ityP!@ 



United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

☒    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended June 30, 2018

2021

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

☐    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to.

Commission File Number: 0-16195

001-39375

II-VI INCORPORATED

(Exact name of registrant as specified in its charter)

PENNSYLVANIA

25-1214948

Pennsylvania

25-1214948
(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

375 Saxonburg Blvd.

375 Saxonburg Boulevard

Saxonburg, PA

16056

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: 724-352-4455

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class

each class

Trading Symbol(s)

Name of Each Exchangeeach exchange on Which Registered

which registered

Common Stock, no par value

IIVI

Nasdaq Global Select Market

Series A Mandatory Convertible Preferred Stock, no par valueIIVIPNasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     Yes   ☐    No   ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ☒    No   ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment  to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Act:

Large accelerated filer

☒

Accelerated filer

☐

Large Accelerated Filer

☒Accelerated filer☐
Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act ☐

(15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at December 29, 2017,31, 2020, was approximately $2,867,219,000$7,871,289,598 based on the closing sale price reported on the Nasdaq Global Select Market. For purposes of this calculation only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant.

Number of outstanding shares of Common Stock, no par value, at August 22, 2018,16, 2021, was 63,595,874.

105,718,326.



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 20182021 Annual Meeting of Shareholders of II-VI Incorporated, are incorporated by reference into Part III of this Annual Report on Form 10-K.

Forward-Looking Statements

This Annual Report on Form 10-K (including certain information incorporated herein by reference) contains forward-looking statements made pursuant to Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The statements in this Annual Report on Form 10-K that are not purely historical but are forward-looking statements, including, without limitation, statements regarding our expectations, assumptions, beliefs, intentions or strategies regarding the future.  In some cases, these forward-looking statements can be identified by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “projects,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements address, among other things, our assumptions, our expectations, our assessments of the size and growth rates of our markets, our growth strategies, our efforts to increase bookings, sales and revenues, projections of our future profitability, cash generation, success of our research, development and engineering investments, results of operations, capital expenditures, our financial condition, our ability to integrate acquired businesses or other “forward-looking” information and include statements about revenues, costs, investments, earnings, margins, or our projections, actions, plans or strategies.

The forward-looking statements in this Annual Report on Form 10-K involve risks and uncertainties, which could cause actual results, performance or trends to differ materially from those expressed in the forward-looking statements herein or in previous disclosures. We believe that all forward-looking statements made by us have a reasonable basis, but there can be no assurance that these expectations, beliefs or projections will actually occur or prove to be correct, at least on the timetable of our expectations. Actual results could differ materially. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA for our forward-looking statements.

The followingrisk factors described in more detail herein under Item 1A. “Risk Factors” and summarized below under “Risk Factor Summary,” among others, in some cases have affected and in the future could affect our financial performance and actual results, and could cause actual results for fiscal 20192022 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Annual Report on Form 10-K or otherwise made by our management:

Investments in future markets of potential significant growth may not result in expected returns.

management.

Our competitive position depends on our ability to develop new products and processes.


Our competitive position may still require significant investments.

Our future success depends on continued international sales, and our global operations are complex to manage, and present multiple challenges to manage.

Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign exchange losses.

Any inability to access financial markets from time to time to raise required capital, finance our working capital requirements or our acquisition strategies, or otherwise to support our liquidity needs could negatively impact our ability to finance our operations, meet certain obligations or implement our growth strategy.

We may incur substantially more indebtedness.

We may not be able to settle conversions of our convertible senior notes in cash or to repurchase the notes in accordance with their terms.

The conditional conversion feature of our outstanding convertible senior notes, if triggered, may adversely affect our financial condition and operating results.

We may fail to accurately estimate the size and growth of our markets and our customers’ demands.

We may encounter increased competition.

There are limitations on the protection of our intellectual property and we may from time to time be involved in costly intellectual property litigation or indemnification.

A significant portion of our business depends on cyclical industries.


•

Changes in laws and regulations governing data privacy and data protection could have a material adverse impact on our business.

Data breach incidents and breakdown of information and communication technologies could disrupt our operations and impact our financial results.

Global economic downturns may adversely affect our business, operating results and financial condition.

We are subject to complex and rapidly changing governmental import and export regulations.

Changes in U.S. trade policies could impact the Company’s international operations and the cost of imported goods into the U.S., which may narrow the size of our markets, materially impact our revenues or increase our operating costs and expose us to contract litigation.

We have entered into supply agreements which commit us to supply products on specified terms.

We depend on highly complex manufacturing processes that require feeder materials, components and products from limited sources of supply.

Our global operations are subject to complex legal and regulatory requirements.

We use and generate potentially hazardous substances that are subject to stringent environmental regulations.

We may be adversely affected by climate change regulations.

Some systems that use our products are complex in design, and our products may contain defects that are not known or detected until deployed which could increase our costs, reduce our revenues, cause us to lose key customers and may expose us to litigation arising from derivative lawsuits related to consumer products.

Unfavorable changes in tax rates, tax liabilities or tax accounting rules could negatively affect future results.

Increases in commodity prices may adversely affect our results of operations and financial condition.

Natural disasters or other global or regional catastrophic events could disrupt our operations, give rise to substantial environmental hazards and adversely affect our results.

Our success depends on our ability to attract, retain, and develop key personnel and requires continued good relations with our employees.

Our stock price has been volatile in the past and may be volatile in the future.

Some anti-takeover provisions contained in our articles of incorporation and by-laws, as well as provisions of Pennsylvania law, could impair a takeover attempt, which could also reduce the market price of our common stock.

Because we do not currently intend to pay dividends, holders of our common stock will benefit from an investment in our common stock only if it appreciates in value, and by the intended anti-dilution actions of our share-buyback program.

The foregoing and additional risk factors are described in more detail herein under Item 1A. “Risk Factors”. All such factors, as well as factors described or referred to in other filings we make with the Securities and Exchange Commission (the “SEC”) from time to time, should be considered in evaluating our business and prospects. Many of these factors are beyond our reasonable control. In addition, we operate in a highly competitive and rapidly changing environment, and, therefore, new risk factors can arise and be present without market playersparticipants like us knowing until a substantial amount of time has passed. It is not possible for management to predict all such risk factors, assess the impact of all such risk factors on our business noror estimate the extent to which any individual risk factor, or combination of risk factors, normay impact our business. It is also not possible for management to mitigate them all such risks, and therefore theyany such risk factor 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 speak only as of the date of this Annual Report on Form 10-K. We do not assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or developments, or otherwise, except as may be required by the securities laws. We caution you not to rely on them unduly.

II-VI Incorporated does communicate with securities analysts from time to time and those communications are conducted in accordance with applicable securities laws. Investors should not assume that II-VI Incorporated agrees with any statement or report issued by any analyst, irrespective of the content of the statement or report.



Risk Factor Summary

The following is a summary of the material risks and uncertainties that could cause our business, financial condition or operating results to be adversely impacted. We encourage you to carefully review the full risk factors contained in Item 1A. “Risk Factors” herein in their entirety for additional information regarding these risks and uncertainties.

Risks Relating to Our Business and Our Industry
3


•Investments in future markets of potential significant growth may not result in the expected return.
•Our competitive position depends on our ability to develop new products and processes.
•A widespread health crises could materially and adversely affect us.
•Global economic downturns may adversely affect us.
•Our products may contain defects that are not detected until deployed.
•Foreign currency risk may negatively affect us and could result in foreign exchange losses.
•Our competitive position may still require significant investments.
•We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel.
•We may not realize expected benefits from our acquisition or be able to retain those benefits even if realized.
•Our global operations are complex and present multiple challenges to manage.
•We are subject to complex and rapidly changing import and export regulations.
•Changes in trade policies could increase the costs of goods imported into the United States or China.
•Any inability to access financial markets from time to time to raise funds could negatively impact us.
•We may not be able to settle conversions of our convertible senior notes in cash or repurchase the notes when required.
•Our current credit agreement restricts our operations in certain regards.
•We may fail to accurately estimate the size and growth of our markets and our customers’ demands.
•We may encounter increased competition.
•There are limitations on the protection of our intellectual property.
•A significant portion of our business is dependent on cyclical industries.
•Our global operations are subject to complex legal and regulatory requirements.
•Changes in laws and regulations governing data privacy and data protection could have a material adverse impact on us.
•We could be negatively impacted by data breach incidents and breakdowns of information and communication technologies.
•We have entered into supply agreements that commit us to supply products on specified terms.
•We depend on highly complex manufacturing processes that require feeder materials, components, and products from limited sources of supply.
•Increases in commodity prices may adversely affect our results of operations and financial condition.
•We use and generate potentially hazardous substances that are subject to stringent environmental regulations.
•We have a substantial amount of debt, which could adversely affect us and prevent us from fulfilling our obligations.
•Unfavorable changes in tax rates, tax liabilities, or tax accounting rules could negatively affect future results.
•Natural disasters or other global or regional catastrophic events could adversely affect us.
•Our success depends on our ability to attract, retain, and develop key personnel and requires good employee relations.
•We contract with a number of large customers that have considerable bargaining power.
•We may be adversely affected by climate change regulations.
•We depend on large purchases from a few significant customers.
•The manufacturing of our products may be adversely affected if we are unable to manufacture certain products in our manufacturing facilities.
•Failure to accurately forecast our revenues could result in additional charges.
•If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

Risks Relating to Our Pending Acquisition of Coherent, Inc. (“Coherent”)

•The market prices of our securities after completion of our pending acquisition of Coherent may be affected by factors different from those currently affecting the markets for our securities or securities issued by Coherent.
•There can be no assurance that we will be able to secure the funds necessary to pay the cash portion of the merger consideration payable in our acquisition of Coherent, in a timely manner or at all.
•The agreements that will govern indebtedness to be incurred or assumed in connection with our acquisition of Coherent are expected to contain various covenants that will impose restrictions on us that may affect our ability to operate our businesses.
•The significant additional indebtedness that we will incur in connection with our acquisition of Coherent could adversely affect us.
•Integrating Coherent may be more difficult, costly or time-consuming than expected, and we may fail to realize the anticipated benefits of the acquisition.
•We and Coherent may have difficulty attracting, motivating and retaining executives and other employees.
•Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on us following the completion of the acquisition.
•The acquisition is subject to conditions that may not be satisfied on a timely basis, or at all.
•We have incurred, and will continue to incur, significant transaction-related costs in connection with the acquisition.
•The closing of the acquisition may trigger change in control provisions in certain agreements to which Coherent is a party.
4

•We and Coherent each are subject to business uncertainties and contractual restrictions while the acquisition is pending.
•Holders of our capital stock will have a reduced ownership and voting interest in us after the completion of the acquisition.
•Shareholder litigation could prevent or delay the closing of the acquisition or otherwise negatively impact us.
•The issuance and sale of our Series B Preferred Stock reduces the relative voting power of holders of our other capital stock, dilutes the ownership of such holders and may adversely affect the market price of our securities.
•Our Series B Preferred Stock has rights that are not held by, and are preferential to, the rights of holders of our other outstanding capital stock.
•The redemption rights of the holders of Series B Preferred Stock may result in the use of our cash in such a way that could adversely affect us and holders of our other capital stock.
•Holders of our Series B Preferred Stock can exercise significant control over us.
•The market prices of our securities may decline in the future as a result of the acquisition.
•Our future results will suffer if we do not effectively manage our expanded operations.
•We and Coherent face competition, which is expected to intensify after the closing of the acquisition.
•We expect to incur substantial expenses related to the acquisition and the related integration.
•Following the consummation of the acquisition, we will be bound by all obligations and liabilities of both companies.
•The acquisition may result in a loss of suppliers and strategic alliances or the termination of existing contracts.

Risks Relating to Our Capital Stock

•The trading prices for our securities have been volatile in the past and may be volatile in the future.
•Provisions in our governing documents and applicable law may delay or prevent our acquisition by a third party.
•We do not currently intend to pay dividends on our common stock.
•Our ability to declare and pay dividends on our capital stock may be limited.
•Trading in preferred stock that we have issued may adversely affect the market price of our common stock.
•Our common stock is subordinate to our existing and future indebtedness and any preferred stock we may issue. Our preferred stock ranks junior to all of our and our subsidiaries’ consolidated liabilities.
•Our board of directors can issue, without approval of our stockholders, preferred stock with rights that could adversely affect holders of our common stock.
•Reports published by securities or industry analysts and others could adversely affect our share price and trading volume.
•Regulatory actions may adversely affect the trading price and liquidity of our Mandatory Convertible Preferred Stock.
•Holders of Mandatory Convertible Preferred Stock have no voting rights, except under limited circumstances.
•We depend on our subsidiaries for cash to fund our operations and expenses.

5

PART I

Item 1.

Item 1.        BUSINESS

Definitions

II-VI Incorporated (“II-VI,” the “Company,” “we,” “us,” or “our”) was incorporated in Pennsylvania in 1971. Our headquarters are located at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056.16056, U.S.A. Our telephone number is 724-352-4455.+1-724-352-4455. Reference to “II-VI,” the “Company,” “we,” “us,” or “our” in this Annual Report on Form 10-K, unless the context requires otherwise, refers to II-VI Incorporated and its wholly-ownedwholly owned subsidiaries. The Company’s name is pronounced “Two Six Incorporated.” The name II-VI refers to Groups II and VI onof the Periodic Tableperiodic table of Elementselements from which II-VI originally designed and produced infrared optics for high-power CO2 lasers used in materials processing. We address 7 major markets. The majority of our revenues are attributable to the sale of engineered materials and optoelectronic components, devices, and subsystems for the industrial materials processing, optical communications, industrial, aerospace and militarydefense, and consumer electronics markets. Reference to “fiscal”“fiscal,” “fiscal year,” or “fiscal year”"FY" means our fiscal year ended June 30 for the year referenced.


