COHERENT CORP. annual report, FY2023

Coherent Corp. Fiscal 2023 Form 10-K Summary

Business context and reporting period

Coherent Corp. filed its Annual Report on Form 10-K for the fiscal year ended June 30, 2023. The filing is not a 2022 fourth-quarter filing; it reports the full fiscal year 2023, with comparative fiscal years 2022 and 2021.

Coherent develops and manufactures engineered materials, optoelectronic components, networking products, lasers, and laser systems serving industrial, communications, electronics, and instrumentation markets. Following the July 1, 2022 acquisition of Legacy Coherent, the Company reports three segments: Networking, Materials, and Lasers.

Fiscal 2023 included Legacy Coherent for the full year.
Backlog was approximately $2.7 billion at June 30, 2023, compared with approximately $2.3 billion a year earlier.
The Company employed approximately 27,000 people worldwide.

Financial performance and key metrics

Metric	Fiscal 2023	Fiscal 2022	Change
Revenue	$5.160 billion	$3.317 billion	+56%
Gross profit	$1.618 billion	$1.265 billion	+28%
Gross margin	31%	38%	Down 680 basis points
Operating income (loss)	$(37) million	$414 million	Declined materially
Net earnings (loss)	$(259) million	$235 million	Turned to loss
Diluted EPS	$(2.93)	$1.45	Declined
Cash flow from operations	$634 million	$413 million	+53%
Capital expenditures	$436 million	$314 million	+39%
Total debt	$4.310 billion	$2.300 billion	+87%
Cash, cash equivalents and restricted cash	$833 million	$2.582 billion	Down $1.749 billion

Revenue growth included $1.469 billion from the Lasers segment and approximately $374 million of organic revenue growth, or 11%, excluding the acquired business. Industrial revenue increased 136%, electronics revenue increased 102%, and communications revenue increased 6%.

Networking revenue was $2.341 billion, up 7%; operating income was $222 million, down 4%.
Materials revenue was $1.350 billion, up 21%; operating income was $160 million, down 27%.
Lasers revenue was $1.469 billion; the segment reported an operating loss of $419 million, substantially affected by acquisition-related amortization and other nonrecurring costs.
Research and development expense increased to $500 million from $377 million.
SG&A increased to $1.037 billion from $474 million, including significant acquisition-related amortization, integration costs, transaction costs, and intangible impairment charges.
Interest and other expense increased to $318 million from $132 million, primarily due to acquisition-related debt.
The reported effective tax rate was 27%, compared with 17% in fiscal 2022, despite a pretax loss, largely reflecting the mix of tax jurisdictions and other tax items.

Liquidity, debt and cash flow

Operating cash flow was $634 million, while investing cash flow was a use of $5.929 billion, including $5.489 billion for the Legacy Coherent acquisition and $436 million of capital expenditures. Financing cash flow provided $3.554 billion, primarily from new borrowings and the issuance of Series B preferred stock.

Debt consisted primarily of an $818 million Term A Facility, a $2.567 billion Term B Facility, and $990 million of 5.000% senior notes due 2029, net of debt issuance costs.
The Term A and revolving facilities bore interest at adjusted SOFR plus 1.75% as of June 30, 2023; the Term B Facility bore interest at adjusted SOFR plus 2.75%.
The Company had approximately $348 million of undrawn revolving credit capacity and no revolving borrowings outstanding at June 30, 2023.
Management stated that cash, operating cash flow, and available borrowing capacity were expected to fund working capital, capital expenditures, debt repayments, leases, R&D, and growth objectives at least through fiscal 2024.
The Company was in compliance with its debt covenants at June 30, 2023. The Term A and revolving facilities require a maximum total net leverage ratio and a minimum interest coverage ratio of 2.50 to 1.00.
Estimated vendor purchase commitments were approximately $757 million, and operating lease obligations were approximately $219 million as of June 30, 2023.

Material changes versus the prior comparable period

The Legacy Coherent acquisition added the Lasers segment and materially increased revenue, assets, debt, goodwill, intangible assets, depreciation and amortization, and interest expense.
Gross margin declined from 38% to 31%, driven by a $158 million acquired-inventory fair-value adjustment, $87 million of incremental technology amortization, unfavorable mix, underutilized capacity, inventory write-offs, site-consolidation costs, and foreign exchange effects.
The Company moved from $235 million of net earnings to a $259 million net loss. Net loss available to common shareholders was $404 million after preferred dividends.
Goodwill increased to $4.513 billion from $1.286 billion, and other intangible assets increased to $3.815 billion from $635 million.
Fiscal 2023 included $119 million of restructuring charges and $20 million of accelerated synergy and site-consolidation costs.
Cash declined principally because of the acquisition payment and higher capital expenditures, while debt increased to finance the transaction.

Guidance, outlook, management commentary and unusual items

Management expects its May 2023 restructuring plan to be substantially completed by the end of fiscal 2025. The Company expects approximately $150 million to $200 million of pretax restructuring charges during fiscal 2023 through fiscal 2025.
The Company expects its previously announced synergy plan to generate $250 million of savings from supply-chain management, internal sourcing, operational efficiencies, functional consolidation, and corporate-cost reductions.
Coherent began reviewing strategic alternatives for its silicon carbide business, including a minority investment, joint venture, or sale. No transaction was assured.
The Lasers goodwill reporting unit had approximately $3.2 billion of goodwill and only approximately 10% estimated fair-value headroom at the April 1, 2023 impairment test date. A deterioration in projected cash flows could result in a material impairment charge.
The fiscal 2023 Lasers operating loss reflected $297 million of acquired-intangible amortization, $158 million of acquired-inventory fair-value amortization, $79 million of integration and site-consolidation costs, $39 million of transaction and financing charges, and $18 million of nonrecurring share-based compensation.
The Company identified AI and machine learning as significant drivers of demand for higher-speed datacom transceivers, including 800G and future 1.6T products.
The filing highlights cyclicality, customer concentration, long sales cycles, supply constraints, foreign currency exposure, inflation, higher borrowing costs, export controls, tariffs, cybersecurity, environmental compliance, and geopolitical risks.
One customer accounted for more than 10% of fiscal 2023 revenue, primarily through the Networking segment.
The Series A mandatory convertible preferred stock converted into approximately 10.2 million common shares on July 3, 2023. Series B preferred stock remained outstanding with a 5% cumulative dividend and redemption and voting rights.
The Company does not currently intend to pay dividends on common stock and did not repurchase common shares under its repurchase program during fiscal 2023.

Important facts for investors to verify

Whether the Lasers segment achieves the forecasted revenue growth, margin improvement, operating efficiencies, and synergy benefits supporting its goodwill valuation.
The timing and total cash cost of the restructuring and site-consolidation plans, including whether the expected $150 million to $200 million charge range changes.
Progress and outcome of the strategic-alternatives review for the silicon carbide business.
Debt reduction, interest expense, leverage-ratio compliance, and available liquidity as floating-rate borrowing costs evolve.
Whether backlog converts to revenue on expected timing and margins, particularly amid cyclical demand and customer concentration.
Demand trends for datacom transceivers, AI/ML infrastructure, telecom, semiconductor equipment, display equipment, and industrial laser applications.
Potential impairment of goodwill or acquired intangible assets if operating results, market conditions, or projected cash flows deteriorate.
Exposure to export restrictions, tariffs, supply constraints, foreign exchange movements, large-customer purchasing changes, and increased costs of materials and labor.