# COHERENT CORP. (COHR) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from COHERENT CORP.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/820318/000082031824000016/iivi-20240630.htm
Accession: 0000820318-24-000016
Filing date: 2024-08-16
Report date: 2024-06-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/COHR/
All MD&A years: /company/COHR/mda/
Previous year: /company/COHR/mda/fy2023/ (FY 2023)
Next year: /company/COHR/mda/fy2025/ (FY 2025)

Item 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Consolidated Financial Statements and related notes included under Item 8 of this annual report. Coherent’s MD&A is presented in the following sections:

•Forward-Looking Statements

•Overview

•Restructuring and Site Consolidation

•Silicon Carbide Investment

•Critical Accounting Policies and Estimates

•Conversion of Series A Preferred Stock

•Fiscal Year 2024 Compared to Fiscal Year 2023

•Fiscal Year 2023 Compared to Fiscal Year 2022

•Liquidity and Capital Resources

•Off Balance Sheet Arrangements

Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to Item 1A for discussion of these risks and uncertainties).

Forward-Looking Statements

Certain statements contained in this MD&A are forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “projects” or similar expressions.

Although our management considers these expectations and assumptions to have a reasonable basis, there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this Annual Report on Form 10-K include, but are not limited to: (i) the failure of any one or more of the assumptions stated above to prove to be correct; and (ii) the risks relating to forward-looking statements and other “Risk Factors” discussed herein at Item 1A. The Company disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or developments, or otherwise.

In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not possible for management to anticipate all such risk factors, or to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Annual Report on Form 10-K are based only on information currently available to us and speak only as of the date of this Report. We do not assume any obligation, and do not intend to, update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.

Investors should also be aware that, while the Company does communicate with securities analysts from time to time, such communications are conducted in accordance with applicable securities laws. Investors should not assume that the Company agrees with any statement, conclusion of any analysis, or report issued by any analyst irrespective of the content of the statement or report.

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Overview

Coherent Corp. (“Coherent”, the “Company,” “we,” “us” or “our”), a global leader in materials, networking, and lasers, is a vertically integrated manufacturing company that develops, manufactures, and markets engineered materials, optoelectronic components and devices, and lasers for use in the industrial, communications, electronics and instrumentation markets. Headquartered in Saxonburg, Pennsylvania, Coherent has research and development, manufacturing, sales, service, and distribution facilities worldwide. Coherent produces a wide variety of lasers, along with application-specific photonic and electronic materials and components, and deploys them in various forms, including integrated with advanced software to enable its customers.

We generate almost all of our revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products and services for our end markets. We also generate revenue, earnings and cash flows from externally-funded research and development contracts relating to the development and manufacture of new technologies, materials and products.

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.

As we grow, we are focused on scaling our Company and deriving the continued benefits of vertical integration as we strive to be a best-in-class player in all of our highly competitive markets. We may elect to change the way in which we operate or are organized in the future to enable the most efficient implementation of our strategy.

Restructuring and Site Consolidation

Restructuring Plan

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 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. 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 22. Restructuring Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Synergy and Site Consolidation Plan

On May 20, 2023, the Company announced that it had 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 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. 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 have been exited and shut down costs.

Silicon Carbide Investment

On May 10, 2023, the Company announced that it had commenced a review of strategic alternatives for its Silicon Carbide business. On December 4, 2023, Silicon Carbide LLC (“Silicon Carbide”), one of the Company’s subsidiaries, completed the sale of Class A Common Units to Denso Corporation (“Denso”) and Mitsubishi Electric Corporation (“MELCO”), under which they collectively invested an aggregate of $1 billion in Silicon Carbide LLC (collectively, the “Equity Investments”). As a consequence of the Equity Investments, the Company’s ownership interest in the Class A Common Units of Silicon Carbide LLC was reduced to approximately 75%. Denso and MELCO each, individually, own approximately 12.5% of the Class A Common Units of Silicon Carbide LLC. The Equity Investments in Silicon Carbide enables Coherent to increase its available free cash flow to provide greater financial and operational flexibility to execute its capital allocation priorities, as the aggregate $1 billion investment will be used to fund future capital expansion of Silicon Carbide. See Note 12. Noncontrolling Interests

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included in Item 8 of this Annual Report on Form 10-K for further information on the noncontrolling interests in our Silicon Carbide subsidiary.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its Consolidated Financial Statements and accompanying notes. Note 1. Nature of Business and Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K, describes the significant accounting policies and accounting methods used in the preparation of the Company’s Consolidated Financial Statements. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Management has discussed the development and selection of the critical accounting policies and estimates described below with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. In addition, there are other items within our Consolidated Financial Statements that require estimation but are not deemed critical. Changes in estimates used in these and other items could impact the Consolidated Financial Statements.

Goodwill

We test goodwill for impairment annually, and when events or changes in circumstances indicate that goodwill might be impaired. The determination of whether goodwill is impaired requires us to make judgments based on long-term projections of future performance. Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated results and general economic and market conditions and their projections. For fiscal year 2024, we performed a quantitative assessment. The fair values of the reporting units were determined using a discounted cash flow analysis with projected financial information based on our most recently completed long-term strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting units, as well as a market analysis. Determination of the fair value requires discretion and the use of estimates by management. If actual results are not consistent with management’s estimates and assumptions, a material goodwill impairment charge could occur, which could have a material adverse effect on our consolidated financial statements.

Due to the cyclical nature of our business, and the other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges and other factors. If material adverse conditions occur that impact one or more of our reporting units, our determination of future fair value might not support the carrying amount of one or more of our reporting units, and the related goodwill would need to be impaired. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods.

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Income Taxes

The Company prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on these judgments and interpretations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities, which may result in future tax, interest and penalty assessments by these authorities. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Management evaluates the realizability of deferred tax assets for each jurisdiction in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in a three-year period including the current and prior two years, management normally concludes that the income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in a three-year period, management then considers a series of factors in the determination of whether the deferred tax assets can be realized. The Company has recorded valuation allowances against certain of its deferred tax assets, primarily those that have been generated from net operating losses in certain foreign taxing jurisdictions and acquired U.S. carryforwards. In evaluating whether the Company would more likely than not recover these deferred tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense.

The Organization for Economic Co-operation and Development (“OECD”), a global policy forum, introduced a framework to implement a global minimum tax of 15% which would apply to multinational corporations, referred to as Pillar Two. Nearly all OECD member jurisdictions have agreed in principle to adopt these provisions and numerous jurisdictions have enacted legislation, including jurisdictions where the Company operates, with a subset of the rules becoming effective for our fiscal year beginning on July 1, 2024, and the remaining rules becoming effective for our fiscal year beginning on July 1, 2025, or in later periods. The Company is continuing to analyze the Pillar Two rules as countries implement additional legislation. Implementation of the OECD proposal may have a material Impact on the Company's Consolidated Financial Statements in the future.

Conversion of Series A Preferred Stock

All outstanding shares of Mandatory Convertible Preferred Stock were converted to Company Common Stock on July 3, 2023, and no shares of Mandatory Convertible Preferred Stock are currently issued and outstanding.

Fiscal Year 2024 Compared to Fiscal Year 2023

The Company reports its financial results in the following three designated segments: (i) Networking, (ii) Materials, and (iii) Lasers.

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The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2024 and 2023 ($ in millions except per share information) (1):

[[GREPCENT_TABLE]]
[["","","Year Ended June 30, 2024","","Year Ended June 30, 2023"],["","","","","% of Revenues","","","","% of Revenues"],["Total revenues","","$","4,708","","","100","%","","$","5,160","","","100","%"],["Cost of goods sold","","3,252","","","69","","","3,542","","","69"],["Gross margin","","1,456","","","31","","","1,618","","","31"],["Operating expenses:"],["Internal research and development","","479","","","10","","","500","","","10"],["Selling, general and administrative","","854","","","18","","","1,037","","","20"],["Restructuring charges","","27","","","1","","","119","","","2"],["Interest and other, net","","244","","","5","","","318","","","6"],["Loss before income taxes","","(148)","","","(3)","","","(356)","","","(7)"],["Income Tax Benefit","","11","","","\u2014","","","(96)","","","(2)"],["Net loss","","(159)","","","(3)","","","(259)","","","(5)"],["Net loss attributable to noncontrolling interests","","(3)","","","\u2014","%","","\u2014","","","\u2014","%"],["Net loss attributable to Coherent Corp.","","$","(156)","","","(3)","%","","$","(259)","","","(5)","%"],["Diluted loss per share","","$","(1.84)","","","","","$","(2.93)"]]
[[/GREPCENT_TABLE]]

(1) Some amounts may not add due to rounding.

