Coherent Corp. — Fiscal 2022 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Coherent Corp. filed its quarterly report for the three months ended September 30, 2022. The company develops and manufactures engineered materials, optoelectronic components and devices, and lasers for communications, industrial, electronics, aerospace and defense, medical, semiconductor, and other applications.
On July 1, 2022, the company completed its approximately $7.1 billion acquisition of Legacy Coherent, Inc. The acquired operations are reported in the new Lasers segment. The company adopted the Coherent name and brand identity on September 8, 2022. Comparisons with the prior year are affected materially by the acquisition and the related purchase-accounting adjustments.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $1.345 billion | $795.1 million | Up 69% |
| Gross profit | $444.0 million | $306.6 million | Up 45% |
| Gross margin | 33% | 39% | Down 560 basis points |
| Operating income | $42.5 million | $95.1 million | Down 55% |
| Net earnings (loss) | $(38.7) million | $74.5 million | Declined to a loss |
| Net earnings (loss) available to common shareholders | $(74.3) million | $57.4 million | Declined to a loss |
| Diluted EPS | $(0.56) | $0.50 | Declined |
| Cash flow from operations | $79.6 million | $52.3 million | Up $27.2 million |
| Capital expenditures | $139.0 million | $47.6 million | Up $91.4 million |
Organic revenue growth was approximately $157 million, or 20%, year over year. Networking revenue was $596.5 million, Materials revenue was $355.6 million, and newly acquired Lasers revenue was $392.4 million. Lasers generated a $123.8 million operating loss, reflecting substantial acquisition-related and purchase-accounting charges.
Cost of goods sold increased to $901.0 million, or 67% of revenue, from $488.5 million, or 61% of revenue. Internal research and development was $121.1 million, and selling, general and administrative expense was $280.0 million. SG&A included approximately $62 million of acquisition-related costs, integration and restructuring costs, incremental amortization, and merger-related share-based compensation.
Interest expense increased to $61.9 million from $12.2 million, primarily because of debt incurred to finance the acquisition. Other expense, net, was $31.6 million, including debt extinguishment and bridge commitment termination costs and foreign-currency effects. The effective tax rate was a 24% benefit for the quarter, compared with an 18% effective tax rate in the prior-year period.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Cash, cash equivalents, and restricted cash were $898.5 million at September 30, 2022, compared with $2.582 billion at June 30, 2022.
- Total debt was $4.623 billion, including $129.0 million classified as current and $4.494 billion classified as long term, compared with total debt of $2.300 billion at June 30, 2022.
- The new senior secured financing consists of an $850 million Term A Facility, a $2.8 billion Term B Facility, and a $350 million revolving facility. The company had $65 million drawn and $285 million of remaining revolving availability.
- The company also had $990 million of 5% Senior Notes due 2029. The 0.25% convertible notes were substantially converted during the quarter and are no longer outstanding after the remaining balance was repaid at maturity.
- Operating cash flow was $79.6 million. Investing cash flow was $(5.628) billion, including $5.489 billion for business acquisitions and $139.0 million of capital expenditures.
- Financing cash flow was $3.913 billion, primarily from new borrowings and the issuance of $1.4 billion of Series B-2 convertible preferred stock, partly offset by debt repayments and issuance costs.
- Cash declined by $1.678 billion during the quarter to $904.2 million including restricted cash. Approximately $644 million of cash and cash equivalents was held outside the United States.
Management stated that existing cash, operating cash flow, and available revolver capacity should be sufficient to fund working capital, capital expenditures, debt and lease obligations, research and development, and growth objectives at least through fiscal 2023.
Material Changes Versus the Prior Comparable Period
- Revenue increased principally because the acquired Legacy Coherent operations contributed $392 million of Lasers revenue, while organic revenue grew approximately 20%.
- Gross margin contracted because of a $45 million inventory fair-value step-up charge and $38 million of incremental acquired-technology amortization.
- SG&A increased by $157 million, reflecting merger transaction and financing costs, integration and restructuring costs, incremental amortization, and merger-related compensation.
- Interest and other expense increased substantially following the acquisition financing and related debt issuance.
- The balance sheet expanded significantly, including $4.006 billion of acquisition goodwill, $2.425 billion of acquired identifiable intangible assets, and higher debt.
- Common shares issued increased to approximately 153.1 million from 120.9 million at June 30, 2022, primarily because of merger consideration and convertible-note conversions.
- Accumulated other comprehensive loss increased to $101.4 million, driven primarily by a $132.4 million foreign-currency translation loss, partly offset by gains on interest-rate hedges.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific revenue, earnings, or margin guidance range. Management emphasized integration of Legacy Coherent, capacity expansion, vertical integration, and expected benefits from combining the businesses. The purchase price allocation remains preliminary and may be revised materially during the measurement period.
- COVID-19 continues to affect suppliers, logistics, shipping, manufacturing inputs, customer operations, order timing, and collections. The company stated that the financial impact cannot be reasonably estimated.
- Supply-chain uncertainty led the company to increase selected inventory levels. Inventories were $1.347 billion at September 30, 2022, compared with $902.6 million at June 30, 2022.
- Variable-rate debt creates interest-rate exposure. Without the effective hedge, a 100-basis-point change in rates would have affected quarterly interest expense by approximately $12 million.
- Foreign-currency exposure remains significant; the company uses forward contracts and other hedging instruments. Foreign-currency forward contracts generated a $23 million realized loss in the quarter.
- Integration risks include combining systems and internal controls, realizing expected synergies, and finalizing valuations of acquired assets and liabilities. Legacy Coherent represented 58% of consolidated assets and 29% of consolidated revenue for the quarter.
- Legal and regulatory proceedings are ongoing in the ordinary course; management believes any resulting liabilities will not materially affect financial condition, liquidity, or results of operations.
- The company was in compliance with the covenants under its new credit facilities and Senior Notes indenture at September 30, 2022.
Important Facts for Investors to Verify
- Progress toward integrating Legacy Coherent and whether the Lasers segment can move from its $123.8 million quarterly operating loss toward profitability.
- The final purchase price allocation, including goodwill, intangible assets, inventory step-up, deferred taxes, and any resulting changes to future amortization or depreciation.
- Debt reduction, variable interest costs, covenant compliance, and the company’s remaining $285 million of revolver availability.
- Whether organic growth in Networking and Materials continues amid softer aerospace and defense demand and slower industrial sales in China.
- Whether supply-chain, logistics, COVID-19, foreign-currency, and customer-demand risks affect revenue conversion, margins, inventory, or collections.
- The potential dilution from the Series A and Series B convertible preferred stock and other potentially dilutive securities; approximately 41.7 million potential shares were excluded from diluted EPS as anti-dilutive in the quarter.