COHERENT CORP

Previous wording

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:

Current wording

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 the following sections:

Previous wording

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.

Current wording

Our customer base includes original equipment manufacturers; laser end-users; system integrators of high-power lasers; manufacturers of equipment and devices for our end markets.

Previous wording

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 nine months ended March 31, 2024, these activities resulted in charges of $12 million and $13 million, respectively, primarily for accelerated depreciation, employee termination costs, and the write-off of property and equipment. 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.

Current wording

In the three months ended September 30, 2024, these activities resulted in charges of $24 million, primarily for impairment losses associated with the sale of our Newton Aycliffe business, accelerated depreciation, and site move costs. In fiscal 2024, these activities resulted in charges of $27 million, primarily for accelerated depreciation, the write-off of property and equipment, and site move costs, with $3 million of those charges in the three months ended September 30, 2023. 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 17. Restructuring Plan to the Company’s Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further information.

Previous wording

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 nine months ended March 31, 2024, the acceleration of these activities resulted in $13 million and $29 million, respectively, of charges primarily for overlapping labor related to transition of manufacturing operations to other sites, shut down costs, accelerated depreciation and employee termination costs. In fiscal 2023, the acceleration of these activities resulted in $20 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.

Current wording

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 months ended September 30, 2024, the acceleration of these activities resulted in $4 million of charges primarily for overlapping labor related to transition of manufacturing operations to other sites and shut down costs, partially offset by a benefit from the reversal of employee termination costs previously accrued. In fiscal 2024, the acceleration of these activities resulted in $40 million of charges primarily for overlapping labor related to transition of manufacturing operations to other sites, shut down costs for sites being exited, accelerated depreciation and employee termination costs, with $8 million of those charges in the three months ended September 30, 2023. In fiscal 2023, the acceleration of these activities resulted in $20 million in charges primarily for employee termination costs, the write-off of inventory for products that are being exited and shut down costs.

Previous wording

The following tables set forth select items from our Condensed Consolidated Statements of Earnings (Loss) for the three and nine months ended March 31, 2024 and 2023 ($ in millions)(1):

Current wording

The following tables set forth select items from our Condensed Consolidated Statements of Earnings (Loss) for the three months ended September 30, 2024 and 2023 ($ in millions)(1):

Previous wording

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2024 were $205 million, or 17% of revenues, compared to $226 million, or 18% of revenues, for the same period last fiscal year. SG&A expenses for the nine months ended March 31, 2024 were $626 million, or 18% of revenues, compared to $781 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 March 31, 2024 compared to the same period last fiscal year was primarily the result of lower amortization expense of $21 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 and higher variable compensation. The decrease in SG&A as a percentage of revenue for the nine months ended March 31, 2024 compared to the same period last fiscal year was the result of lower amortization expense of $64 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.

Current wording

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2024 were $229 million, or 17% of revenues, compared to $212 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 September 30, 2024 compared to the same period last fiscal year was primarily the result of higher sales volumes partially offset by the impact of higher variable compensation.

Previous wording

Restructuring charges. Restructuring charges related to our Restructuring Plan for the three and nine months ended March 31, 2024 were $12 million and $13 million, respectively, and consist of severance, accelerated depreciation, equipment write-offs and move costs 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.

Current wording

Restructuring charges. Restructuring charges related to our Restructuring Plan for the three months ended September 30, 2024 were $24 million and consist of impairment losses associated with the sale of our Newton Aycliffe business, accelerated depreciation, and move costs due to the consolidation of certain manufacturing sites. Restructuring charges related to our Restructuring Plan for the three months ended September 30, 2023 were $3 million and consisted of severance, move costs, equipment write-offs and accelerated depreciation due to the consolidation of certain manufacturing sites. See Note 17. Restructuring Plan included in Item 1 of this Quarterly Report on Form 10-Q for further information.

Previous wording

Interest and other, net. Interest and other, net for the three months ended March 31, 2024 was expense of $54 million, compared to expense of $72 million for the same period last fiscal year, a decrease of $18 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 and dividend income on excess cash balances. For the three months ended March 31, 2024, the decrease of $18 million in comparison to the same period last fiscal year was driven by $15 million incremental interest and dividend income due to increases in interest rates earned on investments as well as the increase in restricted cash balances, $3 million higher gains on deferred compensation plan assets and $2 million lower interest expense primarily due to the higher interest expense benefit from our interest rate cap and swap partially offset by $2 million higher foreign exchange losses. Interest and other, net for the nine months ended March 31, 2024 was expense of $190 million, compared to expense of $240 million for the same period last fiscal year, a decrease of $50 million. The decrease of $50 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 $25 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 $13 million incremental interest expense due to higher interest rates on our Term facilities, net of higher benefit from our interest rate cap and swap.

Current wording

Interest and other, net. Interest and other, net for the three months ended September 30, 2024 was expense of $56 million, compared to expense of $67 million for the same period last fiscal year, a decrease of $11 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 and dividend income on excess cash balances. For the three months ended September 30, 2024, the decrease of $11 million in comparison to the same period last fiscal year was driven by $13 million incremental interest and dividend income due to increases in interest rates earned on investments as well as the increase in restricted cash balances. In addition, $7 million lower interest expense primarily due to lower interest expense on our New Term B Loans resulting from lower balances and lower interest rates. Additionally, we recorded higher interest expense benefit from our interest rate cap and swap partially offset by $11 million higher foreign exchange losses primarily due to higher volatility of exchange rates during the three months ended September 30, 2024.

