Coherent Corp. Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended March 31, 2023, Coherent’s fiscal third quarter and first nine months of fiscal 2023. The filing was signed May 10, 2023. Coherent develops and manufactures engineered materials, optoelectronic components, devices and lasers. Following the July 1, 2022 acquisition of Legacy Coherent, the company reports three segments: Networking, Materials and Lasers.
The requested period is identified as “2022 Q3,” but the filing itself reports fiscal Q3 2023, with comparisons to the three and nine months ended March 31, 2022.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Change | Nine Months Ended March 31 | Change |
|---|---|---|---|---|
| Revenue | $1.240 billion | Up 50% | $3.955 billion | Up 63% |
| Gross profit | $420 million | Up from $322 million | $1.275 billion | Up from $940 million |
| Gross margin | 34% | Down 5.0 percentage points | 32% | Down 6.5 percentage points |
| Net earnings (loss) | $3 million | Down from $49 million | $(81) million | Down from $191 million |
| Net earnings (loss) available to common shareholders | $(34) million | Down from $32 million | $(189) million | Down from $140 million |
| Diluted EPS | $(0.24) | Down from $0.28 | $(1.38) | Down from $1.22 |
| Operating cash flow | Not separately provided | — | $452 million | Up from $276 million |
Quarterly operating income was $67 million, compared with $107 million in the prior-year quarter. Nine-month operating income was $118 million, compared with $300 million in the prior-year period. Interest expense increased to $75 million for the quarter and $208 million for the nine-month period, versus $43 million and $73 million, respectively.
At March 31, 2023, cash, cash equivalents and restricted cash totaled $901 million, including $21 million of restricted cash. Total debt was $4.425 billion, compared with $2.300 billion at June 30, 2022. Revolving-credit availability was $348 million, and no revolving borrowings were outstanding at quarter-end. Approximately $649 million of cash and cash equivalents was held outside the United States.
Material Changes Versus the Prior Comparable Period
- Revenue growth was primarily acquisition-related. Legacy Coherent contributed $365 million of quarterly Lasers revenue and $1.137 billion for the nine-month period.
- Organic revenue growth was $47 million, or 6%, in the quarter, and $388 million, or 16%, for the nine-month period.
- Networking revenue declined 2% for the quarter but increased 9% for the nine-month period. Materials revenue increased 21% and 29%, respectively.
- Lasers reported a $50 million quarterly operating loss and a $337 million nine-month operating loss, primarily due to acquisition-related amortization, inventory fair-value step-up expense, integration costs and transaction-related charges.
- Gross margin declined because of acquired inventory step-up amortization, incremental intangible amortization, unfavorable product mix, underutilized capacity and foreign-exchange effects.
- SG&A increased to $226 million in the quarter and $781 million for nine months, reflecting the acquired laser business, higher selling and administrative requirements, amortization and merger-related costs.
- Research and development increased to $126 million in the quarter and $376 million for nine months, partly due to the Lasers segment.
- Cash declined by approximately $1.677 billion during the nine-month period, principally because of the $5.489 billion acquisition cash outflow and $343 million of capital expenditures, partially funded by $3.682 billion of financing cash flow.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing cash, operating cash flow and available borrowing capacity should be sufficient for working capital, capital expenditures, scheduled debt and lease payments, research and development, and growth objectives for at least the next twelve months. The filing does not provide formal revenue or earnings guidance.
- On May 10, 2023, the company announced a restructuring plan extending through fiscal 2025, including workforce reductions and site consolidations. It expects approximately $150 million to $200 million of restructuring and other non-recurring costs.
- The company began reviewing strategic alternatives for its Silicon Carbide business, including a minority investment, joint venture or sale. No transaction had been completed as of the filing date.
- Variable-rate debt creates interest-rate exposure. Without hedging, a 100-basis-point rate increase would have increased interest expense by an estimated $12 million for the quarter and $36 million for nine months. The company amended its credit agreement and related hedges from LIBOR to SOFR on March 31, 2023.
- Goodwill was $4.505 billion and other intangible assets were $3.954 billion at March 31, 2023. The acquisition accounting remains preliminary, and future valuation adjustments could be material.
- The company reported compliance with the covenants under its senior credit facilities and senior notes. Legal proceedings were described as routine, with management not expecting material adverse effects, although unfavorable outcomes remain possible.
- The Series B preferred stock had a $2.212 billion mezzanine-equity carrying amount and generated $29 million of quarterly preferred dividends and deemed dividends, reducing earnings available to common shareholders.
- Disclosure controls were assessed as effective. Legacy Coherent was still being integrated into the company’s internal-control environment.
Most Important Facts for Investors to Verify
- Whether the acquisition-related Lasers losses and amortization decline as inventory step-up charges and merger costs roll off.
- Progress toward restoring gross margins, particularly given capacity utilization, product mix, foreign-exchange exposure and acquired intangible amortization.
- Debt repayment capacity, variable-rate exposure, covenant compliance and the impact of higher interest rates on cash flow.
- Execution and cash costs of the announced $150 million to $200 million restructuring plan.
- The outcome and valuation implications of the Silicon Carbide strategic-alternatives review.
- Completion of the preliminary purchase-price allocation and any resulting changes to goodwill, intangible assets, deferred taxes or earnings.
- Demand trends in communications, electronics, industrial and instrumentation markets, including the reported softness in portions of Networking and Materials.