Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements of Coherent Corp. (“Coherent”, the “Company”, “we”, “us” or “our”) for the three and six months ended December 31, 2022 and 2021 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation for the periods presented have been included. All adjustments are of a normal recurring nature unless disclosed otherwise. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K dated August 29, 2022. The condensed consolidated results of operations for the three and six months ended December 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet information as of June 30, 2022 was derived from the Company’s audited consolidated financial statements.
The Company is closely monitoring the ongoing impact of the COVID-19 pandemic and related factors on all aspects of our business, including the impact to our employees, suppliers and customers, as well as the impact to our supply chain and the countries and markets in which Coherent operates. In particular, the Company is continuing to focus intensely on mitigating any resulting adverse impacts on our foreign and domestic operations, starting by prioritizing the safety of our employees, suppliers and customers.
Note 2. Recently Issued Financial Accounting Standards
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients to ease the potential burden of accounting for the effects of reference rate reform as it pertains to contract modifications of debt and lease contracts and derivative contracts identified in a hedging relationship. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the temporary accounting rules under Topic 848 from December 31, 2022 to December 31, 2024. The Company is in the process of evaluating the impact of the pronouncement on its consolidated financial statements relative to our floating rate debt, our interest rate swap and our interest rate cap.
Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Accounting Standards Codification ASC 606, Revenue from Contracts with Customers, rather than adjust them to fair value at the acquisition date. We have adopted this accounting standard as of July 1, 2022. The acquisition of Coherent, Inc. has been accounted for in accordance with ASU 2021-08, as will any future acquisitions. Results of operations for quarterly periods prior to adoption remain unchanged as a result of the adoption of ASU No. 2021-08. Refer to Note 3. Coherent Acquisition for further information.
Note 3. Coherent Acquisition
On July 1, 2022 (the “Closing Date”), the Company completed its acquisition of Coherent, Inc. (the “Merger”), a global provider of lasers and laser-based technology for scientific, commercial, and industrial customers, in a combined cash and stock transaction in accordance with the Agreement and Plan of Merger dated March 25, 2021 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, each share of common stock of legacy Coherent, Inc. (“Legacy Coherent”), par value $0.01 per share (the “Legacy Coherent Common Stock”), issued and outstanding immediately prior to July 1, 2022, was canceled and extinguished and automatically converted into the right to receive $220.00 in cash and 0.91 of a share of Coherent's common stock, no par value (“Coherent Common Stock”).
Following the completion of the Legacy Coherent acquisition, the Company announced a new brand identity, including a corporate name change to Coherent Corp. (Nasdaq: COHR) on September 8, 2022.
On the Closing Date, the Company entered into a Credit Agreement (the “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 new term loan A credit facility (the “Term A Facility”) in an aggregate principal amount of $850 million a new term loan B credit facility (the “Term B Facility”) (and, together with the Term A Facility, the “Term Facilities”) in an aggregate principal amount of $2.8 billion, and a new revolving credit facility (the “Revolving Credit Facility”) in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. For additional information on the credit facility refer to Note 8. Debt.
In order to complete the funding of the Merger, the Company had a net cash outflow of $2.1 billion on July 1, 2022. The Company recorded $10 million and $72 million of acquisition related costs in the three and six months ended December 31, 2022, respectively, representing professional and other direct acquisition costs. These costs are recorded within Selling, general and administrative expense in our Condensed Consolidated Statement of Earnings (Loss). Approximately 23 million shares of Coherent Common Stock in the aggregate were issued in conjunction with the closing of the Merger. Total preliminary Merger consideration was $7.1 billion, including replacement equity awards attributable to pre-combination service for certain Legacy Coherent restricted stock units.
The preliminary total fair value of consideration paid in connection with the acquisition of Coherent, Inc. consisted of the following (in $000): | | | | | | | | | | | | | | | | | |
| Shares | | Per Share | | Total Consideration |
Cash paid for merger consideration | — | | — | | $ | 5,460,808 | |
Shares of COHR common stock issued to Legacy Coherent stockholders | 22,587,885 | | $49.83 | | 1,125,554 | |
Converted Legacy Coherent RSUs attributable to pre-combination service | — | | — | | 82,037 | |
Payment of Legacy Coherent debt | — | | — | | 364,544 | |
Payment of Legacy Coherent transaction expenses | — | | — | | 62,840 | |
| | | | | $ | 7,095,783 | |
The Company allocated the fair value of the preliminary purchase price consideration to the tangible assets, liabilities, and intangible assets acquired, generally based on estimated fair values. The excess preliminary purchase price over those fair values is recorded as goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets, inventories, property, plant & equipment and deferred income taxes. In determining the fair value of intangible assets acquired, the Company must make assumptions about the future performance of the acquired business, including among other things, the forecasted revenue growth attributable to the asset group and projected operating expenses inclusive of expected synergies, future cost savings, and other benefits expected to be achieved by combining the Company and Legacy Coherent. The Company’s intangible assets are comprised of trade names and trademarks, customer relationships, developed technology and backlog. The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocation. The estimated fair value of the customer relationships and backlog are determined using the multi-period excess earnings method and the estimated fair value of the trade names and trademarks and developed technology are determined using the relief from royalty method. Both methods require forward looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future economic and market conditions.
The purchase price allocation set forth is preliminary and will be revised as third party valuations are finalized or additional information becomes available during the measurement period, which could be up to 12 months from the Closing Date. Any such revisions or changes may be material. We expect to finalize pushdown accounting as soon as practicable, but no later than twelve months from the Closing Date.
Our preliminary allocation of the purchase price of Legacy Coherent, based on the estimated fair value of the assets acquired and liabilities assumed as of the Closing Date, is as follows (in $000): | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Preliminary Allocation as of 7/1/2022 |
| | Previously Reported September 30, 2022 | | | | Measurement Period Adjustments (i) | | As Adjusted (preliminary) |
Assets | | | | | | | | |
Current Assets | | | | | | | | |
Cash, cash equivalents, and restricted cash | | $ | 393,324 | | | | | $ | — | | | $ | 393,324 | |
Accounts receivable | | 270,928 | | | | | — | | | 270,928 | |
Inventories (ii) | | 497,345 | | | | | 66,581 | | | 563,926 | |
Prepaid and refundable income taxes (iii) | | 8,869 | | | | | (1,592) | | | 7,277 | |
Prepaid and other current assets | | 41,467 | | | | | — | | | 41,467 | |
Total Current Assets | | 1,211,933 | | | | | 64,989 | | | 1,276,922 | |
Property, plant & equipment, net (iv) | | 424,228 | | | | | 16,704 | | | 440,932 | |
Deferred income taxes (iii) | | 1,115 | | | | | (793) | | | 322 | |
Other assets | | 102,726 | | | | | — | | | 102,726 | |
Other intangible assets, net (v) | | 2,425,454 | | | | | 1,079,546 | | | 3,505,000 | |
Goodwill | | 4,005,727 | | | | | (910,633) | | | 3,095,094 | |
Total Assets | | $ | 8,171,183 | | | | | $ | 249,813 | | | $ | 8,420,996 | |
Liabilities | | | | | | | | |
Current Liabilities | | | | | | | | |
Current portion of long-term debt | | $ | 4,504 | | | | | $ | — | | | $ | 4,504 | |
Accounts payable | | 116,754 | | | | | — | | | 116,754 | |
Accrued compensation and benefits | | 60,596 | | | | | — | | | 60,596 | |
Operating lease current liabilities | | 13,002 | | | | | — | | | 13,002 | |
Accrued income taxes payable | | 16,936 | | | | | — | | | 16,936 | |
Other accrued liabilities (vi) | | 136,042 | | | | | 702 | | | 136,744 | |
Total Current Liabilities | | 347,834 | | | | | 702 | | | 348,536 | |
Long-term debt | | 22,991 | | | | | — | | | 22,991 | |
Deferred income taxes (iii) | | 563,824 | | | | | 249,674 | | | 813,498 | |
Operating lease liabilities | | 43,313 | | | | | — | | | 43,313 | |
Other liabilities (vi) | | 97,438 | | | | | (563) | | | 96,875 | |
Total Liabilities | | $ | 1,075,400 | | | | | $ | 249,813 | | | $ | 1,325,213 | |
| | | | | | | | |
Preliminary aggregate acquisition consideration | | $ | 7,095,783 | | | | | $ | — | | | $ | 7,095,783 | |
(i) The Company recorded measurement period adjustments to its preliminary acquisition date fair values due to the refinement of its valuation models, assumptions and inputs. The following measurement period adjustments were based upon information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of the amounts recognized at that date.
(ii) The condensed combined balance sheet has been adjusted to record Legacy Coherent’s inventories at a preliminary fair value of approximately $564 million, an increase of $67 million from the preliminary fair value reported at September 30, 2022 with a corresponding decrease to goodwill. The Condensed Combined Statement of Earnings (Loss) for the three and six months ended December 31, 2022 includes cost of goods sold of approximately $112 million and $158 million, respectively, related to the increased basis in the preliminary fair value compared to the carrying value. The $112 million cost of goods sold recognized in the three months ended December 31, 2022 includes an increase of $33 million due to the measurement period adjustment which relates to a previous reporting period. The costs are being amortized over the expected period during which the acquired inventory is sold, the six months ended December 31, 2022, and thus are not anticipated to affect the Condensed Consolidated Statements of Earnings (Loss) beyond twelve months after the Closing Date.
(iii) The Company has adjusted its prepaid and refundable income taxes, deferred tax asset and deferred tax liability positions as of December 31, 2022, to $7 million, $0 million and $813 million, respectively, as a result of measurement period adjustments.
(iv) The Condensed Consolidated Balance Sheet has been adjusted to record Legacy Coherent’s property, plant and equipment (consisting of land, buildings and improvements, equipment, furniture and fixtures, and leasehold improvements) at a preliminary fair value of approximately $441 million, an increase of $17 million from the preliminary fair value reported at September 30, 2022 with a corresponding decrease to goodwill. The Condensed Consolidated Statements of Earnings (Loss) have been adjusted to recognize additional depreciation expense related to the increased basis. The additional depreciation expense is computed with the assumption that the various categories of assets will be depreciated over their remaining useful lives on a straight-line basis.
(v) Preliminary identifiable intangible assets in the condensed combined balance sheet increased $1.1 billion from the preliminary fair value reported at September 30, 2022 with a corresponding decrease to goodwill. Intangibles amortization recorded in cost of goods sold for the three and six months ended December 31, 2022 was $6 million and $43 million, respectively, and included a reduction in the current quarter of $16 million due to the measurement period adjustment which relates to a previous reporting period. Intangibles amortization recorded in selling, general and administrative expenses for the three and six months ended December 31, 2022 was $80 million and $105 million, respectively, and included an increase in the current quarter of $27 million due to the measurement period adjustment which relates to a previous reporting period.
Preliminary identifiable intangible assets consist of the following and are being amortized over their estimated useful lives in the Condensed Consolidated Statements of Earnings (Loss) (in $000): | | | | | | | | | | | |
| | Preliminary Fair Value | Estimated Useful Life |
Trade names and trademarks | | $ | 430,000 | | N/A |
Customer relationships | | 1,830,000 | | 15 years |
Developed technology | | 1,157,500 | | 13.5 years |
Backlog | | 87,500 | | 1.0 year |
Intangible assets acquired | | $ | 3,505,000 | | |
(vi) The Company recorded approximately $1 million of increases in other current liabilities and $1 million of decreases in other liabilities as measurement period adjustments.
Operating results, including goodwill and intangibles, of Legacy Coherent are reflected in the Company’s consolidated financial statements from the Closing Date, within the Lasers segment. Revenues and net loss for the Lasers segment for the three months ended December 31, 2022 were $379 million and $171 million, respectively. Revenues and net loss for the Lasers segment for the six months ended December 31, 2022 were $772 million and $299 million, respectively. Goodwill in the amount of $3.1 billion arising from the acquisition is attributed to the expected synergies, including future cost savings, and other benefits expected to be generated by combining Coherent and Legacy Coherent. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes.
Supplemental Pro Forma Information
The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.
The following supplemental pro forma information presents the combined results of operations for the three and six months ended December 31, 2022 and December 31, 2021, as if Legacy Coherent had been acquired as of July 1, 2021. The supplemental pro forma information includes adjustments to amortization and depreciation for acquired intangible assets, property, plant and equipment, adjustments to share-based compensation expense, fair value adjustments on the inventories acquired, transaction costs, interest expense and amortization of debt issuance costs related to the Senior Credit Facilities (as defined in Note 8. Debt).
The unaudited supplemental pro forma financial information for the periods presented is as follows (in $000):
| | | | | | | | | | | |
| Three Months Ended December 31, 2022 | | Three Months Ended December 31, 2021 |
Revenue | $ | 1,370,285 | | | $ | 1,191,326 | |
Net Earnings (Loss) | 101,349 | | | (65,115) | |
| | | | | | | | | | | |
| Six Months Ended December 31, 2022 | | Six Months Ended December 31, 2021 |
Revenue | $ | 2,714,855 | | | $ | 2,378,111 | |
Net Earnings (Loss) | 211,420 | | | (241,375) | |
Note 4. Revenue from Contracts with Customers
The Company believes that disaggregating revenue by end market provides the most relevant information regarding the nature, amount, timing, and uncertainty of revenues and cash flows.
As of July 1, 2022, the Company disaggregates revenue into four end markets: industrial, communications, electronics and instrumentation. All prior period market and segment disclosure information has been reclassified to conform to the current reporting structure.
Effective July 1, 2022, the Company updated the operating segments due to the closing of the Merger. In addition, prior year numbers were recast to reflect the transfer of two entities between the Networking and Materials segments. See Note 13. Segment Reporting for further details.
The following tables summarize disaggregated revenue for the three and six months ended December 31, 2022 and 2021 ($000):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2022 | | Six Months Ended December 31, 2022 |
| Networking | | Materials | | Lasers | | Total | | Networking | | Materials | | Lasers | | Total |
Industrial | $ | 15,926 | | | $ | 149,454 | | | $ | 284,851 | | | $ | 450,231 | | | 34,619 | | | 293,537 | | | 583,092 | | | 911,248 | |
Communications | 579,393 | | | 20,662 | | | — | | | 600,055 | | | 1,142,914 | | | 42,539 | | | — | | | 1,185,453 | |
Electronics | 3,003 | | | 196,952 | | | — | | | 199,955 | | | 6,825 | | | 373,574 | | | — | | | 380,399 | |
Instrumentation | 10,358 | | | 15,328 | | | 94,358 | | | 120,044 | | | 20,870 | | | 28,390 | | | 188,495 | | | 237,755 | |
Total Revenues | $ | 608,680 | | | $ | 382,396 | | | $ | 379,209 | | | $ | 1,370,285 | | | $ | 1,205,228 | | | $ | 738,040 | | | $ | 771,587 | | | $ | 2,714,855 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
| Networking | | Materials | | Total | | Networking | | Materials | | Total |
Industrial | $ | 19,996 | | | $ | 166,864 | | | $ | 186,860 | | | 41,725 | | | 321,748 | | | 363,473 | |
Communications | 483,640 | | | 23,562 | | | 507,202 | | | 982,271 | | | 43,437 | | | 1,025,708 | |
Electronics | 3,360 | | | 83,423 | | | 86,783 | | | 6,328 | | | 160,443 | | | 166,771 | |
Instrumentation | 9,545 | | | 16,429 | | | 25,974 | | | 17,230 | | | 28,748 | | | 45,978 | |
Total Revenues | $ | 516,541 | | | $ | 290,278 | | | $ | 806,819 | | | $ | 1,047,554 | | | $ | 554,376 | | | $ | 1,601,930 | |
Contract Liabilities
Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the six months ended December 31, 2022, the Company recognized revenue of $9 million related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2022. The Company had $181 million of contract liabilities recorded in the Condensed Consolidated Balance Sheet as of December 31, 2022. Contract liabilities acquired from the Merger totaled $77 million. As of December 31, 2022, $114 million of deferred revenue is included other accrued liabilities and $67 million is included within other liabilities on the Condensed Consolidated Balance Sheet.
Note 5. Inventories
The components of inventories were as follows ($000): | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
Raw materials | $ | 486,649 | | | $ | 318,758 | |
Work in progress | 608,777 | | | 408,405 | |
Finished goods | 271,949 | | | 175,396 | |
| $ | 1,367,375 | | | $ | 902,559 | |
During the six months ended December 31, 2022, as part of the Merger, a fair value inventory step-up in the amount of $158 million was recorded as part of the preliminary purchase price allocation. The inventory step-up will be amortized to cost of goods sold over the expected period during which the acquired inventory is sold. Refer to Note 3. Coherent Acquisition for additional information. These costs are non-recurring in nature and not anticipated to affect the condensed combined statements of earnings (loss) beyond twelve months after the Closing Date.
Note 6. Property, Plant and Equipment
Property, plant and equipment consists of the following ($000): | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
Land and improvements | $ | 73,887 | | | $ | 19,368 | |
Buildings and improvements | 646,228 | | | 415,530 | |
Machinery and equipment | 1,960,765 | | | 1,651,762 | |
Construction in progress | 315,965 | | | 271,605 | |
Finance lease right-of-use asset | 24,999 | | | 25,000 | |
| 3,021,844 | | | 2,383,265 | |
Less accumulated depreciation | (1,146,286) | | | (1,020,070) | |
| $ | 1,875,558 | | | $ | 1,363,195 | |
During the six months ended December 31, 2022, as part of the Merger, a fair value step-up in the amount of $145 million was recorded to property, plant and equipment as part of the preliminary purchase price allocation. The step-up will be amortized over the useful lives of the related assets. Refer to Note 3. Coherent Acquisition for additional information.
Note 7. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill were as follows ($000):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2022 |
| Networking | | Materials | | Lasers | | Total |
Balance-beginning of period | $ | 1,048,743 | | | $ | 237,016 | | | $ | — | | | $ | 1,285,759 | |
Transfer between segments1 | (35,466) | | | 35,466 | | | — | | | — | |
Goodwill acquired | — | | | — | | | 3,095,094 | | | 3,095,094 | |
| | | | | | | |
Foreign currency translation | (1,633) | | | 786 | | | 46,835 | | | 45,988 | |
Balance-end of period | $ | 1,011,644 | | | $ | 273,268 | | | $ | 3,141,929 | | | $ | 4,426,841 | |
1 Refer to Note 13. Segment Reporting for information regarding the segment transfer of goodwill between segments.
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of December 31, 2022 and June 30, 2022 were as follows ($000):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Technology | $ | 1,658,893 | | | $ | (206,723) | | | $ | 1,452,170 | | | $ | 473,845 | | | $ | (144,409) | | | $ | 329,436 | |
Trade Names | 452,419 | | | (7,866) | | | 444,553 | | | 22,536 | | | (7,454) | | | 15,082 | |
Customer Lists | 2,341,807 | | | (255,047) | | | 2,086,760 | | | 464,880 | | | (173,994) | | | 290,886 | |
Backlog and Other | 90,366 | | | (45,316) | | | 45,050 | | | 1,563 | | | (1,563) | | | — | |
Total | $ | 4,543,485 | | | $ | (514,952) | | | $ | 4,028,533 | | | $ | 962,824 | | | $ | (327,420) | | | $ | 635,404 | |
Refer to Note 3. Coherent Acquisition for additional information on intangibles acquired in the six months ended December 31, 2022.
Note 8. Debt
The components of debt as of the dates indicated were as follows ($000): | | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
New Term A Facility, interest at LIBOR, as defined, plus 2.00% | $ | 839,375 | | | $ | — | |
| | | |
Debt issuance costs, New Term A Facility and New Revolving Credit Facility | (20,453) | | | — | |
New Term B Facility, interest at LIBOR, as defined, plus 2.75% | 2,743,000 | | | — | |
Debt issuance costs, New Term B Facility | (72,802) | | | — | |
1.30% Term loan due 2024 | 163 | | | — | |
1.00% State of Connecticut term loan due 2023 | 2,336 | | | — | |
Facility construction loan in Germany due 2030 | 23,433 | | | — | |
Existing Term A Facility, interest at LIBOR, as defined, plus 1.375% | — | | | 995,363 | |
| | | |
Debt issuance costs, Existing Term A Facility and Existing Revolving Credit Facility | — | | | (18,396) | |
| | | |
| | | |
5.000% Senior Notes | 990,000 | | | 990,000 | |
Debt issuance costs and discount, Senior Notes | (7,308) | | | (7,703) | |
0.25% Convertible Senior Notes | — | | | 341,501 | |
Debt issuance costs and discount, 0.25% Convertible Senior Notes | — | | | (339) | |
| | | |
Total debt | 4,497,744 | | | 2,300,426 | |
Current portion of long-term debt | (74,927) | | | (403,212) | |
Long-term debt, less current portion | $ | 4,422,817 | | | $ | 1,897,214 | |
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”), in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. The Term A Facility and the Revolving Credit Facility each bear interest at LIBOR subject to a 0.00% 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 LIBOR plus 2.00% as of December 31, 2022. The Term B Facility bears interest at LIBOR (subject to a 0.50% floor) plus 2.75%. In relation to the Term Facilities, the Company incurred interest expense, including amortization of debt issuance costs, of $61 million and $114 million in the three and six months ended December 31, 2022, respectively, which is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss).
Proceeds of the loans borrowed under the Term Facilities on July 1, 2022, together with other financing sources (including the net proceeds from Coherent's offer and sale of its 5.000% Senior Notes due 2029 (the “Senior Notes”) and cash on hand) were used to fund the cash portion of the Merger consideration, the repayment of certain indebtedness (including the repayment in full of all amounts outstanding under the Prior Credit Agreement as defined below), and certain fees and expenses in connection with the Merger and otherwise for general corporate purposes.
The Company capitalized approximately $90 million of debt issuance costs during the six months ended December 31, 2022. These capitalized costs are presented as contra-debt within the long-term debt caption in the Condensed Consolidated Balance Sheet. Amortization of debt issuance costs related to the New Term Facilities for the three and six months ended December 31, 2022 totaled $5 million and $9 million, respectively, and is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss). As of December 31, 2022, the Company was in compliance with all covenants under the New Term Facilities.
Prior Senior Credit Facilities
Through June 30, 2022, the Company had senior credit facilities (the “Prior Senior Credit Facilities”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.
The credit agreement governing the Senior Credit Facilities (the “Prior Credit Agreement”) provided for senior secured financing of $2.4 billion in the aggregate, consisting of
(i)Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan facility (the “Prior Term A Facility”),
(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Prior Term B Facility” and together with the Prior Term A Facility, the “Prior Term Loan Facilities”), which was repaid in full during the quarter ended September 30, 2020, and
(iii)Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit facility (the “Prior Revolving Credit Facility” and together with the Prior Term Loan Facilities, the “Prior Senior Credit Facilities”).
The Prior Credit Agreement also provided for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility initially not to exceed $20 million.
On July 1, 2022, the Company terminated the Prior Credit Agreement and repaid all amounts outstanding thereunder, of which $62 million was recorded as current portion of long-term debt and $933 million was recorded as long-term debt at June 30, 2022.
Debt extinguishment costs related to the termination of the Prior Credit Agreement of $17 million were expensed in other expense (income), net in the Condensed Consolidated Statement of Earnings (Loss) during the six months ended December 31, 2022.
Bridge Loan Commitment
Subject to the terms of an amended and restated commitment letter entered into in connection with Coherent entering into the Merger Agreement, the commitment parties thereto committed to provide, in addition to the Term Facilities and the Revolving Credit Facility, a senior unsecured bridge loan facility in an aggregate principal amount of $990 million (the "Bridge Loan Commitment"). As a result of the issuance and sale of the Senior Notes, the Bridge Loan Commitment was terminated. During the six months ended December 31, 2022, the Company incurred expenses of $18 million, respectively, related to the termination of the Bridge Loan Commitment, which is included in other expense (income) in the Condensed Consolidated Statements of Earnings (Loss). There will be no additional expense related to the Bridge Loan Commitment going forward.
Debt Assumed through Acquisition
The Company assumed the remaining balances of three term loans with the closing of the Merger. The aggregate principal amount outstanding is $26 million as of December 31, 2022. The terms loans assumed consisted of the following: (i) 1.3% Term Loan due 2024, (ii) 1.0% State of Connecticut Term Loan due 2023, and (iii) Facility construction loan in Germany due 2030. For the Facility construction loan, on December 21, 2020, Coherent LaserSystems GmbH & Co. KG entered into a loan agreement with Commerzbank for borrowings of up to 24 million Euros, which were drawn down by October 29, 2021, to finance a portion of the construction of a new facility in Germany. The term of the loan is 10 years, and borrowings bear interest at 1.55% per annum. Payments are made quarterly.
5.000% Senior Notes due 2029
On December 10, 2021, the Company issued and sold $990 million aggregate principal amount of Senior Notes pursuant to the indenture, dated as of December 10, 2021 (the "Indenture"), between the Company and U.S. Bank National Association, as trustee. The Senior Notes are guaranteed by each of the Company’s domestic subsidiaries that guarantee its obligations under the Senior Credit Facilities. Interest on the Senior Notes is payable on December 15 and June 15 of each year, commencing on June 15, 2022, at a rate of 5.000% per annum. The Senior Notes will mature on December 15, 2029.
On or after December 15, 2024, the Company may redeem the Senior Notes, in whole at any time or in part from time to time, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time prior to December 15, 2024, the Company may redeem the Senior Notes, at its option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus a “make-whole” premium set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Notwithstanding the foregoing, at any time and from time to time prior to December 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes using the proceeds of certain equity offerings as set forth in the Indenture, at a redemption price equal to 105.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
In relation to the Senior Notes, the Company incurred interest expense of $13 million and $25 million in the three and six months ended December 31, 2022, respectively, which is included in interest expense in the Condensed Consolidated Statements of Earnings (Loss).
The Indenture contains customary covenants and events of default, including default relating to among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. As of December 31, 2022, the Company was in compliance with all covenants under the Indenture.
0.25% Convertible Senior Notes due 2022
In August 2017, the Company issued and sold $345 million aggregate principal amount of its 0.25% Convertible Senior Notes due 2022 (the “Convertible Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.
Beginning on June 1, 2022 until the close of business on the business day immediately preceding September 1, 2022 (the “Maturity Date”), holders were able to convert their Convertible Notes at any time. For the fiscal quarter ended September 30, 2022, the holders of the Convertible Notes converted $332 million of principal, which was recorded as current portion of long-term debt at June 30, 2022, and received approximately 7 million shares of Coherent Common Stock in settlement of the conversions.
On the Maturity Date, $4 million aggregate principal amount of Convertible Notes remained outstanding, and was repaid in cash, and the Convertible Notes are no longer outstanding. At the Maturity Date, the accrued interest on the Coherent Convertible Notes was immaterial. The total interest expense related to the Convertible Notes was immaterial for both the three and six months ended December 31, 2022 and December 31, 2021.
Aggregate Availability
The Company had aggregate availability of $350 million under its Revolving Credit Facility as of December 31, 2022.
Note 9. Income Taxes
The Company’s year-to-date effective income tax rate at December 31, 2022 was 29% compared to an effective tax rate of 16% for the same period in 2021. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were due to nondeductible expenses and tax rate differentials between U.S. and foreign jurisdictions.
U.S. GAAP prescribes the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements which includes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2022 and June 30, 2022, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $71 million and $37 million, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, $32 million of the gross unrecognized tax benefits at December 31, 2022 would impact the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision in the Condensed Consolidated Statements of Earnings (Loss). The amount of accrued interest and penalties included in the gross unrecognized income tax benefit was $6 million and $3 million at December 31, 2022 and June 30, 2022, respectively. Fiscal years 2019 to 2022 remain open to examination by the Internal Revenue Service, fiscal years 2018 to 2022 remain open to examination by certain state jurisdictions, and fiscal years 2011 to 2022 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for certain subsidiary companies in California for the years ended September 30, 2018 through September 30, 2019; Colorado for the years ended September 30, 2018 through September 30, 2021; Vietnam for the years ended September 30, 2018 through September 30, 2021; India for the year ended March 31, 2016; Singapore for the year ended September 30, 2020; and Germany for the years ended June 30, 2012 through September 30, 2020. The Company believes its income tax reserves for these tax matters are adequate.
Note 10. Leases
We determine if an arrangement is a lease at inception for arrangements with an initial term of more than 12 months, and classify it as either finance or operating.
Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life. Finance lease assets are recorded in property, plant and equipment, net, and finance lease liabilities within other accrued liabilities and other liabilities on our Condensed Consolidated Balance Sheets. Finance lease assets are amortized in operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component for lease liabilities included in interest expense and recognized using the effective interest method over the lease term.
Operating leases are recorded in other assets and operating lease liabilities, current and non-current on the Company’s Condensed Consolidated Balance Sheets. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.
The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to the Company. For the purpose of lease liability measurement, the Company considers only payments that are fixed and determinable at the time of commencement. Any variable payments that depend on an index or rate are expensed as incurred. The Company accounts for non-lease components, such as common area maintenance, as a component of the lease, and includes it in the initial measurement of leased assets and corresponding liabilities. The Company’s lease terms and conditions may include options to extend or terminate. An option is recognized when it is reasonably certain that Coherent will exercise that option.
The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to commencement. Our lease assets are tested for impairment in the same manner as long-lived assets used in operations.
The following table presents lease costs, which include leases for arrangements with an initial term of more than 12 months, lease term, and discount rates ($000): | | | | | | | | | | | |
| Three Months Ended December 31, 2022 | | Six Months Ended December 31, 2022 |
Finance lease cost | | | |
Amortization of right-of-use assets | $ | 417 | | | $ | 833 | |
Interest on lease liabilities | 284 | | | 572 | |
Total finance lease cost | 701 | | | 1,405 | |
Operating lease cost | 13,045 | | | 26,311 | |
| | | |
Total lease cost | $ | 13,746 | | | $ | 27,716 | |
| | | |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | |
Operating cash flows from finance leases | $ | 284 | | | $ | 572 | |
Operating cash flows from operating leases | 12,354 | | | 25,052 | |
Financing cash flows from finance leases | 346 | | | 688 | |
| | | |
Weighted-Average Remaining Lease Term (in Years) | | | |
Finance leases | 9.0 | | |
Operating leases | 6.8 | | |
| | | |
Weighted-Average Discount Rate | | | |
Finance leases | 5.6 | % | | |
Operating leases | 5.3 | % | | |
| | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
Finance Lease Cost | | | |
Amortization of right-of-use assets | $ | 418 | | | $ | 838 | |
Interest on lease liabilities | 302 | | | 609 | |
Total finance lease cost | $ | 720 | | | $ | 1,447 | |
Operating lease cost | 9,176 | | | 18,395 | |
Sublease income | 143 | | | 507 | |
Total lease cost | $ | 9,753 | | | $ | 19,335 | |
| | | |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities | | | |
Operating cash flows from finance leases | $ | 302 | | | $ | 609 | |
Operating cash flows from operating leases | 8,850 | | | 17,665 | |
Financing cash flows from finance leases | 312 | | | 622 | |