Previous wording

Income taxes. The Company’s year-to-date effective income tax rate at March 31, 2024 was 29% compared to an effective tax rate of 33% for the same period in 2023. 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.

Current wording

Income taxes. The Company’s year-to-date effective income tax rate at September 30, 2024 was (29)% compared to an effective tax rate of 24% for the same period in 2024. 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. The current quarter rate was impacted by the recording of a $11 million windfall on stock awards due to the increase in stock price.

Previous wording

Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests for the three and nine months ended March 31, 2024 was $3 million and $4 million, respectively, 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.

Current wording

Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests for the three months ended September 30, 2024 was $1 million, and represents the noncontrolling interest holders’ shares of losses of Silicon Carbide LLC. See Note 11. Noncontrolling Interests included in Item 1 of this Quarterly Report on Form 10-Q for further information.

Previous wording

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.

Current wording

Revenues and segment profit for the Company’s reportable segments are discussed below. During the first quarter of fiscal 2025 as a result of a new CEO joining the Company in the fourth quarter of fiscal 2024, our Chief Operating Decision Maker (“CODM”) implemented changes in the measure he uses to allocate resources and assess performance. Our CODM now evaluates each segment’s performance and allocates resources based on segment revenue and segment profit, instead of operating income, as our CODM believes segment profit is a more comprehensive profitability measure for each operating segment. Segment profit includes operating expenses directly managed by operating segments, including research and development, direct sales, marketing and administrative expenses. Segment profit does not include share-based compensation, acquisition or integration related costs, amortization and impairment of acquisition-related intangible assets, restructuring charges, and certain other charges. Additionally, effective the first quarter of fiscal 2025, we no longer allocate Corporate strategic research and development, strategic marketing and sales expenses and shared general and administrative expenses, as these expenses are not directly attributable to our operating segments. Management believes segment profit 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 segment profit to earnings (loss) before income taxes, which is incorporated herein by reference. We report our financial results in the following three designated segments: (i) Networking, (ii) Materials, and (iii) Lasers.

Previous wording

Net cash provided by operating activities was $383 million for the nine months ended March 31, 2024 compared to $452 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 nine months ended March 31, 2024 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.

Current wording

Net cash provided by operating activities was $153 million for the three months ended September 30, 2024 compared to $199 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 three months ended September 30, 2024 compared to the same period last fiscal year was primarily due to increases in accounts receivables and inventories as a result of higher revenues partially offset by higher earnings.

Previous wording

Net cash used in investing activities was $249 million for the nine months ended March 31, 2024, compared to net cash used of $5.8 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 $96 million year-over-year.

Current wording

Net cash used in investing activities was $66 million for the three months ended September 30, 2024, compared to net cash used of $64 million for the same period last fiscal year. Lower cash used to fund capital expenditures of $30 million year-over-year was offset by cash received from the sale of a business of $27 million.

Previous wording

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 2.00% as of March 31, 2024. As amended, the Term B Facility bears interest at an adjusted SOFR rate (subject to a 0.50% floor) plus 2.75% as of March 31, 2024. On April 2, 2024, Coherent entered into Amendment No. 2 to the Credit Agreement, under which the principal amount of term B loans outstanding under the Credit Agreement (the “Existing Term B Loans”) were replaced with an equal amount of new term loans (the “New Term B Loans”) having substantially similar terms as the Existing Term B Loans, except with respect to the interest rate applicable to the New Term B Loans and certain other provisions. As further amended, the New Term B Loans will bear interest at an adjusted SOFR rate (subject to a 0.50% floor) plus 2.50% as of April 2, 2024. The maturity of the New Term Loans and revolving credit facility remains unchanged. In relation to the Term Facilities, the Company incurred expense of $59 million and $181 million, respectively, for the three and nine months ended March 31, 2024, 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 $11 million and $34 million, respectively, during the three and nine months ended March 31, 2024.

Current wording

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 1.85% as of September 30, 2024. On April 2, 2024, Coherent entered into Amendment No. 2 to the Credit Agreement, under which the principal amount of term B loans outstanding under the Credit Agreement (the “Existing Term B Loans”) were replaced with an equal amount of new term loans (the “New Term B Loans”) having substantially similar terms as the Existing Term B Loans, except with respect to the interest rate applicable to the New Term B Loans and certain other provisions. As further amended, the New Term B Loans will bear interest at an adjusted SOFR rate (subject to a 0.50% floor) plus 2.50% as of September 30, 2024. The maturity of the New Term Loans and revolving credit facility remains unchanged. In relation to the Term Facilities, the Company incurred expense of $53 million for the three months ended September 30, 2024, 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 $13 million during the three months ended September 30, 2024.

Previous wording

During the nine months ended March 31, 2024, the Company made payments of $163 million for the Term Facilities, including voluntary payments of $110 million.

Current wording

During the three months ended September 30, 2024, the Company made payments of $117 million for the Term Facilities, including voluntary payments of $100 million.

Previous wording

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.

Current wording

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 R&D, and internal and external growth objectives at least through the next twelve months.

Previous wording

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 March 31, 2024, the Company held approxim ately $764 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.

Current wording

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 September 30, 2024, the Company held approxim ately $877 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.

Previous wording

At March 31, 2024, we had $894 million of restricted cash, which includes $889 million at our Silicon Carbide LLC that is restricted for use by only that subsidiary.

Current wording

At September 30, 2024, we had $763 million of restricted cash, which includes $757 million at our Silicon Carbide LLC that is restricted for use by only that subsidiary.