The following acronymsdefined terms are defined for reference: 3 dimensional (“3D”); 4th generation (“4G”) wireless; 5th generation (“5G”) wireless;used in this Annual Report on Form 10-K: bismuth telluride (“Bi(Bi2Te3”); cadmium telluride (“CdTe”); carbon monoxide (“CO”)(CdTe); carbon dioxide (“CO(CO2”); chemical vapor deposited (“CVD”)deposition (CVD) of materials including diamond; wavelength division multiplexing (“WDM”)datacenter interconnect (DCI); dense wavelength division multiplexing (“DWDM”)(DWDM); extreme ultraviolet (“EUV”)extreme-ultraviolet (EUV) lithography; 5th-generation (5G) wireless; 4th-generation (4G) wireless; gallium arsenide (“GaAs”)(GaAs); gallium nitride (“GaN”)(GaN); gigabit Ethernet (“GbE”)(GbE); gigabit per second (“Gb/s”)(Gbps); high-definition multimedia interface (HDMI); high-electron-mobility transistor (HEMT); indium phosphide (“InP”)(InP); infrared (“IR”)(IR); integrated circuit (IC); intellectual property (IP); light detection and ranging (“LiDAR”)(LiDAR); near infrared (“NIR”)liquid crystal (LC); liquid crystal on silicon (LCOS); millimeters (mm); nanometers (“nm”)(nm); near-infrared (NIR); optical channel monitor (OCM); original equipment manufacturer (“OEM”); organic light-emitting diode (“OLED”)(OEM); optical time domaintime-domain reflectometer (“OTDR”)(OTDR); research, development and engineering (“RD&E”)polymerase chain reaction (PCR); radio frequency (“RF”)(RF); reconfigurable optical add/drop multiplexer (“ROADM”)(ROADM); research and development (R&D); research, development, and engineering (RD&E); silicon carbide (“SiC”)(SiC); terabit per second (Tbps); three-dimensional (3D); transimpedance amplifier (TIA); ultraviolet (“UV”)(UV); vertical cavity surface emittingsurface-emitting laser (“VCSEL”)(VCSEL); wavelength division multiplexing (WDM); wavelength selective switching (WSS); zinc selenide (“ZnSe”)(ZnSe); and zinc sulfide (ZnS).


Pending Coherent Acquisition

On March 25, 2021, II-VI, Coherent and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“ZnS”Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”).

Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”). Additional information regarding the terms of the Merger is set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.


The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger at special meetings held on June 24, 2021 by the respective companies.

The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by the end of the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.

In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21, 2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc., PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA) LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively, the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the Commitment Letter is subject to a number of customary conditions.

6

In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement, dated as of March 30, 2021, (the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (the “Investor”).Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold, and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company,no par value per share (“II-VI Series B-1 Convertible Preferred Stock”), for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the Company would issue, sell and deliver to the Investor:

•105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company, no par value per share (“II-VI Series B-2 Convertible Preferred Stock,” and together with the II-VI Series B-1 Convertible Preferred Stock, “New II-VI Convertible Preferred Stock”), for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.1 billion, immediately prior to Closing; and

•immediately prior to Closing, if elected by the Company and agreed by the Investor, up to an additional 35,000 shares of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million.

Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.

The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other in Note 15, Segment and Geographic Reporting.
General Description of Business

We develop, manufacture, and market engineered materials, optoelectronic components, and devices for precision use in industrial materials processing, optical communications, military,industrial, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences, and automotive applications and markets. We use advanced engineered materials growth technologies coupled withand proprietary high-precision fabrication, micro-assembly,microassembly, optical thin-film coating, and electronic integration to manufacture complex optoelectronic devices and modules. Our products are deployed in a variety of applications, including (i) optical, data, and wireless communications products; (ii) laser cutting, welding, and marking operations; (ii)(iii) 3D sensing consumer applications; (iii) optical, data(iv) aerospace and wireless communication products; (iv) strategic militarydefense applications including intelligence, surveillance, and reconnaissance; (v) semiconductor processing and tooling;tools; and (vi) thermoelectric cooling and power generationpower-generation solutions.

Through RD&E investments and its strategic acquisitions, II-VI has expanded its portfolio of materials.materials and product platforms. We believe that the materials that we grow and fabricate are differentiated by one or a combination of unique optical, electrical, thermal, and mechanical properties. II-VI’s optics are shaped by precision surfacing techniques to meet the most stringent requirements for flat or curved geometries, functionalized with smooth or structured surfaces, or with patterned metallization. Proprietary processes developed at our global optical coating centers differentiate our products’ durability against high energyhigh-energy lasers and extreme operating environments. Optical coatings also provide the desired spectral characteristics, ranging from the ultraviolet to the far-infrared. II-VI leverages these capabilities to deliver miniature-miniature to large-scale precision optical assemblies, including those in combination with thermal managementthermal-management components, integrated electronics, and/orand software.

II-VI also offers a broad portfolio of compound semiconductor lasers that are used in a variety of applications in most of our end markets. These compound semiconductor lasers enable high-power lasers for materials processing, optical signal transmission, reception, and amplification in terrestrial and submarine communications networks, high bit ratenetworks; high-bit-rate server connectivity between and within datacenters,datacenters; optical communications network monitoring; materials processing; and fast and accurate measurements in biomedical instruments and consumer electronics and optical communications network monitoring.  

electronics.

II-VI continues to work to perfectimprove its operational capabilities, develop next generationnext-generation products, and invest in new technology platforms.platforms to drive growth in the short term and the long term. With aour strategic focus on fast growingfast-growing and sustainable markets, II-VI pursues its visionmission of enabling the world to be safer, healthier, closer, and more efficient.

efficient, and strives to attain its vision of a world transformed through innovative materials vital to a better life today and the sustainability of future generations.

Information Regarding Market Segments and Foreign Operations

7

Financial data regarding our revenues, results of operations, industry segments, and international sales for the three years ended June 30, 20182021, are set forth in the Consolidated Statements of Earnings (Loss) and in Note 1215. Segment and Geographic Reporting to the Company’sour Consolidated Financial Statements, which are included in Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference. We also discuss certain Risk Factors set forth in Item 1A – Risk Factors of this Annual Report on Form 10-K related to our foreign operations, which are incorporated herein by reference.


Bookings and Backlog

We define our bookings as customer orders received that are expected to be converted to revenues over the next 12 months. For long-term customer orders, to address the inherent uncertainty of orders that extend far into the future, theThe Company recordsreports as bookings only those orders whichthat are expected to be converted into revenues within 12 months from the end of the reporting period. Bookings are adjusted if changes in customer demands or production schedules cause the expected time of a delivery to extend beyond 12 months. For the fiscal year ended June 30, 2018,2021, our bookings were approximately $1.2$3.3 billion, compared towith bookings of approximately $1.1$2.7 billion for the fiscal year ended June 30, 2017.

2020.

We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2018,2021, our backlog was approximately $450$1,252 million, compared towith approximately $400$957 million as of June 30, 2017.

2020.

Global Operations

II-VI is headquartered in Saxonburg, PA,Pennsylvania, U.S.A., with RD&E, manufacturing, and sales facilities worldwide. Our U.S. production and research and developmentRD&E operations are located in Pennsylvania,Arizona, California, Colorado, Connecticut, Delaware, Florida, Illinois, Massachusetts, Michigan, Mississippi, New Jersey, Texas, Mississippi, Massachusetts, Connecticut, Delaware, New York, FloridaOhio, Oregon, Pennsylvania, and IllinoisTexas, and our non-U.S. production and RD&E operations are based in Australia, China, Singapore, Vietnam,Germany, Malaysia, the Philippines, Germany,Singapore, Sweden, Switzerland, andThailand, the United Kingdom.Kingdom, and Vietnam. We also utilize contract manufacturers and strategic suppliers. In addition to sales offices co-located at most of our manufacturing sites, we have sales and marketing subsidiaries in Belgium, Canada, China, Germany, Hong Kong, Italy, Japan, Germany, China,South Korea, Switzerland, Belgium,Taiwan, and the United Kingdom, Italy, South Korea,Kingdom.

Human Capital

Our mission is “Enabling the world to be safer, healthier, closer, and Taiwan. Approximately 68%more efficient.”

Our vision is “A world transformed through innovative materials vital to a better life today and the sustainability of future generations.”

Our core values are: Integrity, Collaboration, Accountability, Respect, and Enthusiasm (I CARE).

Our people are essential to fulfilling our mission and working toward our vision. As a result, our human capital strategies are core to the long-term success of the Company.

As of June 30, 2021, the Company employed approximately 23,000 employees worldwide.

Number of
employees		Percent of
total
Direct production15,83369%
Research, development, engineering, sales and marketing4,27619%
General administration2,85212%
Total:22,961100%

We believe that our efforts in managing our workforce have been effective, as evidenced by a strong culture and a good relationship between the Company and our employees.

•Our People. Our people are critical to our continued success. We provide a workplace that develops, supports, and motivates our employees. In FY21, we again participated in the Gallup Employee Engagement Survey. We believe Gallup’s employee engagement survey questions and resources are an effective way to gauge our progress to create a stronger, more engaged workplace. Gallup provides comparative data from numerous studies over many years linked to organizational performance, proven consistent survey methodology, and actionable guidance at both the local and enterprise level. We had a 94% participation rate and an engagement mean of 4.16 out of 5.00. The responses to each of
8

the 12 questions within Gallup’s survey demonstrated improvement by us from our prior survey conducted in FY19. Action plans are created across the globe to continue to improve our engagement level.

•Employee Safety. It is our highest priority to keep our employees, customers, and suppliers safe, as the health and safety of our revenues forworkforce is fundamental to the fiscal year endedsuccess of our business. We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. We have experienced employees on-site at each of our manufacturing locations who are tasked with environmental, health, and personal safety education and compliance. The safety calculation recognized by the Occupational Safety and Health Administration, the Total Recordable Incident Rate (“TRIR”), is closely monitored throughout the Company. As of June 30, 2018, were generated from sales2021, our TRIR was 0.23 as compared to customers outside0.26 for FY20. Each year, we strive to improve our TRIR as a part of our strong safety culture, as evidenced by a year-over-year reduction of 12%. We customize our policies to the United States.

Employees

The table below summarizeslocal requirements and circumstances of each plant.


•COVID-19. Our top priority during the numberongoing COVID-19 pandemic has been and continues to be protecting the health and safety of our employees and their families, our customers, and our communities. Our on-site work environments were changed to accommodate best-in-class protocols. The commitment to this effort is evidenced by the extensive planning and numerous actions we swiftly took to respond to the pandemic, including the development and implementation of a Pandemic Response Team and Pandemic Response Guide, a work-from-home program, health check protocols, temperature screenings, and periodic COVID-19 testing where permitted and deemed appropriate for all employees working on-site. Additionally, new process workflows were initiated to ensure reduced contact for employees working on-site, contact tracing processes and protocols were established, quarantining and testing protocols for exposure and positive tests were implemented, travel guidelines and protocols were created to ensure that employees who must travel for work can do so safely, and phased return-to-work plans and approval processes were formed to enable non-manufacturing employees to return to work when permitted by local government regulations and deemed appropriate by II-VI leadership. We hired an infectious disease expert who specializes in COVID-19 to offer guidance to our Pandemic Response Team, managers, and site leaders. We are continuing with our work-from-home arrangements for non-manufacturing and operations employees through at least December 2021.

•Talent Acquisition, Development, and Training. Hiring talented individuals and continuing to develop them are critical to our operations, and we are focused on creating experiences and programs that foster growth and performance. We have a robust succession-planning process that identifies internal candidates for development. We provide all employees the chance to learn and develop critical skills, and we strive to attract, motivate, and retain high-quality talent. We encourage all employees to broaden their knowledge. For example, we offer monthly Technology Spotlight Seminars designed to highlight and communicate the many technical advances and competencies within II-VI, as well as foster innovation within the Company and technical community. Tuition reimbursement and funding for growth and development is built into the annual budget to ensure that II-VI has the skilled workforce we need. Our global internship programs welcome a new talent pipeline. In FY21, II-VI pledged $1,000,000 to fund STEM educational and research programs in 2021.

•Total Rewards. Our “One II-VI” approach to total rewards provides a competitive total compensation package that: attracts, motivates, and retains high-quality talent; matches total rewards of competitors with which we compete for talent; increases transparency of rewards programs, company and segment metrics, and measurement of achievements in relation to challenging objectives; balances fixed costs (benefits and base pay) and variable costs (bonus and equity), with a substantial portion of total direct compensation tied to performance; pays for performance – base, bonus, and equity reflect both company and individual performance; and aligns with the interests of our shareholders. Globally, all non-sales employees participate in a variable incentive program measured on the operating earnings of their business segment. Similarly, sales employees are incentivized on revenue and profit-after-tax attainment. Select employees are eligible to receive equity-based awards, to align employee and shareholder interests. In addition to offering competitive and fair compensation, we also offer a suite of benefits, including comprehensive health benefits to all of our employees globally.

•Diversity and Inclusion. II-VI supports fundamental human rights – values inherent to all human beings. We expect all leaders and employees to treat each other with dignity, fairness, and respect. We are consciously expanding the diversity of our workforce, creating growth and development opportunities for our employees, embracing different perspectives, and fostering an inclusive work environment. In FY21, we greatly enhanced communication on diversity topics, and globally, employees attended education on Diversity & Inclusion awareness.

Globally, approximately 50% of the workforce is female, with 11,428 females and11,533 males as of June 30, 20182021. In the II-VI’s Senior Leadership Team (“SLT”), which consists of senior directors and above, there are 20 females and 179 males. The SLT meets quarterly to discuss strategy, business trends, company operations, financials, and people programs. Our global footprint is diverse, with approximately 18,400 employees in the main functions. We have a long-standing practice of encouraging active employee participationAsia-Pacific region, 1,000 in areas of operationsEurope, and quality management. We believe our relations with our employees are good. We reward substantially all our employees with some form of variable compensation based on achievement of performance goals. There are approximately 265 employees located3,600 in the United States and the Philippines who are covered under collective bargaining agreements. The Company’s collective bargaining agreement in the Philippines expires in June 2019. The collective bargaining agreement covering certain U.S. based employees expires in January 2021. There are 730 employees of Photop in China who work under contract manufacturing arrangements for customers of the Company.

Americas.

 

Number of employees

Percent of total

Direct production

8,977

79%

Research, development & engineering

1,513

13%

Sales, marketing, administration, finance and supporting services

953

8%

Total:

11,443

100%

9




Manufacturing Processes

Our success in developing and manufacturing many of our products depends on our ability to manufacture and to tailor the optical and physical properties of technically-challengingtechnically challenging materials and components. The ability to produce, process and refine these complex materials, and to control their quality and in-process yields, is an expertise of the Company that is critical to the performance of our customers’ instrumentssubsystems and systems. In the markets we serve, there areis a limited number of high-quality suppliers of many of the components we manufacture andmanufacture. Aside from datacenter transceivers, there are very few industry-standard products.

Our network of worldwide manufacturing sites allows us to manufacture our products in regions that provide cost-effective and risk management advantages. We employ numerous advanced manufacturing technologies and systems at our manufacturing facilities. These include metal organicmetal-organic chemical vapor deposition and molecular beam epitaxy reactors, automated Computer Numeric Controlcomputer numeric control optical fabrication, high throughputhigh-throughput thin-film coaters, nano-precisionnanoprecision metrology, and custom-engineered automated furnace controls for crystal growth processes. Manufacturing products for use across the electro-magneticelectromagnetic spectrum requires the capability to repeatedly producemanufacture products with high yields to atomic tolerances. II-VI continuously updates its comprehensive quality management systems that feature manufacturing quality best practices. II-VI is committed to delivering products within specification, on time, and with high quality, with a goal of fully satisfying customers and continually improving.


We continue to focus our efforts to convert locations to renewable energy. During the past two fiscal years we have converted 15 of our sites to renewable-electricity contracts. In addition, II-VI participates in Apple’s Supplier Clean Energy Program, and all of our Apple production facilities are powered with 100% renewable energy.

Additionally, our Fremont, California, and Dallas, Texas, facilities are multiyear award recipients for continued compliance with local wastewater treatment programs. Additional information can be found on the Community & Environment section of our website at www.ii-vi.com. The website address is intended to be an inactive textual reference only. None of the information on, or accessible through, II-VI's website is part of this Annual Report on Form 10-K or is incorporated by reference herein.
Sources of Supply

Among the major feed stock and raw materials

In our production processes, we use numerous optical, electrical, and mechanical parts that are sourced from third-party supplies. These include zinc, selenium, ZnSe, ZnS, hydrogen selenide, hydrogen sulfide, tellurium, yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, graphite, GaAs,  InP, copper, germanium, molybdenum, quartz,integrated circuits, mechanical housings, and optical glass, diamond,components, and otherwe commonly refer to them as raw materials.

The continued high-qualityhigh quality of and access to these raw materials isare critical to the stability and predictability of our manufacturing yields. We specify and test these raw materials at the onset of and throughout the production process. Additional research and capital investment may beare sometimes needed to better define future materialraw materials specifications. WeAs a result of COVID-19, we have not experienced significantsome production delays due to shortages of materials. However,raw materials, and we are driving the development of strategic second sources as part of our overall business continuity planning. We do occasionally experience problems associated with vendor-supplied raw materials not meeting contract specifications for quality or purity. AsRisks associated with reliance on third parties for the timely and reliable delivery of raw materials is discussed in greater detail in Item 1A – Risk Factors of this Annual Report on Form 10-K, significant failure of our suppliers to deliver sufficient quantities of necessary high-quality materials to our specifications on a timely basis could have a materially adverse effect on our results of our operations.

Report.

Business Units

The Company’s organizational structure is divided into threetwo reporting segments for the purpose of making operational decisions and assessing financial performance: (i) II-VI LaserPhotonic Solutions and (ii) II-VI Photonics,Compound Semiconductors.

The Photonic Solutions Segment leverages II-VI’s compound semiconductor technology platforms and (iii) II-VI Performance Products. These segments, and the units within the segments, are reflected in the organization chart below:

II-VI Laser Solutions designs, manufactures anddeep knowledge of end-user applications for our key end markets optical and electro-opticalto deliver differentiated components and materials sold under the II-VI Infrared brand name that are used primarilysubsystems.


The Compound Semiconductors Segment is a market leader in high-power CO2 lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG, direct diode laser modules, sub-systems and systems sold under the II-VI SUWTECH and II-VI DIRECTPHOTONICS brand names and super-hardengineered materials processing laser systems sold under the II-VI LASERTECH brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers under the II-VI EPIWORKS brand name for applications in optical components, wireless devices, and high-speed communication systems and manufactures 6-inch gallium arsenide wafers allowing for the production of high-performance lasers optoelectronics and integrated circuits in high volume sold under the II-VI Laser Enterprise,  II-VI EpiWorks, II-VI Compound Semiconductor Ltd. and II-VI OptoElectronic Devices Division brand names.  

II-VI Photonics manufactures crystal materials, optics, microchip lasers and optoelectronic modules for use in optical communication networksdevices such as those based on GaAs, InP, GaN, and other diverse consumer, life sciences and commercial applications.  In addition,SiC. We may from time to time reorganize parts of a given segment or corporate center to drive the segment also manufactures pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for both terrestrial and submarine applications within the optical communications market.

II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical and commercial laser imaging applications.  In addition, the segment designs, manufactures and markets unique silicon carbide engineered materials for thermoelectric devices and subsystems for silicon carbide applications servicing the semiconductor equipment, military, communications, automotive and life science markets.

focus of certain priorities.

II-VI’s segments are organized by business unit at the group or division level. Each of these business units develops and markets products as described below.

10


Segment:

Group/Division:

Our Products:

II-VI LaserPhotonic Solutions

II-VI Infrared

•      Laser optics and accessories for CO2 lasers used in materials processing semiconductor and life sciences

•      High power fiber and direct diode laser optics

•      Infrared thermal imaging optics and assemblies

•      II-VI compound crystalline material production including ZnSe, ZnS, ZnS multispectral and CVD diamond

II-VI HIGHYAG

Business Unit

•      Laser processing heads and beam delivery systems for laser materials processing with fiber lasers, disk lasers, and diode lasers

Our Products

II-VI Laser Enterprise

ROADM

•      High-power semiconductor lasers and laser bars enabling fiber and direct diode lasers for materials processing, medical, defense, consumer and printing applications

•      VCSELs for optical interconnects and sensing

II-VI OEG

•      VCSELs for 3D sensing in consumer electronics and automotive

•      RF devices for communications

II-VI Compound Semiconductor

•      RF electronic devices for military applications

II-VI EpiWorks

•     III-V epitaxial wafers to enable higher performance photonic and RF components for consumer, communications, network and mobile applications, including wireless handsets, tablets and the Internet of things

II-VI SUWTECH

•      Diode pumped solid state lasers, green lasers and Q-switched lasers

•      Laser diode modules for multiple markets and applications, including aiming, leveling, range finding, machine vision, bio-medical instrumentation, Raman spectroscopy, and fluorescence spectroscopy

•      Fiber coupled high power diode lasers in the 8xx and 9xx nm wavelength ranges for fiber laser and solid state laser pumping, as well as for medical and other applications

II-VI LASERTECH

•      Laser cutting and drilling machines for processing a wide variety of super hard materials such as CVD diamond, polycrystalline diamond, polycrystalline cubic boron nitride, and ceramics among others as well as for high efficiency laser cutting of non-conductive materials

II-VI DIRECTPHOTONICS

•      High brightness, high power direct diode laser engines for cutting, welding, and thermal processing applications, including optimized solutions for aluminum and aluminum-copper processing applications


Segment:

Group/Division:

Our Products:

II-VI Photonics

II-VI Optical Communications

•Products and solutions that enable high bit ratehigh-bit-rate interconnects for datacenters and communicationcommunications service providers, datacenter inter-connects,interconnects, ROADM systems, and submarineundersea fiber-optic transmission

II-VI Photop

Transceivers

•Pluggable transceivers for Ethernet and Fiber Channel applications in cloud and enterprise datacenter applications
•High-speed optoelectronics and modules for optical communications in telecom networks, including for datacenter interconnects and for metro, regional, long-haul, and ultralong-haul networks
Advanced Optics
•Fiber optics and precision optics used in projection and displays,displays; crystal materials and components for optical communications, high powercommunications; high-power UV, visible, and NIR optics for industrial lasers,lasers; filters and assemblies for life sciences as well as for sensors, instrumentation, and semiconductor equipment

11

II-VI Performance Products

II-VI Optical Systems

•      Precision optical assemblies, objectives, infrared optics, thin film coatings and optical materials

•      Optical solutions to critical and complex designs, engineering and production challenges in defense, aerospace and commercial industries

II-VI M Cubed

•      Advanced ceramic and metal matrix composite products for semiconductor equipment, flat panel display equipment, industrial and optical equipment, as well as for defense applications

II-VI Marlow

Compound Semiconductors
Business Unit

Our Products

Engineered Materials & Laser Optics
•Laser optics and accessories for CO2 lasers used in industrial, semiconductors, and life sciences applications
•High-power fiber and direct-diode laser optics
•Infrared thermal imaging optics and assemblies
•Polycrystalline materials production including ZnSe, ZnS, and CVD diamond
•Thermoelectric components, sub-assembliessubassemblies, and systems for heating, cooling, temperature tuning, thermal cycling, and power generation in aerospace and defense, medical, industrial, automotive, consumer, telecommunications, and power generationenergy-production markets

II-VI Advanced Materials

•      SiC and advanced semiconductor materials for high frequency and high power electronic device applications in defense, telecommunications, automotive and industrial markets

II-VI Performance Metals

•Specialty refining, recycling, and materials recoverymaterials-recovery services for high purityhigh-purity rare metals such as Seleniumselenium and Tellurium,tellurium, as well as related chemical products such as Tellurium Dioxide,tellurium dioxide for optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy, agriculture, and industrial applications

•Advanced ceramic and metal-matrix composite products for semiconductor capital equipment, flat-panel displays, industrial and optical equipment, and defense applications
Laser Devices & Systems
•High-power semiconductor lasers and laser bars enabling fiber and direct-diode lasers for industrial, defense, consumer, and printing applications
•Laser heads and modules, Q-switched laser modules, high-power uncooled pump laser modules, laser solutions for superhard materials processing, high-brightness direct-diode laser engines
•Laser processing heads and beam delivery systems for laser materials processing with industrial lasers
•High-speed VCSELs for optical communications
•High-power pumps for amplifiers and optical communications
•Precision optical assemblies, objectives, infrared optics, thin-film coatings, and optical materials
•Optical solutions for critical and complex design, engineering, and production challenges in aerospace and defense
New Ventures & Wide-Bandgap Electronics
•SiC and advanced semiconductor materials for high-frequency and high-power electronic device applications in defense, telecommunications, automotive, and industrial markets
Optoelectronic & RF Devices
•VCSELs for sensing, including 3D sensing in consumer electronics and automotive applications
•GaAs-based RF electronic devices
•Integrated circuits for transceivers for optical communications
•III-V epitaxial wafers to enable higher-performance photonic and RF components for consumer, communications, network, and mobile applications
InP Devices
•Semiconductor lasers and detectors for optical interconnects and sensing applications

12


Our Markets

Our market-focused businesses are currently organized by technologytechnologies and products. Our businesses are composed ofaddress the following primary markets: Communications, Materials Processing, Military, Semiconductor Equipment, Life Sciences, Consumer Electronicsoptical and Automotive.

wireless communications, industrial, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences, and automotive. As we grow, we may add new primary markets.

Communications Market


II-VI’s optical communications and wireless products and technologies enable the next generation ofnext-generation high-speed optical transmission systems, networks, and datacenter solutions necessary to meet the accelerating global bandwidth demand. At

Demand for our products is largely driven by the continually growing need for additional network bandwidth created by the ongoing proliferation of data and video traffic from video conferencing for work, school, and leisure; video downloads and streaming; live TV; social networking; online gaming; file sharing; enterprise IP/internet traffic; cloud computing; and datacenter virtualization that must be handled by both wireline and wireless networks. This traffic increase reflects the recent shift to the work-from-home and study-from-home approach, which was driven by the COVID-19 pandemic but is expected to continue. Mobile traffic is increasing as a result of the proliferation of smartphones, tablet computers, and other mobile devices.

We are a global technology leader in optical communications, providing materials, subcomponents, components, modules, and subsystems to optical component and module manufacturers, networking equipment manufacturers, datacenter operators, and telecom service providers. We design products that meet the increasing demands for network bandwidth and data storage.

Our optical communications products can be divided into two main groups, optical transmission and optical transport.
Our optical transmission products consist primarily of transmitters, receivers, transceivers, transponders, and active optical cables, which provide the fundamental optical-electrical, or optoelectronic, interface for interconnecting the electronic equipment used in networks. This equipment includes switches, routers, and servers used in wireline networks, as well as antennas and base stations used in wireless networks. These products rely on advanced components such as semiconductor lasers and photodetectors, in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber-optic cable at speeds ranging from less than 1 Gbps to more than 400 Gbps, over distances of less than 10 meters to more than 5,000 kilometers, using a wide range of network protocols and physical configurations.

Our optical transport products are at the core of both terrestrial and undersea optical networks, ournetworks. Our market-leading 980 nm pump lasers are the key enablers of our erbium-doped fiber amplifiers, which boost the power of the optical signalsignals in the fiber optic cablefiber-optic cables at intervals along the wayspanning 80 km, typically, to enable a larger number of high speedallow high-speed signals to be transmitted over longer distances. Our latest generation of 980 nm pump lasers along with miniature tunable filters and hybrid passives are part of our ultra-compact family of components for coherent transceivers is critical to a new generation of small size, long reachsmall-size, long-reach DWDM transmission modules operating atfrom 100 200Gbps to 1 Tbps and 400 Gb/s.

beyond.


Customers continue to rely on us for our industry-leading optical amplification and embedded monitoring solutions for their next generationnext-generation ROADM systems to compensate for the inherent signal loss and to monitor the signal integrity. Our proprietary OTDR modules allow systems to automatically detect and pinpoint issues along the transmission path in real time. Together with our OCM solutions, which monitor the optical power of the channels transmitted in a fiber-optic link, they enable real-time intelligence to perform preventive maintenance so as to preserve data transmission. In addition, we offer a portfolio of WSS products, which we also incorporate into ROADM line cards and subsystems.

Our proven experience in both transmission and transport allows us to effectively address the emerging DCI market. Our transceivers, submodules, pluggable amplifiers, and configurable line cards are able to meet the requirements of low power consumption, compactness, ease of installation and operation, and cost savings, which are often mandatory features in the DCI market.

The accelerating adoption of applications such as cloud computing areis driving the rapid growth of datacenter buildouts. Our high-speed 25 Gb/sGbps VCSELs enable transceivers for intra-datacenter transceivers to transmit and receive signals.communication. Our miniature WDM thin filmthin-film filter assemblies are used to increase the bandwidth within 100 GbE transceivers by combining wavelengths at the transmitter end and separating them out at the receiver end.


In the mobile wireless applications,market, II-VI suppliesis a global leader in the strategic supply chain for materials and devices utilized in the latest 4G and 5G base station infrastructure. The deployment of 5G wireless is accelerating globally, driving the demand for RF power amplifiers that can operate efficiently in new high-frequency bands and be manufactured on a technology platform that can scale
13

to meet the growing demand. GaN-on-SiC RF power amplifiers have superior performance, compared with devices based on silicon, over a wide spectrum of 5G operating frequencies in the gigahertz range, including in the millimeter-wave bands.

We are a market leader in the technology development and large-volume manufacturing of 100 mm and 150 mm semi-insulating SiC substrates. These substrates are utilized by customers worldwide to customers who manufacture GaN-on-SiC HEMT RF power amplifier devices that are embedded in remote radio heads in 4G wireless bases stations to boost the power of RF signal before it reaches the antenna. These devices are also widely expected to be embedded in next generation active antennas forand 5G wireless wherebase stations. In areas of high bandwidth demand, 5G antennas with beamforming technology utilizing multiple devices per antenna are expected to be densely deployed, increasing the demand for GaN-on-SiC power amplifiers by approximately an order of magnitude or more versus 4G antennas. Looking forward, II-VI continues to advance the state of the art in SiC substrates, with a strong technology portfolio of 30 active patents using highly differentiated and proprietary manufacturing platforms and technologies including crystal growth, substrate fabrication, and polishing. Our recent demonstration of the world’s first prototype 200 mm semi-insulating SiC substrates will be requiredenable the RF power amplifier market to continue to scale, increasingly replacing functions performed by devices based on silicon and enabling new applications.

Leveraging this materials expertise, II-VI has invested aggressively in a world-class 150 mm compound semiconductor manufacturing platform and is developing a fully vertically integrated, 150 mm wafer fabrication capability to manufacture the state-of-the-art GaN-on-SiC HEMT devices that will enable higher bandwidth. SiC has a high number of intrinsic physical and electronic advantages, such as high thermal conductivity, that enable them to operate at high-power levels and still dissipate the excess heat generated.

Materials Processingthese next-generation wireless networks.

Industrial Market


Our industrial laser optics and solutions for the materials processingindustrial market remain well-positioned, although we were impacted in strong demand. There continues to be a steadyFY21 by the global demand to support existing installations and new deployments of CO2 and fiber laser systems.industrial slowdown associated with COVID-19. Our vertically integrated and market leadingmarket-leading ZnSe optics and components, due to their inherent low loss at around 10 micronthe 10-micron wavelength, have enabled high-power CO2 laser systems for many decades and remain critical to the steady stream of new deployments as well as to continued operation, serving as replacement optics offor the installed base of CO2 lasers. II-VI continues to introduce products that address new and growing applications for low-power CO2 lasers, such as drilling and cutting plastics, textiles, leather, wood, and other organic materials, for which the CO2 laser’s 10 micron10-micron wavelength is ideally suited. The 5G market enabled strong growth for our low-power CO2 drilling machines. CO2 lasers are also at the core of EUV lithography systems, which are now emerging on the market to enable a new generation of smaller and more powerful personal integrated circuits forcircuits.
Fiber lasers that operate at about the internet of things computing devices.  

Over the past several years, fiber laser-based systems operating at one micron1-micron wavelength in pulsed or continuous mode have taken a central role in nearly all materials processing segments,many industrial applications, especially for metal cutting and especially forwelding along with precision machining such as marking and micro drilling. Frommicrodrilling. II-VI supplies a broad range of materials, components, and subsystems that enable many functions within these fiber lasers, from the laser chips that generate the input optical power to the beam delivery systems that direct the output optical power to the target, II-VI supplies a broad set of laser optics and fused fiber products that enable many functions within these systems.target. The same set of II-VI products is also at the core of existing and emerging direct diodedirect-diode laser systems. II-VI is also driving innovation with a direct-diode laser engine small enough to be mounted on a robotic arm so that the end user can apply square beams directly to the work piece at wavelengths optimized for aluminum processing.

Another emerging and fast growing application is the processing of displays for consumer electronics, including those based on the OLED technology that are scribed with CO lasers and sealed with UV lasers.

II-VI’s broad portfolio of coated optics and crystal materials serveserves all of these growing laser markets.

Military

Aerospace and Defense Market

Our focus


II-VI’s aerospace and defense solutions enable mission-critical capabilities for applications in high-energy lasers (HELs); contested space; and intelligence, surveillance, and reconnaissance. From uniquely grown single crystals and advanced ceramics, to completely engineered gimbal subsystems, II-VI solutions are embedded on nearly every platform in the military market is enabling lasers for targeting, night vision, navigation,field as well as intelligence, surveillancethose under development. Recently acquired coherent laser beam combining and reconnaissance systems. Multiple fighter jetsadvanced lightweight gimbal technologies, along with domestically produced high-power fiber laser pumps and amplifiers, are equippedenabling next-generation HEL systems and space-based laser communications applications. With the addition of nanomachined single-crystal silicon and grating technologies, together with our large area sapphire windows that surroundII-VI’s advanced HEL coating capabilities, we enable advanced spectral beam combining and novel microstructured surface capabilities, which are highly valued within the aerospace and defense industry.

Our advanced missile warning, electro-optical targeting, and imaging systems. Infraredsystems are deployed on virtually every U.S. fixed-wing and rotary platform. Our advanced sapphire, germanium, and multispectral domes provide unique protection to our advanced imaging, seeker, and laser solutions that are usedpackaged behind them.The domes provide hemispherical coverage for airborne, naval, and ground-based systems.

14

Our solutions for the Lunar Reconnaissance Orbiter (LRO) provided the first images proving that the footprints on missiles with infrared guidance systems ranging from small, human-portable designsthe moon are still there. The LRO continues to larger designs mounted on helicopters, fixed-wing aircraftorbit the moon and ground vehicles. High-precision domesprovide rich information for future lunar landing sites. The LRO camera, and more advanced derivatives, are an integral component of a missile’s targeting system, providing efficient tactical capability, while serving as a protective cover to its internal components.


Rotary and fixed-wing aircraft also use missile warning systems to protect against shoulder fired human-portable missiles. Our competencies in material growththe basis for UV crystals and our optical assembly capabilities provide significant support to these missile warning systems. A key attribute of several of these systems is the ability to filter electro-magnetic interference using micro-fine conductive mesh patterns. This technology is also applied to non-opticalmany advanced space imaging applications for absorbing and transmitting energy from the surfaces of aircraft and missiles.

Many military systems employ laser designation and range-finding capabilities supportedbeing pursued by our semiconductor lasers barscustomers. Our solution for the OSIRIS-REx mission enables the first-ever ability for a NASA satellite to touch down on an asteroid (Bennu) and solid state laser host crystalsto retrieve a sample and laser optics, all manufactured in-house, as well asreturn it to Earth. Our advanced imaging lenses and windows ensure our competency in short wave infraredcustomers’ vehicles are able to safely and visible optics.accurately dock with the Space Station. Our thermoelectric coolers are usedadvanced telescope solution for the Geostationary Lightning Mapper enables the GOES satellites to increase thermaldetect early lightning strikes and predict tornados a full 20 minutes before previous technology. It forms the basis for many of our customers’ advanced multispectral imaging sensitivity, or to maintain a constant window temperature in various visible and infrared applications.  

We provide a range of battlefield-ready technologies for soldier equipment and specifically designed variants for law enforcement. Our precision patterned reticles are embedded in rifle scopes. Our reaction bonded boron carbide materials are shaped into torso plates and employed as in-aircraft cabin and protective body armor. Our thermo-electric coolers are used to regulate the soldier’s body heat. They are also used to convert heat produced by battlefield fuel burners into electrical power, for example to extend battery life on the battlefield.  

We maintainsolutions.


II-VI’s Aerospace & Defense (A&D) Division maintains separate business development, accounting, finance, engineering, and manufacturing facilities in the United States with strictly controlled access thataccess; they are dedicated to our U.S. government supportedgovernment-supported contracts.

Semiconductor Capital Equipment Market

Semiconductor capital equipment requires advanced materials to meet the need for tighter tolerances, enhanced thermal stability, faster wafer transfer speeds, and reduced stage settling times. Our metal matrixmetal-matrix composites and reaction bondedreaction-bonded ceramics enable these applications, thanks to their optimum combination of light weight, strength, hardness, and coefficient of thermal expansion. Our reaction bondedreaction-bonded SiC materials are used to manufacture wafer chucks, light weightlightweight scanning stages, and high temperature, corrosion resistanthigh-temperature, corrosion-resistant wafer support systems. Our cooled SiC mirrors and precision patterned reticles are used in the illumination systems of lithography tools.

Our products enable legacy EUV lithography equipment that is widely deployed in semiconductor fabs. In the emerging market of EUV lithography systems, CO2 lasers are used to generate extreme ultravioletextreme-ultraviolet light. These CO2 lasers and beam delivery systems leverage our broad portfolio of CO2 laser optics, CdTe Modulators, high power damage resistantmodulators, and high-power damage-resistant polycrystalline CVD diamond windows to route the powerful laser beam to a tin droplet from which EUV light will emanate. Due to theirits very high mechanical and thermal performance characteristics, our reaction bondedreaction-bonded SiC areis used in structural support systems that are integral to EUV lithography optics to meet critical requirements for optical system stability.

Life Sciences Market

The majority of our business in


Within the life sciences end market, is in II-VI focuses on analytical tools. Many analytical tools found in modern biotech laboratories are based on some form of interaction with light. This appliesinstrumentation that integrates light and/or thermal management solutions. We segment this market into three application areas (biotechnology, medical laser, and scientific) and deliver targeted and unique product portfolios for each segment. II-VI vertically integrates from the component-level to more complex subassemblies and even full systems. Applications within the biotechnology segment includeflow cytometry, cell sorting, confocal microscopy, DNA genome sequencing, RamanPCR, molecular diagnostics, imaging, and spectroscopy, fluorescence spectroscopy and particle sizing to name a few. Our multi-coloredbroad product portfolio delivers solutions covering illumination, light management, and thermal control.Visible-wavelength “QOMO” lasers and multicolored laser engines along with our broad portfolio of application-specific optics,provide low-noise, high-performance, reliable light sources.Optical components and subassemblies such as filters, lenses, flow cells, gratings, objective lenses, and gratingspatterned reticles are embedded ininto these analytical tools.  We also supply objective lenses, precision patterned reticles and assemblies for microscopes.

Genome sequencing involves temperature cycling DNA in flow cells with a high degree of temperature uniformity and precision. We believe that ourinstruments to manage light delivery.Our state-of-the-art thermal engines are the state of the art in chiller technology, and they achieve what we believe to be industry-leadingprecisely control temperature control and uniformity across large areas. Our green lasers are usedareas such as plate and block assemblies, even extending to excite the fluorescence of DNA to reveal its structure. Our flow cells are micro-machined with a high degree of precision to insure the smooth flow ofreagent or sample fluids undergoing analysis. Our thermal engines are also used in a multitude of other biomedical applications, for example to measure substance concentration in complex mixtures, to protect blood supplieschilling.


Medical laser and to perform heating- and cooling-based physical therapy.

Clinicalclinical procedures are increasingly performed with toolssystems that embedintegrate our lasers, optics, and optics. For example, ourthermal solutions.These applications are performed at or near the patient, requiring extreme precision and often complex designs and typically reach into the NIR and IR wavelengths. Applications are varied, from laser-based treatments and surgeries to medical imaging and even point of care.II-VI’s semiconductor laser bars and stacks are used in applications such as hair and wrinkle removal proceduresremoval. Crystals and our custom designedlaser cavities, along with custom-designed lens assemblies, are used for ophthalmic, dental, and dermatological surgeries. Finally, thermal components and subassemblies deliver solutions for medical-based applications such as delivering heating and cooling to the human body and medical laser eye surgery. We continuetemperature control.


For the scientific segment, II-VI's solutions are the building blocks of molecular spectroscopy and imaging-based platforms. These tools typically target environmental applications such as water, air, food and beverage, pharmaceutical, and agricultural testing and monitoring. II-VI continues to leverage ourits core lasers,laser, optics, and temperature controltemperature-control expertise into new applications to grow our business in life sciences.

deliver custom components and subassembly-level solutions at all wavelengths, from UV to NIR and IR.

Consumer Electronics Market


15


II-VI manufactures low cost VCSELs, VCSEL arrays, and low angle shiftoptical filters for the consumer electronics market. Our VCSEL products leverage our world-class 6-inch GaAs platform, combining our epitaxial wafer growth and wafer fabrication capabilities.


Our VCSELs unlike many on the market, have already been designed intoused in consumer products such as the computer mouse as well asmice and mobile phones for menu navigation in smart phones and in car steering wheels.many years. Our VCSELs are also widely deployed in datacenters and in the emerging market for HDMI optical cables.cables as well as in vehicle steering wheels. This expertise in VCSEL technology is beinghas been leveraged for the emerginggrowing 3D sensing market. With our acquisitions3D sensing was the first application to drive the demand for relatively large two-dimensional VCSEL arrays. A typical design for 3D sensing requires tens or hundreds of VCSELs per chip in order to scale up the optical power required for, for example, face recognition. Therefore, 3D sensing applications created the need to scale up manufacturing to6-inch epitaxywafer processing. Today, II-VI is one of the very few vertically integrated 6-inch VCSEL manufacturers with a proven track record in high-volume manufacturing of high-reliability, large multi-emitter VCSEL dies designed for 3D sensing. An increasing number of consumer devices are coming on the market with embedded VCSELs, including multiple smartphones and wafer capabilities, we have invested significantly to round out our capacity expansion.

tablets, smart watches, and household robots.

Automotive Market


II-VI is a global leader in SiC substrates for power electronics that improve the energy efficiency of electric and hybrid-electric vehicles. Power conversion electronics for high-efficiency electric vehicles need a combination of high-power density, high-efficiency and high-temperature operation that are only afforded by advanced material systems based on SiC substrates.enable systems to achieve significantly improved power utilization and conversion efficiencies, lower operating temperatures, and reduced thermal loads. This in turn enables either increased driving range or reductions in required battery capacity for a given range, which results in a significant cost reduction. Our SiC substrates are available in large diameterscomprehensive understanding of crystal growth and have what we believematerials processing was acquired over decades of sustained R&D and manufacturing, allowing us to be best-in-class qualitycontinuously evolve our technology and low defect levels.

Our thermoelectric modules are used to cool batteries to extend their operating life. They are also more efficient than resistive heaters when used in heated car seats and extend an electric vehicle’sIP portfolio. We offer a full range of travel in cold environments.

To operate safely, self-driving cars will rely on control systems that are informed by a comprehensive number of sensors. One such sensor is based on LiDAR, which employssubstrate diameters, including the world’s first 200 mm substrate.


Our industry-leading semiconductor lasers, optics, and materials are at the core of LiDAR systems embedded in advanced driver-assistance systems (ADAS) for autonomous vehicles. LiDAR sensors enable ADAS to properly identifyperform functions such as emergency braking and measure the distance to obstacles ahead. Our GaAs-based semiconductor laser platform, which alreadyadaptive cruise control. II-VI enables LiDAR sensors with a broad portfolio of productscomponents and modules, including high-power laser diodes, fiber amplifiers, frequency-modulated continuous wave detection solutions, optical filters for detection, mirrors for scanning, and thermoelectric coolers for temperature control. Our product offerings include edge-emitters and VCSELs that are capable of providing a wide range of peak powers for direct illumination and imaging for short- and long-range LiDAR solutions. Emission and return windows on LiDAR systems are available in communicationsultrahard bulk materials, such as SiC and materials processing, is now being scaled further for consumer electronics,diamond, and with optical coatings that are water-shedding and oil-resistant. Our thermoelectric coolers are qualified to automotive standards and enable LiDAR systems to operate with optimal performance and efficiency.

New generations of vehicles will be leveragedequipped with a greater number of sensors that can monitor a driver’s alertness and let occupants interact with the console using touch sensing or gesture recognition. In the event of a collision, sensors can help provide critical information about the position and attention of occupants to deliver a highly reliableactivate restraints and cost-effective laser productdeploy airbags in the best possible manner. II-VI’s products enable the most advanced in-cabin control and monitoring systems for this emerging market.  

Marketingthe latest applications in human-vehicle interactions. Our VCSELs are ideal for optical touch sensors integrated in dashboards or steering wheels. Our VCSEL arrays can provide infrared cabin illumination and structured light projection to enable gesture recognition.


Automotive manufacturers continue to differentiate their products with comfort features such as temperature-controlled car seats and cup holders, all of which require thermoelectric devices. II-VI offers thermal management solutions that are qualified to stringent automotive industry standards and tailored to various applications.
Sales

and Marketing

We market our products through a direct sales forcesforce and through representatives and distributors around the world. Our market strategy is focused on understanding our customers’ requirements and building market awareness and acceptance of our products. New products are continually being produceddeveloped and introduced to our new and established customers in all markets.

The Company is centralizinghas centralized its worldwide sales and strategic marketing and sales functions across the Company’s business units.functions. Sales offices have been strategically establishedaligned to best serve and distribute products to our worldwide customer base. There are significant cooperation, coordination, and synergies among our business units, which capitalize on the most efficient and appropriate marketing channels to address diverse applications within our markets.

Our sales forces developforce develops effective communications with our OEM and end-user customers worldwide. Products are actively marketed through targeted mailings, telemarketing,key account relationships, personal selling, select advertising, attendance at trade shows, and customer partnerships. Our sales force includes a highly-trainedhighly trained technical sales support team of applications engineers to assist customers in designing, testing, and
16

qualifying our partsproducts as key components of our customers’ systems. As of June 30, 2018,2021, we employed approximately 263400 individuals in sales, marketing, and support.

We do business with a number of customers in the aerospace and defense industry, who in turn generally contract with a governmental entity, typically a U.S. governmentalgovernment agency. Most governmental programs are subject to funding approval and can be modified or terminated without warning by a legislative or administrative body.


Customers

Customers

The representative groups of customers by segmentssegment are as follows:


Segment:

Photonic Solutions
Business Unit:

Group/Division:

Our Customers Are:

Representative Customers:

II-VI Laser Solutions

ROADM

II-VI Infrared

OEM and system integrators of industrial, medical and military laser systems.  Laser end-users who require replacement optics for their existing laser systems.

•      TRUMPF GmbH + Co. KG

•      Bystronic Laser AG

•      Coherent, Inc.

II-VI HIGHYAG

Automotive manufacturers, laser manufacturers and system integrators.

•      Ford Motor Company

•      Laserline GmbH

II-VI Laser Systems

OEM and subsystem integrators of aiming, machine vision, bio-medical instruments, and fiber lasers.

Laser cutting machines for super-hard materials.

•      BGI Complete Genomics, Shenzhen Co., Ltd.

•      SPI Lasers Limited

II-VI OEG

Manufacturers of industrial laser components, optical communication equipment and consumer technology applications.  

•      Laserline GmbH

•      Wuhan Raycus Fiber Laser Technologies Co., Ltd

II-VI Photonics

II-VI Optical Communications & II-VI Photop

Worldwide network system and sub-systemsubsystem providers of telecommunications, data communications, and CATV.

CATV

•Ciena Corporation
•Fujitsu Network Communications
•NEC Corporation
•Nokia Corporation

TransceiversCloud service providers, telecom service providers, enterprises with internal datacom networks, datacom OEMs, telecom OEMs
•Alibaba Group
•Cisco Systems Inc.

•      Fujitsu Network Communications

Extreme Networks Inc.

•      Corning Incorporated

•      Coherent, Inc.

•      Acacia Communications, Inc.

•      Han’s Laser Technology Industry GroupH3C Technologies Co. Ltd.

•Tencent

Advanced Optics

Global manufacturers of industrial and medical laser optics and crystals including commercial and consumer products used in a wide array of instruments, sensors, fiber lasers, displays, and projection devices.

devices
•Coherent Inc
•Corning Incorporated.
•Han’s Laser Technology Industry Group Co. Ltd.
17

II-VI Performance Products

Compound Semiconductors
Business Unit:

II-VI Optical Systems

Our Customers Are:

Representative Customers:

Engineered Materials & Laser OpticsOEM and system integrators of industrial, medical, personal comfort, and aerospace and defense laser systems; laser end users who require replacement optics for their existing laser systems
•Bystronic Laser AG
•Coherent Inc.
•TRUMPF GmbH + Co. KG
Manufacturers and developers of integrated-circuit capital equipment for the semiconductor capital equipment industry
•ASML Holding NV
•Carl Zeiss AG
•KLA Corporation
•Nikon Corporation
Primary mineral processors, refiners, and providers of specialized materials used in laser optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy, and industrial products
•Aurubis AG
Manufacturers of equipment and devices for aerospace, defense, and commercial markets.

markets

•Lockheed Martin Corporation

•Raytheon Technologies Corporation

II-VI M Cubed

Laser Devices & Systems

Manufacturers of industrial laser components, optical communications equipment, and developers of integrated circuit capital equipment for the semiconductor industry.

consumer technology applications; automotive manufacturers

•      ASML Holding NV

Ford Motor Company

•      Carl Zeiss AG

Hisense Broadband Inc.

•      Nikon Corporation

Laserline GmbH

•      KLA-Tencor Corporation

Wuhan Raycus Fiber Laser Technologies Co. Ltd.

ManufacturersOEM and developerssubsystem integrators of productsaiming, machine vision, biomedical instruments, and componentsfiber lasers; laser cutting machines for various defense and industrial markets.

superhard materials

•      Corning Incorporated

TRUMPF GmbH + Co. KG

II-VI Marlow

New Ventures & Wide-Bandgap Electronics

Manufacturers and developers of equipment and devices for defense, space, telecommunications, medical, industrial, automotive, personal comfort and commercial markets.

•Lumentum Operations LLC

II-VI Advanced Materials

Manufacturers and developers of equipment and devices for high-power RF electronics and high-power, voltage-switching, and voltage switching and power conversionpower-conversion systems for both commercial and military applications.

aerospace and defense applications

•Infineon Technologies AG
•IQE PLC
•Showa Denko KK
•Sumitomo Electric Device Innovations Inc.

•      Showa Denko K. K.

•      STMicroelectronics

•      IQE PLC

•      Infineon Technologies AG

II-VI Performance Metals

Optoelectronic & RF Devices

Primary mineral processors, refineriesManufacturers of consumer electronics and providers of specialized materials that are used in laser optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy and industrial products.

transceivers

•Aurubis AG

Apple Inc.








18

Competition

We believe we are

II-VI is a global leader in many of ourits product families. We compete, partlyin part, on the basis of our reputation for offering highly engineered products, product and technology roadmaps,products. We also compete by leveraging our intellectual property, ability to scale, product quality, on-time delivery, time,and technical support and pricing.support. We believe that we compete favorably with respect to these factors and that our vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees, and worldwide marketing and distribution channels provide us with competitive advantages. The representative groups of our competitors by segment are as follows:


Photonic Solutions
Areas of Competition:Competitors:
Optical components, modules, and subsystems for optical communications
•Accelink Technologies Co. Ltd.
•InLC Technology
•InnoLight Technology Ltd.

•Intel Data Platforms Group
•Lumentum Operations LLC
•Molex LLC
•O-Net Communications Ltd.
Optical and crystal components, thin-film coatings, and subassemblies for lasers and metrology instruments•      CASTECH Inc.
•      Casix Inc.
•      IDEX Corporation
• Optowide Technologies Co. Ltd.
•      Research Electro-Optics Inc.

Segment:

Compound Semiconductors

Areas of Competition:

Competitors:

II-VI Laser Solutions

Infrared laser optics

•      American Photonics
•Forerun (China)
•Lambda Research Corporation
•      MKS Instruments Inc.
•      Ophir Corporation
•Research Electro-Optics Inc.

•Pleiger Maschinenfabrik GmbH & Co. KG
•Sigma Koki Co. Ltd.
•Sumitomo Electric Industries Ltd.

•     MKS Instruments

ULO Optics Ltd.

•Wavelength OptoElectronic PteOpto-Electronic Pte. Ltd.

•      SIGMAKOKI Co., LTD.

Automated equipment and laser materialmaterials processing tools to deliver high-power one-micron1-micron laser systems

•Empower
•Mitsubishi Cable Industries Ltd.
•Optoskand AB

•      Precitec GmbH & Co. KG

•      MITSUBISHI CABLE INDUSTRIES, LTD

Bio-medicalBiomedical instruments for flow cytometry, DNA sequencing, and fluorescence microscopy

•      Coherent Inc.

•      Shimadzu Corporation
•    Pavilion Integration Corporation

•      SHIMADZU CORPORATION

Semiconductor laser diodes for the industrial and consumer markets

•ams AG
•Broadcom Inc.
•Everbright LLC
•Hamamatsu Photonics KK
•Jenoptik AG
•Lumentum Operations LLC

•     Finisar Corporation

nLight Inc.


•     BroadcomOptowell Co. Ltd.

•     Koninklijke Philips N.V

•     Jenoptik AG

•     OsramOSRAM Licht AG

•Panasonic Corporation
•Wuhan Raycus Fiber Laser Technologies Co. Ltd.
•ROHM Co. Ltd.
•Sony Corporation

•     Hamamatsu Photonics K.K.

TRUMPF GmbH + Co. KG

II-VI Photonics

Optics, optical components, modules & subsystems for optical communications

•     Oplink Communications, Inc.

•     Lumentum Operations LLC

Optical and crystal components, thin film coatings and sub-assemblies for lasers and metrology instruments

•     Casix, Inc.

•     CASTECH Inc.

•     Research Electro-Optics, Inc.

•     IDEX Corporation

II-VI Performance Products

Infrared optics for militaryaerospace and defense applications

•In-house fabrication and thin-film coating capabilities of major militaryaerospace and defense customers

Thermoelectric components, sub-assembliessubassemblies, and systems

•      Ferrotec Corporation

•      Laird Thermal Systems
•Komatsu Ltd.

•     Laird PLC

•     Ferrotec Corporation


Metal Matrix CompositesMetal-matrix composites and reaction bonded ceramicsreaction-bonded ceramic products

•      Berliner Glas KGaA Herbert Kubatz GmbH & Co.

•      CoorsTek Inc.

•      Japan Fine Ceramics Co. Ltd.

•Kyocera Corporation
•Morgan Advanced Materials PLC
•Schunk GmbH

Single crystalSingle-crystal SiC substrates

•      Cree Inc.

•      Dow Corning Corporation

Inc.

•ROHM Co. Ltd.
•      SICC Co., Ltd

Ltd.

•      TankeBlue CO., LTD.

•     SiCrystal AG

Semiconductor Co. Ltd.

Refining and materials recovery services for high purityhigh-purity rare metals

•      5N Plus Inc.
•      RETORTE GmbH
•      Vital Materials Co., Limited

•     5N Plus Inc.

•     RETORTE GmbH Selenium Chemicals & Metals

Ltd.


19

In addition to competitors who manufacture products similar to those we produce, there are other technologies and products available that may compete with our technologies and products.




Our Strategy

Our strategy is to grow businesses with world-class engineered materialmaterials capabilities to advance our current customers’ strategies, penetratereach new markets through innovative technologies and platforms, and enable new applications in large and growing markets. A key strategy of ours is to develop and manufacture high-performance materials and, in certain cases, components fromincorporating those materials, that are differentiated from those produced by our competitors. We focus on providing components that are critical to the heart of our customers’ assembly lines, for products servingthat serve the applications mentioned above.

We have grown substantiallycontinue to grow the number and size of our key accounts. Now, a substantialA significant portion of our business is based on sales orders with market leaders, which enableenables our forward planning and production efficiencies. We intend to continue capitalizing and executing on this proven model, participating effectively in the growth of the markets discussed above, and continuing our focus on operational excellence as we execute our primary business strategies:


Key Business Strategies:

Our Plan to Execute:

Identify New Products and Markets

Identify new technologies, products, and markets to meet evolving customer requirements for high-performance engineered materials through our dedicated RD&E programs, toand thereby increase new product revenue and maximize return on investment.

investment

Balanced Approach to Research and Development

InternallyRD&E both internally and externally funded, RD&E expenditures, targeting an overall investment of between 10% - 15%8%-12% of revenues depending on the nature of the investment in terms of technology platforms or products.

Leverage Vertical Integration

Combine RD&E and manufacturing expertise, operating with a bias totoward components and production machines, reducingmachines; reduce cost and lead time to enhance competitiveness, time to market, profitability, and qualityquality; and enablingenable our customers to offer competitive products.

products

Investment in Scalable Manufacturing

Strategically invest in, evaluate, and identify opportunities to consolidate and automate manufacturing operations worldwide to increase production capacity, capabilities, and cost effectiveness.  

cost-effectiveness

Enhance Our Performance and Reputation as a Quality and Customer Service Leader

Continue to improve upon our established reputation as a consistent, high-quality supplier of engineered materials and optoelectrical components that are built into our customers’ products.

products

Execute our global quality transformation process, eliminating costs of non-conformingnonconforming materials and processes.

processes

Identify and Complete Strategic Acquisitions and Alliances

Identify acquisition opportunities that accelerate our access to emerging, high-growth segments of the markets we serve and further leverage our competencies and economies of scale.

scale

Research, Development, and Engineering

During the fiscal year ended June 30, 2018,2021, the Company continued to identify, invest in, and focus our research and development on new products and platform technologies in an effort to accelerate our organic growth. This approach is managed under a disciplined innovation program that we refer to as the “II-VIII-VI Phase Gate Process.”

From time to time, the ratio of externally funded contract activity to internally funded contract activity varies due to the unevenness of government funded research programs and changes in the focus of our internally funded research programs. We are committed to having the right mix of internally and externally funded research that ties closely to our long-term strategic objectives.

We devote significant resources to RD&E programs directed at the continuous improvement of our existing products and processes, and to the timely development of new materials, technologies, materialsplatforms, and products. We believe that our RD&E activities are essential to establishestablishing and maintainmaintaining a leadership position in each of the markets we serve. As of June 30, 2018, we employed 1,513 people in RD&E functions, 1,439 of whom are engineers or scientists. In addition, certain manufacturing personnel support or participate in our research and development efforts on an ongoing basis. We believe thisthe close interaction between the development and manufacturing functions enhances the direction of our projects, reducing costs and accelerating technology transfers.

It also offers development opportunities to our employees.

During the fiscal year ended June 30, 2018,2021, we focused our RD&E investments in the following areas:


20

Segment:

Photonic Solutions

Area of Development:

Our Research and DevelopmentRD&E Investments:

II-VI Laser Solutions

Photonics design

High Power Laser DiodesContinue to develop and High Volume Manufacturing

Focusing on increasing fiber coupled optical output power of multi-emitter modules.

Developing high power VCSELs for consumer devices and next generation high speed VCSELs for 3D sensing and datacom applications.

CVD Diamond Technology

Developing CVD diamond for EUV applications.

Broadening our portfolio beyond infrared windows applications.

II-VI Photonics

Photonics Design

Continuing to improve photonic crystal materials, precision optical parts, and laser device components.

components for photonics applications

Datacom transceivers

Continue cost reduction on 10G-100G products by leveraging our engineering resources and manufacturing scale; continue to develop high-end 200G/400G/800G products, including RF and packaging designs; explore high-density, high-bandwidth co-packaged designs through silicon photonics; continue to develop vertically integrated designs, including with lasers and ICs
Coherent opticsDrive further integration to reduce size and power consumption; optimize product cost with new design architectures and more efficient manufacturing flow
Pump Lasers

lasers

ContinuingContinue to invest in next generationour next-generation GaAs pump laser portfolio and flexible manufacturing footprint to address evolving terrestrial and undersea markets.

markets

DevelopingDevelop InP growth and processing capability.

capability together with associated packaging technology

Optical Amplifiersamplifiers and Subsystems

subsystems

InvestingInvest in and broadeningbroaden the range of amplifiers and integrated subsystems, including ROADMs.

ROADMs

WSS

Develop LC and LCOS technologies and associated module designs for WSS; invest in manufacturing equipment, including the WSS automated assembly platform
Optical Monitoring

monitoring

ContinuingContinue optical channel monitor investment.

monitoring investment

Developing compactDevelop OTDRs embedded in optical system equipment to monitor the health of the fiber plant.

plant

Micro-Optics Manufacturing

Micro-optics manufacturing

ShiftingShift toward smaller, more compact optics and automated assembly platforms and packages.

packages

InvestingInvest in manufacturing equipment for computerized processes.

processes

II-VI Performance Products

Compound Semiconductors
Area of Development:

Our RD&E Investments:

High-power laser diodes

Semiconductor lasers

Devices for optical communications and sensing, and high-volume manufacturing
Increase fiber-coupled optical output power of multi-emitter modules
Develop high-power VCSELs, including multi-junction VCSELs for 3D sensing and consumer devices as well as next-generation, high-speed VCSELs for datacom applications
Develop high-power and high-speed InP lasers, detectors, and components for applications in optical communications
High-power beam deliveryDevelop multi-kW beam delivery systems and cables for welding and cutting
CVD diamond technologyDevelop CVD diamond for EUV applications and as substrates for high-performance RF devices
Broaden our portfolio beyond infrared window applications
SiC Technology

technology

DevelopingDevelop advanced SiC substrate growth technologies to support emerging markets in GaN RF and SiC power electronics.

electronics

Continuous improvementsimprovement to maintain world-class, high quality, large diameterhigh-quality, large-diameter substrates and epitaxial wafers.

wafers

Thermoelectric Materialsmaterials and Devices

devices

Continuing

Continue to develop leading Bi2Te3 materials for thermoelectric cooling/heating.

heating

FocusingFocus on thermoelectric power generationpower-generation capability in order to introduce new products to the market.

Metal Matrix CompositesMetal-matrix composites and Reaction Bonded Ceramics

reaction-bonded ceramics

Support Industrialindustrial customers in developing application-specific material wear out and thermal management solutions.

thermal-management solutions

The development of our products and manufacturing processes is largely based on proprietary technical know-how and expertise. We rely on a combination of contract provisions, trade secret laws, invention disclosures and patents to protect our proprietary rights. We have entered into selective intellectual property licensing agreements. We have asserted in the past, and expect that we will continue to assert and vigorously protect our intellectual property rights. We have a total of approximately 800 patents globally.  

21

Fiber laser technologiesDevelop high-power fiber laser technologies for aerospace, defense, and commercial applications
High-speed ICsHigh-performance analog TIAs, laser drivers, and clock and data-recovery retimer (CDR) ICs

Other R&D
Area of Development:Our RD&E Investments:
Digital Signal Processors (DSPs)Develop high-speed DSPs for coherent optical communications
Optoelectronic chip hybrid integration platformDevelop wafer-scale assembly technologies and processes for integration of lasers, optics, and ICs
Silicon photonics devicesDevelop silicon-based photonic ICs for coherent and direct-detection transceivers and co-packaging solutions
Battery technologyDevelop technology for lithium-ion batteries
Laser additive manufacturingDevelop alloys and multibeam delivery systems for laser additive manufacturing

Internally funded research and development expenditures were $117.2$330 million, $96.8$339 million, and $60.4$139 million for the fiscal years ended June 30, 2018, 20172021, 2020, and 2016,2019, respectively. For these same periods, externally funded research

Import and development expenditures were $12.7 million, $8.7 million and $9.5 million, respectively and were included in Cost of goods sold in the Consolidated Statements of Earnings.


Export and Import Compliance

We are required to comply with various export/import controlimport/export and economic sanctionsanctions laws and regulations, including:

•The import regulations administered by U.S. Customs and Border Protection;

•The International Traffic in Arms Regulations administered by the U.S. Department of State, Directorate of Defense Trade Controls, which among other things impose licensing requirements on the export from the United States of certain defense articles and defense services, which generally includeincluding items that are specially designed or adapted for a military application and/or listed on the U.S.United States Munitions List;

•The Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and Security, which among other things impose licensing requirements on certain dual-use goods, technology, and software, which are items that potentially have both commercialsoftware; and military applications;

•The regulations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control, which implementimplementing economic sanctions imposed against designated countries, governments, and persons based on U.S. foreign policy and national security considerations; and

considerations.

The import regulations administered by the U.S. Customs and Border Protection.

Foreign governments also have also implemented similar import and export control, and import control regulations, which may affect our operations or transactions subject to their jurisdiction.sanctions, laws and regulations. For additional discussionsdiscussion regarding our import, export and exportsanctions compliance, see the discussion set forth in Item 1A – Risk Factors of this Annual Report Form on Form 10-K.

Trade Secrets, Patents, and Trademarks

Our use of trade secrets, proprietary know-how, trademarks, copyrights, patents, and contractual confidentiality, and IP ownership provisions helphelps us develop and maintain our competitive position with respect to our products and manufacturing processes. We aggressively pursue process and product patents in certain areas of our businesses.businesses and in certain jurisdictions across the globe. We have entered into selective intellectual property licensing agreements. We have confidentiality and non-competitionnoncompetition agreements with certain personnel. We require that our U.S. employees to sign a confidentiality and non-competitionnoncompetition agreement upon their commencement of their employment with us.

The design, processes and specialized equipment utilized in our engineered materials, advanced components and subsystems are innovative, complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology, or that all aspects We have a total of our proprietary technology will be protected. Others have obtainedapproximately 2,205 patents covering a variety of materials, devices, equipment, configurations and processes, and others could obtain patents covering technology similar to ours. We may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted that may adversely affect our results of operations. In addition, our research and development contracts with agencies of the U.S. Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.

globally.

Executive Officers of the Registrant

The executive officers of the Company and their respective ages and positions as of June 30, 20182021, are set forth below. Each executive officer listed has been appointed by the Boardboard of Directorsdirectors to serve until removed or until such person’sa successor is appointed and qualified.


22

Name

Age

Position

Name

AgePosition
Vincent D. Mattera, Jr.

62

65

President and Chief Executive Officer; Director

Walter R. Bashaw II

56President
Mary Jane Raymond

57

61

Chief Financial Officer and Treasurer and Assistant Secretary

Giovanni Barbarossa

56

59

Chief TechnologyStrategy Officer and President, II-VI Laser Solutions

Compound Semiconductors

Gary A. Kapusta

58

Chief Operating Officer

Jo Anne Schwendinger

62

65

Chief Legal Officer and Compliance Officer and Secretary

David G. Wagner

Christopher Koeppen

55

50

Vice President, Human Resources

Chief Technology Officer


Vincent D. Mattera, Jr. Dr. Mattera initially served as a member of the II-VI Boardboard of Directorsdirectors from 2000-2002.2000 to 2002. Dr. Mattera joined the companyCompany as a Vice President in 2004 and served as Executive Vice President from January of 2010 to November of 2013, when he became the Chief Operating Officer. In November of 2014, Dr. Mattera became the President and Chief Operating Officer and was reappointed to the Boardboard of Directors.directors. In November of 2015, he became the President of II-VI. In September of 2016, Dr. Mattera became the Company’s third President and Chief Executive Officer in 45 years.years and served as the Company's President through June 2019, when the roles of President and Chief Executive Officer were separated. Dr. Mattera will become the Company’s Board Chair immediately following the Company’s 2021 Annual Meeting of Shareholders. During his career at II-VI, he has assumed


successively broader management roles, including as a lead architect of the Company’s diversification strategy. He has provided vision, energy, and dispatch to the Company’s growth initiatives, including overseeing the acquisition-related integration activities in the US,United States, Europe, and Asia-especiallyAsia—especially in China-therebyChina—thereby establishing additional platforms. These have contributed to a new positioning of the Company into large and transformative global growth markets while increasing considerably the global reach of the Company, deepening the technology and IP portfolio, broadening the product roadmap and customer base, and increasing the potential of II-VI.

Prior to joining II-VI as an executive, Dr. Mattera had a continuous 20 year20-year career in the Optoelectronic Device Division of AT&T Bell Laboratories, Lucent Technologies, and Agere Systems, during which he led the development and manufacturing of semiconductor laser basedlaser-based materials and devices for optical and data communications networks. Dr. Mattera has 34 years of leadership experience in the compound semiconductor materials, and device technology, operations, and markets that are core to II-VI’s business and strategy. Dr. Mattera holds a B.S. degree in chemistry from the University of Rhode Island (1979), and a Ph.D. degree in chemistry from Brown University (1984). He completed the Stanford University Executive Program (1996).

Walter R. Bashaw II has served as the Company’s President since July 2019. Mr. Bashaw served as the Company's Senior Vice President, Corporate Strategy and Development, Administration from October 2018 to July 2019. Previously, Mr. Bashaw served as the Company's Interim General Counsel and Secretary from December 2015 until March 2017. Mr. Bashaw also previously was a Managing Shareholder and a Director of the law firm of Sherrard, German & Kelly, P.C. (SGK) in Pittsburgh, Pennsylvania, until October 2018 and Of Counsel at SGK from October 2018 until June 2019. Mr. Bashaw graduated from the Pennsylvania State University with a B.S. degree in Logistics and also holds a J.D. degree from the University of Pittsburgh School of Law.

Mary Jane Raymondhas been Chief Financial Officer and Treasurer of the Company since March 2014. Previously, Ms. Raymond was Executive Vice President and Chief Financial Officer of Hudson Global Inc. (NASDAQ: HSON) from 2005 to 2013. Ms. Raymond was the Chief Risk Officer and Vice President and Corporate Controller at Dun and Bradstreet Inc., from 2002 to 2005. Additionally, she was the Vice President, Merger Integration, at Lucent Technologies Inc., from 1997 to 2002 and held several management positions at Cummins Engine Company from 1988 to 1997. In 2019 Ms. Raymond was named to the Board of Directors and Audit Committee of Veeco, Inc. Ms. Raymond holds a B.A. degree in Public Management from St. Joseph’s University, and an MBA from Stanford University.

Giovanni Barbarossajoined II-VI in October 2012 and has been the Chief Strategy Officer of the Company and the President Laser Solutionsof the Compound Semiconductors Segment since 2014, andJuly 2019. Previously, he was the Chief Technology Officer since 2012.of the Company and the President of the Laser Solutions Segment. Dr. Barbarossa was employed at Avanex Corporation from 2000 through 2009, serving in various executive positions in product development and general management, ultimately serving as President and Chief Executive Officer. When Avanex merged with Bookham Technology, forming Oclaro, Dr. Barbarossa became a member of the Boardboard of Directorsdirectors of Oclaro and served as such from 2009 to 2011.2012. Previously, he hadheld senior management responsibilitiesroles in the Optical Networking Division of Agilent Technologies and in the Network Products Group of Lucent Technologies. He was previously a Member of Technical Staff, then Technical Manager at AT&T Bell Labs, and a Research Associate at British Telecom AT&T Bell Labs, Lucent Technologies, and Hewlett-Packard.Labs. Dr. Barbarossa graduated from the University of Bari, Italy, with a B.S. degree in Electrical Engineering, and holds a Ph.D. in Photonics from the University of Glasgow, U.K.

Gary A. Kapusta joined II-VI in February 2016 and has served since then as the Company’s Chief Operating Officer. Prior to his employment with the Company, Mr. Kapusta served in various roles at Coca-Cola, including as President & Chief Executive Officer, Coca-Cola Bottlers’ Sales & Services L.L.C.; President, Customer Business Solutions; and Vice President, Procurement Transformation, Coca-Cola Refreshments. He joined Coca-Cola following a 19 year career at Agere Systems, Lucent Technologies, and AT&T. Mr. Kapusta graduated from The University of Pittsburgh with B.S. and M.S. degrees in Industrial Engineering, and holds an MBA from Lehigh University.  

23

Jo Anne Schwendinger has served as the Company’s Chief Legal and Compliance Officer and Secretary since MarchNovember 2017. Ms. Schwendinger also served as the Company’s General Counsel and Secretary from when she joined the Company in March 2017 until November 2017. Prior to her employment with the Company, Ms. Schwendinger practiced law with the law firm Blank Rome LLP from August 2016 until February 2017. Previously, Ms. Schwendinger served in various legal roles at Deere & Company from February 2000 until August 2016, including Regional General Counsel-Asia-PacificCounsel–Asia-Pacific and Sub-Saharan Africa and Assistant General Counsel.Africa. Ms. Schwendinger holds a Bachelor’sbachelor’s degree from the Université d'Avignond’Avignon et des Pays de Vaucluse, a Master’smaster’s degree from the Université de Strasbourg, and a Juris DoctorJ.D. degree from the University of Pittsburgh Law School.

David G. Wagner has been employed by

Christopher Koeppen joined the Company since 2008,in 2011 following the acquisition of Aegis Lightwave, Inc., where he served as General Manager, Aegis-NJ. He was named General Manager of II-VI’s Agile Network Products Division in 2012 and has been theDirector of Corporate Strategic Technology Planning in 2015. He then served as Vice President Human Resources since 2011.  Priorof the Industrial Laser Group and Corporate Strategic Technology Planning from 2017, until his appointment as Chief Technology Officer in 2019. Previously, Dr. Koeppen was co-founder and Chief Executive Officer of CardinalPoint Optics, prior to his employment with the Company, Mr. Wagner was employed with Owens Corning (NYSE:OC) from 1985 through 2008, servingits acquisition by Aegis Lightwave. He has more than two decades of progressively increasing general and technology management experience in various human resource management positions, ultimately becoming the Vice President, Human Resources, for Owen Corning’s global sales force.  Mr. Wagner graduated withhigh-tech companies, including at Meriton Networks, Mahi Networks, Photuris, and Lucent Technologies. Dr. Koeppen holds a B.S. degreePh.D. in Human Resources Management from Juniata College in 1985. Mr. Wagner has announced his intention to retirePhysics from the Company, effectiveUniversity of Pennsylvania, where he was an AT&T Bell Laboratories Scholar, and B.S. degrees in 2019, as of a date to be determined.

Physics and Mathematics from the Pennsylvania State University.

Availability of Information

Our Internetinternet address is www.ii-vi.com.www.ii-vi.com. Information contained on our website is not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K. We post the following reports on our website as soon as reasonably practical after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”)(SEC): our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, we post our proxy statements on Schedule 14A related to our annual shareholders’ meetings as well as reports filed by our directors, officers, and 10% beneficial owners pursuant to Section 16 of the Exchange Act. In addition, all filings are available via the SEC’s website (www.sec.gov)(www.sec.gov). We also make our corporate governance documents available on our website, including the Company’s Code of Ethical Business Conduct, and Ethics, governance guidelinesGovernance Guidelines, and the charters for our board committees. All such documents are located on the Investors page of our website and are available free of charge.


24

Item 1A.

Item 1A. RISK FACTORS

We caution our investors that our performance is subject to risks and uncertainties.


The following materialare certain risk factors maythat could affect our business, results of operations, financial position or cash flows. These risk factors should be considered along with the forward-looking statements contained in this Annual Report on Form 10-K, because these factors could cause our futureactual results or financial condition to differ materially from those projected in forward-looking statements. The following discussion is not an all-inclusive listing of risks, although we believe these are the material risks that we face. If any forward-looking statement.of the following occur, our business, results of operations, financial position, or cash flows could be adversely affected. You should carefully consider these factors, as well as the other information contained in this Annual Report on Form 10-K, when evaluating an investment in our securities.


Risks Relating to Our Business and Our Industry

Investments in Future Marketsfuture markets of Potential Significant Growth May Not Resultpotential significant growth may not result in Expected Returns

the expected return.


We have initiated investmentcontinue to make investments in programs with the goal of gaining a greater share of end markets using semiconductor lasers and other components, including those used for 3D sensing.sensing and emerging 5G technology. We cannot guarantee that our investments in capital and capabilities will be sufficient. The potential end markets, as well as our ability to gain market share in such markets, may not materialize on the timeline anticipated or at all. We cannot be sure of the end market price, specification, or yield for products incorporating our technologies. Our technologies could fail to fulfill, partially or completely, our target customers’ finalized specifications. We cannot guarantee the end market customers’ acceptance of our technologies. Further, we may be unable to fulfill the terms of our contracts with our target customers, which could result in penalties of a material nature, including consequential damages, loss of market share, and loss of reputation.


Our Competitive Position Dependscompetitive position depends on Our Abilityour ability to Develop New Productsdevelop new products and Processes

processes.


To meet our strategic objectives, we must develop, manufacture, and market new products and continue to update our existing products and processes to keep pace with market developments to address increasingly sophisticated customer requirements. Our success in developing and selling new and enhanced products and processes depends upon a variety of factors, including strategic product selection, efficient completion of product design and development, timely implementation of manufacturing and assembly processes, effective sales and marketing, and high-quality and successful product performance in the market.

The introduction by our competitors of products or processes using new developments that are better or faster than ours could render our products or processes obsolete or unmarketable. We intend to continue to make significant investments in RD&Eresearch, development, and engineering to achieve our goals. There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products and processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could have a material adverse effect on our ability to grow our business and maintain our competitive position and on our results of operations and/or financial condition.

Our Competitive Position May Still Require Significant Investments

We continuously monitor the marketplace for strategic opportunities,


A widespread health crises could materially and adversely affect our business, strategy includes expandingfinancial condition, and results of operations.

The outbreak of a widespread health crisis, whether global in scope or localized in an area in which we, our product lines and markets through both internal product development and acquisitions.  Consequently, we expect to continue to consider strategic acquisition of businesses, products or technologies complementary to our business.  This may require significant investments of management time and financial resources.  If market demand is outside our organic capabilities, if a strategic acquisition is required and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the expected return on investment, expose us to unforeseen liabilities or jeopardize our ability to comply with our credit facility covenants due to any inability to integrate the business, adjust to operating a larger and more complex organization, adapt to additional political and other requirements associated with the acquired business, retain staff, or work with the customers or otherwise we could suffer a material adverse effect on our business, results of operations or financial condition.

Our Future Success Depends on Continued International Sales, and Our Global Operations are Complex, and Present Multiple Challenges to Manage

Sales to customers in countries other than the United States accounted for approximately 68%, 69% and 63% of revenues during the years ended June 30, 2018, 2017 and 2016, respectively. We anticipate that international sales will continue to account for a significant portion of our revenues for the foreseeable future. If wesuppliers do not maintain our current volume of international sales, we could suffer a material adverse effect on our business, results of operations and/or financial condition.

We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, Switzerland, and the United Kingdom and through a contract manufacturer in Thailand.  We also maintain direct sales offices in Hong Kong, Japan, Germany, China, Switzerland, Belgium, the United Kingdom, China, Italy, South Korea, and Taiwan.  Our operations vary by location and are influenced on a location-by-location basis by local customs, languages and work practices, as well as different local weather conditions, management styles and education systems. In addition, multiple complex issues may arise concurrently in different countries, potentially hampering our management’s ability to respond in an effective and timely manner. Any inability to respond in an effective and timely manner to issues in our global operations could have a material adverse effect on our business, resultsoperations and the operations of our suppliers and customers. Potential impacts on our operations include:


•significant reductions in demand for one or more of our products or a curtailment to one or more of our product lines caused by, among other things, any temporary inability of our customers to purchase and utilize our products in next-stage manufacturing due to shutdown orders or financial condition.

hardship;

•workforce constraints triggered by any applicable shutdown orders or stay-at-home polices;

Foreign Currency Risk May Negatively Affect

•disruptions to our Revenues, Costthird-party manufacturing and raw materials supply arrangements caused by constraints over our suppliers’ workforce capacity, financial, or operational difficulties;
•heightened risk and uncertainty regarding the loss or disruption of Salesessential third-party service providers, including transportation services, contract manufacturing, marketing, and Operating Marginsdistribution services;
•requirements to comply with governmental and Could Resultregulatory responses such as quarantines, import/export restrictions, price controls, or other governmental or regulatory actions, including closures or other restrictions that limit or close our operating and manufacturing facilities, restrict our workforce’s ability to travel or perform necessary business functions, or otherwise impact our suppliers or customers, which could adversely impact our operating results; and
•increased operating expenses and potentially reduced efficiency of operations.

In the early stages of the outbreak of the global novel coronavirus (COVID-19) in Foreign Exchange Losses

We conduct2020, we closely monitored the impact of the COVID-19 pandemic on all aspects of our business, including the impact to our suppliers, customers, and incur costs in employees, as well as

25

the local currency of mostimpact to the countries and markets in which we operate. Our net sales outsideWe began focusing intensely on mitigating the United States represented a majorityadverse impacts of COVID-19 on our total salesforeign and domestic operations, starting by protecting our employees, suppliers, and customers. While we believe that we have been successful in eachidentifying, managing, and mitigating the economic disruption impacts of the last three fiscal years. We incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it operates or holds assets or liabilities in a currency different than its functional currency. Changes in exchange rates can also affect our results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S. dollars. WeCOVID-19 pandemic on us, we cannot accurately predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates,provide any assurance that we may notsimilarly will be able to effectively managemitigate the impacts of any future widespread health crises, including as a result of any variants of COVID-19. Factors beyond our currency risks,current knowledge or control, including the duration and severity of any volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers or increase the manufacturing cost of our products, either of which may have an adverse effect on our financial condition, cash flows and profitability.

Any Inability to Access Financial Markets from Time to Time to Raise Required Capital, Finance Our Working Capital Requirements or Our Acquisition Strategies, or Otherwise to Support our Liquidity Needs Could Negatively Impact our Ability to Finance our Operations, Meet Certain Obligations or Implement our Growth Strategy

We occasionally borrow under our existing credit facilities to fund operations, including working capital investments, and to finance our acquisition strategies. In the past, market disruptions experienced in the United States and abroad have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive, and, in certain cases, have resulted in the unavailability of certain types of financing. Uncertainty in the financial markets may negatively impact our ability to access additional financing or to refinance our existing credit facilities or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future expansionoutbreak, as well as future acquisitionsany resulting governmental and development. These disruptions may include turmoil in the financial services industry, volatility in the markets where our outstanding securities trade, and general economic downturns in the areas where we do business. If we are unable to access funds at competitive rates, or if our short-term or long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategiesregulatory actions, could be adversely affected.  

In the future we may be required to raise additional capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business and prospects. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants that may limit our ability to undertake certain operational activities that we otherwise would find to be desirable. Further, debt service obligations associated withcause any such debt financing could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be ablecrisis to grow our business or respond to competitive pressures.

We May Incur Substantially More Indebtedness

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, including secured indebtedness, subject to the restrictions contained in our debt instruments.  We are not restricted under the terms of the indenture governing our outstanding convertible senior notes from incurring additional indebtedness, securing existing or future indebtedness, recapitalizing our debt obligations or taking a number of other actions that are not limited by the terms of the indenture.  Our credit facility currently restricts our ability to incur additional indebtedness, including secured indebtedness, but if our credit facility matures or is repaid, we may not be subject to such restrictions under the terms of any subsequent indebtedness.

We May Not Be Able to Settle Conversions of Our Convertible Senior Notes in Cash or to Repurchase the Notes in Accordance with Their Terms

Holders of our outstanding convertible senior notes have the right to require us to repurchase all or a portion of their notes upon the occurrence of a fundamental change (as defined in the indenture governing the notes) at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any.  In addition, upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversions (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor or pay cash with respect to notes being converted.

In addition, our ability to repurchase or to pay cash upon conversion of the notes may be limited by law, regulatory authority or agreements governing our future indebtedness.  Our failure to repurchase notes at a time when the repurchase is required by the governing indenture or to pay any cash upon conversion of the notes as required would constitute a default under the indenture. A default under the indenture or the fundamental change itself also could lead to a default under agreements governing our credit facility and any of our future indebtedness.  If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes or to pay cash upon conversion of the notes.


The Conditional Conversion Feature of Our Outstanding Convertible Senior Notes, if Triggered, May Adversely Affect Our Financial Condition and Operating Results

In the event the conditional conversion feature of the notes is triggered, holders of notes will be entitled to convert the notes at any time during specified periods at their option.  If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.

We May Fail to Accurately Estimate the Size and Growth of Our Markets and Our Customers’ Demands

We make significant decisions based on our estimates of customer requirements.  We use our estimates to determine the levels of business we seek and accept, production schedules, personnel needs and other resource requirements.

Customers may require rapid increases in production on short notice.  We may not be able to purchase sufficient supplies or allocate sufficient manufacturing capacity to meet such increases in demand. Rapid customer ramp-up and significant increases in demand may strain our resources or negatively affect our margins.  Inability to satisfy customer demand in a timely manner may harm our reputation, reduce our other opportunities, damage our relationships with customers, reduce revenue growth, and/or incur contractual penalties.

Alternatively, downturns in the industries in which we compete may cause our customers to significantly reduce their demand.  With respect to orders we initiate with our suppliers to address anticipated demand from our customers, certain suppliers may have required non-cancelable purchase commitments or advance payments from us, and those obligations and commitments could reduce our ability to adjust our inventory or expense levels to declining market demands. Unexpected decline in customer demands can result in excess or obsolete inventory and result in additional charges.  Because certain of our sales, research and development and internal manufacturing overhead expenses are relatively fixed, a reduction in customer demand likely would decrease our gross margins and operating income.   

We May Encounter Increased Competition

We may encounter substantial competition from other companies in the same market, including established companies with significant resources. Some of our competitors may have financial, technical, marketing or other capabilities that are more extensive than ours.  They may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not be able to compete successfully against our present or future competitors.  Our failure to effectively compete could have a material adverse effect on our business, operating results, of operations orand financial condition.

There Are Limitations on the Protection of Our Intellectual Property and We May From Time to Time be Involved in Costly Intellectual Property Litigation or Indemnification

We rely on a combination of trade secret, patent, copyright and trademark laws combined with employee confidentiality, noncompetition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps taken by us will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance that third-parties will not assert infringement claims against us in the future.

Asserting our intellectual property rights or defending against third-party claims could involve substantial expense.  In the event a third-party were successful in a claim that one of our processes infringed its proprietary rights, we could be required to pay substantial damages or royalties, or spend substantial amounts in order to obtain a license or modify processes so that they no longer infringe such proprietary rights.  Any such events could have a material adverse effect on


Global economic downturns may adversely affect our business, operating results, of operations orand financial condition.

A Significant Portion of Our Business is Dependent on Cyclical Industries

Our business is dependent on the demand for products produced by end-users of industrial lasers, optical communication products and components for 3D sensing. Many of these end-users are in industries that have historically experienced a highly cyclical demand for their products. As a result, demand for our products is subject to these cyclical fluctuations. Fluctuations in demand could have a material adverse effect on our business, results of operations or financial condition.



Changes in Laws and Regulations Governing Data Privacy and Data Protection Could Have a Material Adverse Impact on our Business

We are subject to many data privacy, data protection, and data breach notification laws, including the European Union General Data Protection Regulation (“GDPR”), which became effective in May of 2018. While we have taken measures to assess the requirements of, and to comply with, the GDPR, as well as new and existing data-related laws and regulations of other jurisdictions, these measures may be challenged, including by authorities that regulate data-related compliance. We could incur significant expense in facilitating and responding to investigations, and if the measures we have taken prove to be inadequate, we could face fines, penalties or damages, and incur reputational harm, which could have a material adverse impact on our business.

Data Breach Incidents and Breakdown of Information and Communication Technologies Could Disrupt our Operations and Impact Our Financial Results

In the course of our business, we collect and store sensitive data, including intellectual property (both our own and that of our customers), as well as proprietary business information. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted or we could suffer legal claims, loss of reputation, financial loss, property damage, or regulatory penalties because of lost or misappropriated information.

Global Economic Downturns May Adversely Affect Our Business, Operating Results and Financial Condition

Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction forof the global economy as a whole. It is even more difficult to estimate growth or contraction in various parts, sectors, and regions of the economy, including the industrial, military,aerospace and defense, optical communications, telecommunications, semiconductor, consumer, and medical and life science markets in which we participate. All aspects of our company forecastforecasts depend on estimates of growth or contraction in the markets we serve. Thus, prevailing global economic uncertainties render estimates of future income and expenditures very difficult to make.


Global economic downturns may affect industries in which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’ products. Such conditions could have a material adverse effect on demand for our customers’ products and, in turn, on demand for our products.


Adverse changes may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, decline in stock markets, contraction of credit availability, or other factors affecting economic conditions. For example, factors that may affect our operating results include disruption in the credit and financial markets in the United States, Europe, and elsewhere, adverse effects of slowdowns in the U.S., European, and Chinesor Chinese economies, slowdown in the Chinese economy, reductions or limited growth in consumer spending or consumer credit, global trade tariffs, and other adverse economic conditions that may be specific to the Internet, e-commerce, and payments industries.


These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, the cost and availability of financing, and costs associated with manufacturing and distributing products. Any economic downturn could have a material adverse effect on our business, results of operations, or financial condition.

We Are Subject to Complex and Rapidly Changing Governmental Import and Export Regulations

We are subject to the passage of and changes in the interpretation of regulation by U.S. government entities at the federal, state and local levels and non-U.S. agencies, including, but not limited to, the following:


We are required to comply with import laws and export control and economic sanctions laws, which may affect our transactions with certain customers, business partners and other persons, including dealings with or between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies.  We may be required to obtain an export license before exporting a controlled item.  Compliance with the import lawsSome systems that apply touse our businesses may restrict our access to, and may increase the cost of obtaining, certain products and could interrupt our supply of imported inventory.

Exported technologies necessary to develop and manufacture certain products are subject to U.S. export control lawscomplex in design, and similar laws of other jurisdictions.  Weour products may be subject to adverse regulatory consequences, including government oversight of facilities and export transactions, monetary penalties and other sanctions for violations of these laws. In certain instances, these regulations may prohibit the Company from developing or manufacturing certain of its products for specific end applications outside the United States.


Failure to comply with any of these laws and regulationscontain defects that are not detected until deployed, which could result in civil and criminal, monetary and non-monetary penalties, disruptions toincrease our business, limitations on our ability to import and export products and services and damage to our reputation.

Changes in U.S. Trade Policies Could Impact the Company’s International Operations and the Cost of Imported Goods into the U.S., Which May Narrow the Size of Our Markets, Materially Impact Our Revenues or Increase Our Operating Costs and Expose Us to Contract Litigation

On March 23, 2018, President Trump announced new steel and aluminum tariffs, and on April 15, 2018, the U.S. Department of Commerce issued a denial order against two companies in the telecommunications market. Other international trade actions and initiatives also have been announced, notably the imposition by the U.S. of additional tariffs on products of Chinese origin, and China’s imposition of additional tariffs on U.S.-origin goods. If we cannot obtain relief from, or if we cannot take other action to mitigate the impact of, these additional duties, our business and profits may be materially and adversely affected. Further changes in U.S. trade policy, or additional sanctions, could result in retaliatory actions by other countries that could materially and negatively impact the volume of economic activity in the U.S., which, in turn, may decrease our access to customers and markets,costs, reduce our revenues, and increase our operating costs.

We Have Entered into Supply Agreements which Commit Us to Supply Products on Specified Terms

We have supply agreements with some customers which require us to supply products and to allocate sufficient capacity to make these products.  We have also agreed to pricing schedules and methodologies which could result in penalties if we fail to meet development, supply, capacity and quality commitments.  Failure to do so may cause us to be unable to generate the amount of revenuelose key customers, or the level of profitability we expect from these arrangements.  Our ability to realize a profit under some of these agreements will be subject to the level of customer demand, the cost of maintaining facilities and manufacturing capacity, and supply chain capability.

If we fail to fulfill our commitments under these supply agreements, our business, after using all remedies available, financial conditions and results of operations may suffer a material adverse effect.

We Depend on Highly Complex Manufacturing Processes That Require Feeder Materials, Components and Products from Limited Sources of Supply

Our operations are dependent upon a supply chain of difficult-to-make or difficult-to-refine products and materials.  Some of our product inflow is subject to yield reductions from growth or fabrication losses, and thus the quantities we may receive are not consistently predictable.  Customers may also change the specification for a product that our suppliers cannot meet.

We also make products for which the Company is one of the world’s largest suppliers.  We use high-quality, optical grade ZnSe in the production of many of our IR optical products. We are a leading producer of ZnSe for our internal use and for external sale. The production of ZnSe is a complex process requiring a highly controlled environment. A number of factors, including defective or contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high quality ZnSe. Lack of adequate availability of high quality ZnSe could have a material adverse effect upon our business. There can be no assurance that we will not experience manufacturing yield inefficiencies which could have a material adverse effect on our business, results of operations or financial condition.

We produce hydrogen selenide gas which is used in our production of ZnSe. There are risks inherent in the production and handling of such material. Our lack of proper handling of hydrogen selenide could requireexpose us to curtail our production of hydrogen selenide. Our potential inability to internally produce hydrogen selenide could have a material adverse effect on our business, results of operations or financial condition.

In addition, we produce and use other high purity and relatively uncommon materials and compounds to manufacture our products including, but not limited to, ZnS, GaAs, Yttrium Aluminum Garnet, Yttrium Lithium Fluoride, Calcium Fluoride, Germanium, Selenium, Telluride, Bismuth Telluride and SiC. A significant failure of our internal production processes or our suppliers to deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on our business, results of operations or financial condition.

Our Global Operations Are Subject to Complex Legal and Regulatory Requirements

We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, Switzerland, and the United Kingdom and through a contract manufacturer in Thailand.  We also maintain direct sales offices in Hong Kong, