expected to repay an additional $75 million of debt during the remainder of fiscal 2023 after making $68 million of Term Facility payments during the first six months.
- Supply-chain conditions showed signs of improvement, but suppliers and customers continued to face potential material shortages, capacity constraints, delays, reduced orders and collection risks related to COVID-19 and broader economic conditions.
- Variable-rate debt creates interest-rate exposure. Management estimated that an unhedged 100-basis-point rate increase would have increased interest expense by approximately $12 million for the quarter and year to date. An interest-rate cap becomes effective July 1, 2023.
- The preliminary acquisition accounting remains subject to measurement-period revisions that could be material. The company was integrating Legacy Coherent into its systems and internal-control environment.
- The company reported compliance with covenants under its new Term Facilities and Senior Notes. It stated that routine legal and regulatory matters were not expected to materially affect financial condition, liquidity or results, although unfavorable outcomes remain possible.
- No specific numerical revenue or earnings guidance was provided in the filing text.
Important facts for investors to verify
- Verify the sustainability of organic growth in Networking and Materials and the demand outlook across communications, electronics, industrial and instrumentation markets.
- Assess the normalization of Lasers profitability after the acquired-inventory step-up and acquisition-related amortization and integration charges.
- Review debt maturities, floating-rate exposure, covenant requirements, planned repayments and the effect of higher interest rates on cash flow.
- Evaluate the final purchase-price allocation, including goodwill, acquired intangible values, useful lives and potential future impairment or amortization.
- Monitor liquidity after the substantial acquisition cash outflow, including international cash availability and working-capital requirements.
- Consider potential dilution from Series A and Series B convertible preferred stock, employee awards and other potentially issuable shares.