Consolidated

Revenues. Revenues for the year ended June 30, 2024 decreased 9% to $4,708 million, compared to $5,160 million for the prior fiscal year.

Revenues decreased in all four markets, with the largest decline, $270 million, or 43%, in the electronics market, primarily from lower volumes in the consumer electronics vertical, largely due to a design change implemented by a significant electronics customer. Revenues decreased by $82 million, or 17% in the instrumentation market due to decreased volumes in the life sciences vertical from continued inventory digestion by our customers and in the industrial market by $81 million, or 5%, as a result of decreased shipments in the precision manufacturing vertical primarily due to macroeconomic conditions. In addition, revenues decreased $20 million, or 1%, in the communications market, primarily due to decreased volumes in the telecom vertical as our communications service provider customers continued to work down their inventory levels with reduced capital spending, partially offset by increased shipments in the datacom vertical driven by increased AI-related datacom shipments.

From a segment perspective, Materials decreased $333 million year-over-year, primarily due to lower demand for sensing products and other consumer applications in the consumer electronics vertical within the electronics market for the reasons discussed above. Networking revenues decreased $45 million year-over-year, with decreases from the telecom vertical partially offset by increases in the datacom vertical, both in our communications market, for the reasons discussed above. Lasers revenue decreased $74 million year-over-year due to lower demand in the life sciences vertical in the instrumentation market and to lower demand in the precision manufacturing and semiconductor and display capital equipment verticals in the industrial end market.

Gross margin. Gross margin for the year ended June 30, 2024 was $1,456 million, or 30.9%, of total revenues, compared to $1,618 million, or 31.4% of total revenues, for fiscal 2023, a slight decrease of 43 basis points. During fiscal 2023, the Company recorded $158 million in Cost of goods sold related to the fair value adjustment on acquired inventory from the acquisition of Coherent, Inc. (“Merger”). Gross margin, excluding the fair value adjustment on acquired inventory, decreased 349 basis points for fiscal 2024 compared to fiscal 2023 primarily due to lower revenues, less favorable sales mix especially in the datacom vertical in the communications market, underutilized operating capacity in several plants, shut down costs related to site consolidations, lower yields in the datacom vertical, higher costs related to product lines that are being exited, higher inventory provisions and the unfavorable foreign exchange rates.

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Internal research and development. Internal research and development (“IR&D”) expenses for the fiscal year ended June 30, 2024 were $479 million, or 10% of revenues, compared to $500 million, or 10% of revenues, last fiscal year. The decrease of $21 million for fiscal 2024 is due to all three segments and was driven by lower costs due to the consolidation of sites and our efforts to control costs. The IR&D expenses are primarily related to our continued investment in new products and platform technologies in an effort to accelerate our organic growth across all of our businesses, including significant investments in datacom transceivers for AI, indium phosphide and gallium arsenide semiconductor lasers, silicon carbide materials, and lasers for display processing, semiconductor capital equipment, and instrumentation.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2024 were $854 million, or 18% of revenues, compared to $1,037 million, or 20% of revenues, last fiscal year. The decrease in SG&A as a percentage of revenue for fiscal 2024 compared to fiscal 2023 was primarily the result of lower amortization expense of $117 million resulting from (1) the Merger, as backlog intangibles were fully amortized in fiscal 2023, (2) lower amortization for tradenames impaired in the fourth quarter of fiscal 2023, and (3) $31 million charges for impairment of certain tradename and customer list intangibles assets in fiscal 2023. In addition, SG&A decreased due to lower charges related to the Merger, including $39 million lower transaction fees and financing, and lower one-time expense of $18 million related to share-based compensation resulting from the Merger, 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.

Restructuring Charges. Restructuring charges related to our Restructuring Plan for the year ended June 30, 2024 were $27 million, or 1% of revenues, and consist primarily of accelerated depreciation, equipment write-offs and move costs due to the consolidation of certain manufacturing sites. Restructuring charges related to our Restructuring Plan for the year ended June 30, 2023 were $119 million, or 2% of revenues, and consisted of severance and equipment write-offs, net of reimbursements, due to the consolidation of certain manufacturing sites. See Note 22. Restructuring Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Interest and other, net. Interest and other, net for the year ended June 30, 2024 was expense of $244 million compared to expense of $318 million last fiscal year, a decrease of $75 million. Included in Interest and other, net, were interest expense on borrowings, Merger financing fees (fiscal 2023), foreign currency gains and losses, amortization of debt issuance costs, equity gains and losses from unconsolidated investments, and interest income on excess cash balances. The decrease of $75 million in comparison to fiscal 2023 was driven by driven by $39 million incremental interest and dividend income due to increases in interest and dividend rates earned on investments, as well as the increase in restricted cash balances and $35 million incurred in the prior year related to financing of the Merger. In addition, interest expense increased $2 million due to higher interest rates on our Term facilities, net of higher benefit from our interest rate cap and swap.

Income taxes. Our effective income tax rate for fiscal 2024 was (8)%, compared to an effective tax rate of 27% last fiscal year. The difference between our effective tax rate and the U.S. statutory rate of 21% was due to the establishment of a valuation allowance related to certain US deferred tax assets.

Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests for the year ended June 30, 2024 was $3 million, 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 12. Noncontrolling Interests to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Segment Reporting

Revenues and operating income for our reportable segments are discussed below. Operating income differs from net earnings in that operating income excludes certain operational expenses, including interest, the impact of foreign exchange, and other miscellaneous expenses as reported in Other expense (income) - net. 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 15. Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference.

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Networking ($ in millions)

[[GREPCENT_TABLE]]
[["","","Year Ended June 30,","","% Decrease"],["","","2024","","2023"],["Revenues","","$","2,296","","","$","2,341","","","(2)","%"],["Operating income","","$","179","","","$","222","","","(20)","%"]]
[[/GREPCENT_TABLE]]

Revenues for the year ended June 30, 2024 for Networking decreased 2% to $2,296 million, compared to $2,341 million for last fiscal year. The decrease in revenues of $45 million during fiscal 2024 was primarily due to decreased volumes year-over-year in the telecom vertical as our communications service provider customers continue to work down their inventory levels with reduced capital spending, partially offset by increases in the datacom vertical driven by increased AI-related datacom transceivers shipments, both within the communications market.

Operating income for the year ended June 30, 2024 for Networking decreased 20% to $179 million, compared to operating income of $222 million last fiscal year. The decrease in operating income for fiscal 2024 was driven by $45 million lower revenues and lower margin percentage partially offset by lower restructuring charges. The margin percentage was lower than fiscal 2023 due to less favorable sales mix in the datacom vertical, the impact of fixed manufacturing costs as a percentage of revenues on lower revenues in the telecom vertical, lower yields in the datacom vertical and higher inventory provisions related to products that are being exited. The restructuring charges decreased $60 million due to lower charges for employee terminations related to our Restructuring Plan.

Materials ($ in millions)

[[GREPCENT_TABLE]]
[["","","Year Ended June 30,","","% Decrease"],["","","2024","","2023"],["Revenues","","$","1,017","","","$","1,350","","","(25)","%"],["Operating income","","$","63","","","$","160","","","(61)","%"]]
[[/GREPCENT_TABLE]]

Revenues for the fiscal year ended June 30, 2024 for Materials decreased 25% to $1,017 million, compared to revenues of $1,350 million last fiscal year. The decrease in revenues during the current fiscal year was primarily related to a decrease of $265 million in the electronics market mostly due to lower volumes in our consumer electronics vertical largely due to a design change implemented by a significant electronics customer, partially offset by higher shipments in our automotive vertical driven by electric vehicles, as well as decreases in shipments to a lesser extent derived from macroeconomic conditions in our precision manufacturing and semiconductor capital equipment verticals in the industrial market.

Operating income for the fiscal year ended June 30, 2024 for Materials decreased 61%, with operating income of $63 million in the current year, compared to operating income of $160 million last fiscal year. The decrease in operating income during the current fiscal year was driven by $333 million lower revenues and higher costs for sites being shutdown, partially offset by $33 million lower restructuring charges, primarily severance, related to our Restructuring Plan and $33 million charges in fiscal 2023 for impairment of certain tradename, customer list and technology intangibles.

Lasers ($ in millions)

[[GREPCENT_TABLE]]
[["","","Year Ended June 30,","","% Decrease"],["","","2024","","2023"],["Revenues","","$","1,395","","","$","1,469","","","(5)","%"],["Operating income","","$","(146)","","","$","(419)","","","(65)","%"]]
[[/GREPCENT_TABLE]]

Revenues for the fiscal year ended June 30, 2024 for Lasers decreased 5% to $1,395 million, compared to revenues of $1,469 million last fiscal year. The decrease was primarily due to $56 million lower shipments to the instrumentation market, primarily in the life sciences vertical where we see continued inventory digestion by our customers, and an $18 million drop in the industrial market as a result of lower volumes in our precision manufacturing and display capital equipment verticals due to macroeconomic conditions, partially offset by higher volumes in our semiconductor capital equipment display vertical.

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Operating loss for the fiscal year ended June 30, 2024 for Lasers decreased 65%, with operating loss of $146 million in the current year, compared to operating loss of $419 million last fiscal year. The lower operating loss was driven by $312 million lower costs in the current year compared to the prior year related to the Merger, including $158 million lower amortization of the fair value step-up on acquired inventory, $83 million lower amortization expense related to the fair value of intangible assets acquired, $39 million lower transaction fees and financing, $18 million lower nonrecurring share-based compensation and $14 million lower integration costs. Excluding the lower Merger related costs, operating income for fiscal 2024 decreased $39 million primarily due to lower revenues and lower gross margin percentage, due to less favorable mix within the industrial and instrumentation markets, the unfavorable impact of fixed manufacturing costs with lower revenues and higher inventory provisions.

Fiscal Year 2023 Compared to Fiscal Year 2022

The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2023 and 2022 ($ in millions except per share information) (1):

[[GREPCENT_TABLE]]
[["","","Year Ended","","Year Ended"],["","","June 30, 2023","","June 30, 2022"],["","","","","% of Revenues","","","","% of Revenues"],["Total revenues","","$","5,160","","","100","%","","$","3,317","","","100","%"],["Cost of goods sold","","3,542","","","69","","","2,051","","","62"],["Gross margin","","1,618","","","31","","","1,265","","","38"],["Operating expenses:"],["Internal research and development","","500","","","10","","","377","","","11"],["Selling, general and administrative","","1,037","","","20","","","474","","","14"],["Restructuring charges","","119","","","2","","","\u2014","","","\u2014"],["Interest and other, net","","318","","","6","","","132","","","4"],["Earnings (loss) before income tax","","(356)","","","(7)","","","282","","","8"],["Income tax (expense) benefit","","(96)","","","(2)","","","47","","","1"],["Net earnings (loss)","","$","(259)","","","(5)","%","","$","235","","","7","%"],["Diluted earnings (loss) per share","","$","(2.93)","","","","","$","1.45"]]
[[/GREPCENT_TABLE]]

(1) Some amounts may not add due to rounding.

Consolidated

Revenues. Revenues for the year ended June 30, 2023 increased 56% to $5,160 million, compared to $3,317 million for fiscal 2022. The biggest driver of increased revenue relates to the Lasers segment, which was acquired as part of the Merger. The largest growth was in the industrial market with increased sales of $1,015 million, or 136%, year-over-year primarily due to the Lasers segment. The remaining contributions to the increased revenues were from volume growth in the electronics market, which grew 102% year-over-year, contributing an incremental $315 million in sales, and strength in the communications market, which grew by 6% year-over-year, contributing an incremental $139 million in sales. The growth in the industrial end market was primarily due to incremental sales of $1,088 million in the Lasers segment, partially offset by $73 million of softer sales in the Materials and Networking segments. The growth in the electronics market was primarily in the Materials segment due to innovations in sensing products. The strength in the communications market, primarily in the Networking segment, was due to stronger demand volumes in telecom and datacom. Lasers revenue for fiscal 2023 was $1,469 million, of which 74% was in the industrial end market and 26% in the instrumentation end market.

Organic revenue growth was $374 million, or 11%, year-over-year. Materials contributed $230 million of this organic growth year-over-year, with $316 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the industrial end market. Networking increased $144 million year-over-year, with volume growth in both telecom and datacom.

Gross margin. Gross margin for the year ended June 30, 2023 was $1,618 million, or 31%, of total revenues, compared to $1,265 million, or 38% of total revenues, for fiscal 2022. Gross margin as a percentage of revenues decreased 680 basis points compared to fiscal 2022. The decrease as a percent of revenue for fiscal 2023 was driven by $158 million of additional expense related to the preliminary fair value adjustment on acquired inventory from the Merger and $87 million of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the fair value adjustment on acquired inventory and incremental amortization decreased 206 basis points for fiscal 2023 compared to the

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fiscal 2022, which included a less favorable mix of revenues, higher costs related to the write-off of inventory for product lines that are being exited, underutilized operating capacity in several plants, shut down costs related to site consolidations, and the unfavorable impact of foreign exchange rates.

Internal research and development. IR&D expenses for the fiscal year ended June 30, 2023 were $500 million, or 10% of revenues, compared to $377 million, or 11% of revenues, in fiscal 2022. The increase of $122 million for fiscal 2023 was driven by an additional $132 million of IR&D expenses from the Lasers segment. As a percentage of revenues, IR&D spend in the Materials segment decreased 4% year-over-year, due to higher costs in fiscal 2022 related to the launch of new products. The IR&D expenses are primarily related to our continued investment in new products and manufacturing processes across all of our businesses, including significant investments in indium phosphide semiconductor lasers, silicon carbide materials, devices for both power electronics and wireless devices, and lasers for display processing and semiconductor capital equipment.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2023 were $1,037 million, or 20% of revenues, compared to $474 million, or 14% of revenues, in fiscal year 2022. The increase in SG&A as a percentage of revenue for fiscal 2023 compared to fiscal 2022 was primarily the result of incremental amortization expense of $240 million, including $209 million related to the Merger and $31 million charges for impairment of certain tradename and customer list intangibles assets (see Note 7. Goodwill and Other Intangible Assets to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information). In addition, the increase in SG&A as a percentage of revenue was due to higher one time-charges related to the Merger of $125 million for integration, share-based compensation, and transaction fees, as well as the comparatively larger sales and administrative efforts required to sell an entire laser system versus components and subsystems.

Restructuring Charges. Restructuring charges related to our Restructuring Plan for the year ended June 30, 2023 were $119 million, or 2% of revenues, and consist of severance and equipment write-offs, net of reimbursements, due to the consolidation of certain manufacturing sites. See Note 22. Restructuring Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Interest and other, net. Interest and other, net for the year ended June 30, 2023 was expense of $318 million compared to expense of $132 million in fiscal 2022, an increase of $186 million. Included in Interest and other, net, were interest expense on borrowings, Merger financing fees, foreign currency gains and losses, amortization of debt issuance costs, equity gains and losses from unconsolidated investments, and interest income on excess cash balances. The increase of $186 million in comparison to fiscal 2022 was driven by $166 million incremental interest expense due to the new debt assumed in the financing of the Merger, with $79 million of the fiscal 2022 interest expense related to funding both raised in advance of the closing of the Merger, and fees for financing to be funded contingent upon the close of the Merger, as well as $35 million incurred in the current year related to financing of the Merger. The increases were partially offset by $6 million lower net foreign currency losses and $5 million of incremental interest income.

Foreign currency losses were $11 million for the year ended June 30, 2023, primarily the result of volatility in the foreign exchange market, compared to $16 million of losses for the year ended June 30, 2022. The fiscal 2022 losses include a $24 million realized loss related the purchase of $345 million Euros to pay off the Euro based debt of Coherent, Inc. at transaction closing.

Income taxes. Our effective income tax rate for fiscal 2023 was 27%, compared to an effective tax rate of 17% last fiscal year. The difference between our effective tax rate and the U.S. statutory rate of 21% was due to research and development incentives in certain jurisdictions.

Segment Reporting

Revenues and operating income for our reportable segments are discussed below. Operating income differs from net earnings in that operating income excludes certain expenses, including interest, the impact of foreign exchange, and other miscellaneous expenses 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 15. Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference.

57

Networking ($ in millions)

[[GREPCENT_TABLE]]
[["","","Year Ended June 30,","","% Increase"],["","","2023","","2022"],["Revenues","","$","2,341","","","$","2,197","","","7","%"],["Operating income","","$","222","","","$","232","","","(4)","%"]]
[[/GREPCENT_TABLE]]

Revenues for the year ended June 30, 2023 for Networking increased 7% to $2,341 million, compared to $2,197 million for fiscal year 2022. The increase in revenues of $144 million during fiscal 2023 was primarily due to increased revenue in the communications market due to stronger demand in telecom and datacom.

Operating income for the year ended June 30, 2023 for Networking decreased 4% to $222 million, compared to operating income of $232 million for fiscal year 2022. The driver of the decreased operating income was the $56 million in restructuring charges, primarily severance, related to our Restructuring Plan, partially offset by strong sales, lower variable compensation costs and the leveraging of corporate resources across each of our three segments.

Materials ($ in millions)

[[GREPCENT_TABLE]]
[["","","Year Ended June 30,","","% Increase"],["","","2023","","2022"],["Revenues","","$","1,350","","","$","1,119","","","21","%"],["Operating income","","$","160","","","$","219","","","(27)","%"]]
[[/GREPCENT_TABLE]]

Revenues for the fiscal year ended June 30, 2023 for Materials increased 21% to $1,350 million, compared to revenues of $1,119 million for fiscal year 2022. The increase in revenues during fiscal 2023 was primarily driven by an increase in demand in the electronics end market from innovations in sensing products, partially offset by softer demand in the industrial end market.

Operating income for the fiscal year ended June 30, 2023 for Materials decreased 27%, with operating income of $160 million in fiscal 2023, compared to operating income of $219 million for fiscal year 2022. The decrease in operating income during fiscal 2023 was driven by $60 million in restructuring charges, primarily severance, related to our Restructuring Plan and $33 million for charges for impairment of certain tradename, customer list and technology intangibles. The increases were partially offset by lower variable compensation costs and lower IR&D spending. As a percentage of revenue, operating income decreased from 20% to 12% primarily due to lower gross margins and the fiscal 2023 restructuring charges, partially offset by lower IR&D spending and lower variable compensation. The lower gross margins as a percentage of revenue were driven by less favorable mix of revenues, higher costs related to the write-off of inventory for products that are being exited, underutilized operating capacity in several plants and shut down costs related to site consolidations.

Lasers ($ in millions)

[[GREPCENT_TABLE]]
[["","","Year Ended June 30,","","% Increase"],["","","2023","","2022"],["Revenues","","$","1,469","","","$","\u2014","","","N/.A"],["Operating income","","$","(419)","","","$","\u2014","","","N/A"]]
[[/GREPCENT_TABLE]]

Revenues for the fiscal year ended June 30, 2023 for Lasers were $1,469 million, with 74% in the industrial end market and 26% from the instrumentation end market.

Operating loss for the fiscal year ended June 30, 2023 for Lasers was $419 million. The loss was driven by $297 million of amortization expense related to the preliminary fair value of intangible assets acquired, $158 million of amortization of the preliminary fair value step-up on acquired inventory, $79 million of integration and site consolidation and shut down costs, one-time charges of $39 million for transaction fees and financing, and $18 million of nonrecurring share-based compensation.

58

Liquidity and Capital Resources

Historically, our primary sources of cash have been provided from operations, long-term borrowings, and advance funding from customers. Other sources of cash include proceeds from the issuance of equity, proceeds received from the exercises of stock options, and sale of equity investments and businesses. Our historic uses of cash have been for business acquisitions, capital expenditures, investments in research and development, payments of principal and interest on outstanding debt obligations, payments of debt and equity issuance costs to obtain financing and payments in satisfaction of employees’ minimum tax obligations. Supplemental information pertaining to our sources and uses of cash for the periods indicated is presented as follows:

Sources (uses) of Cash (millions):

[[GREPCENT_TABLE]]
[["Year Ended June 30,","","2024","","2023","","2022"],["Net cash provided by operating activities","","$","546","","","$","634","","","$","413"],["Net proceeds from debt and equity issuances, including noncontrolling interest holders","","968","","","1,358","","","990"],["Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan","","42","","","24","","","18"],["Proceeds from long-term borrowings and revolving credit facilities","","19","","","3,715","","","\u2014"],["Payments on Convertible Debt and Finisar Notes","","\u2014","","","(4)","","","(15)"],["Cash paid for dividends","","\u2014","","","(28)","","","(35)"],["Debt issuance costs","","\u2014","","","(127)","","","(10)"],["Purchases of businesses, net of cash acquired","","\u2014","","","(5,489)","","","\u2014"],["Effect of exchange rate changes on cash and cash equivalents and other items","","(1)","","","(4)","","","34"],["Other investing and financing","","(5)","","","(5)","","","(8)"],["Payments in satisfaction of employees\u2019 minimum tax obligations","","(22)","","","(54)","","","(21)"],["Payments on existing debt and revolving credit facilities","","(248)","","","(1,330)","","","(62)"],["Additions to property, plant & equipment","","(347)","","","(436)","","","(314)"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities:

Net cash provided by operating activities was $546 million during the current fiscal year ended June 30, 2024 compared to $634 million of cash provided by operating activities during the same period last fiscal year. The decrease in cash flows provided by operating activities during the year ended June 30, 2024 compared to the same period last fiscal year was primarily due to lower non-cash adjustments partially offset by lower losses.

Net cash provided by operating activities was $634 million and $413 million for the fiscal years ended June 30, 2023 and 2022, respectively. The increase in cash flows provided by operating activities during the fiscal year ended June 30, 2023 compared to the fiscal year ended June 30, 2022 was driven by improved management of working capital accounts.

Net cash used in investing activities:

Net cash used in investing activities was $0.4 billion for the fiscal year ended June 30, 2024, compared to net cash used of $5.9 billion for the same period last fiscal year. In fiscal 2023, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures decreased by $89 million year-over-year.

Net cash used in investing activities was $5.9 billion and $320 million for the fiscal years ended June 30, 2023 and 2022, respectively. In fiscal 2023, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures increased by $122 million during the fiscal year ended June 30, 2023 compared to the fiscal year ended June 30, 2022, to continue to increase capacity to meet the growing demand for our product portfolio.

Net cash provided by financing activities:

Net cash provided by financing activities was $0.8 billion for the fiscal year ended June 30, 2024, compared to net cash provided by financing activities of $3.6 billion for the same period last fiscal year. Financing inflows in the current year included the $1.0 billion contribution from noncontrolling interests and proceeds from employee stock purchases, partially offset by payments on existing debt and equity issuance costs related to the contribution from noncontrolling interests.

Net cash provided by financing activities was $3.6 billion for the year ended June 30, 2023 compared to net cash provided by financing activities of $863 million for the year ended June 30, 2022. Cash inflow for fiscal 2023 was from borrowings under the New Term Facilities, defined below, as well the net proceeds from the issuance of Coherent’s Series B-2 Convertible Preferred Stock. Financing outflows included payments to settle the Company’s existing senior credit facilities.

59

New Senior Credit Facilities

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 June 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 bear interest at a SOFR rate (subject to a 0.50% floor) plus 2.50% as of June 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 $237 million for the fiscal year ended June 30, 2024, which is included in Interest expense in the 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 $45 million during the fiscal year ended June 30, 2024.

During the fiscal year ended June 30, 2024, the Company made payments of $225 million for the Term Facilities, including voluntary prepayments of $155 million.

As of June 30, 2024, the Company had no borrowings outstanding under the Revolving Credit Facility.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 7% and 6% for the years ended June 30, 2024 and 2023, respectively.

Our cash position, borrowing capacity and debt obligations are as follows (in millions):

[[GREPCENT_TABLE]]
[["","","June 30, 2024","","June 30, 2023"],["Cash and cash equivalents","","$","926","","","$","821"],["Restricted cash, current","","174","","","12"],["Restricted cash, non-current","","690","","","4"],["Available borrowing capacity under Revolving Credit Facility","","346","","","348"],["Total debt obligations","","4,100","","","4,310"]]
[[/GREPCENT_TABLE]]

Other Liquidity

On December 4, 2023, the Company consummated two investment agreements under which Silicon Carbide LLC, a Company subsidiary, received $1.0 billion cash in exchange for 25% of the equity of that entity. Such funds will be used primarily to fund future capital expansion, including the previously-announced capital that Coherent intended to invest in its silicon carbide business. As a result, the transaction is enabling Coherent to allocate the capital it had intended to invest in this business unit to other corporate purposes, thus increasing its available free cash flow which will provide greater financial and operational flexibility. See Note 12. Noncontrolling Interests to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

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 fiscal year 2025.

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 June 30, 2024, we held approximately $870 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.

60

At June 30, 2024, we had $864 million of restricted cash, which includes $858 million at our Silicon Carbide LLC that is restricted for use by only that subsidiary.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined by Regulation S-K of the Securities Act of 1933.

Contractual Obligations

As of June 30, 2024, in the ordinary course of business, we had total estimated purchase commitments from vendors of approximately $751 million. In addition, as of June 30, 2024, we had obligations under our operating leases of approximately $258 million, $52 million of which will be paid in the fiscal year 2025.

61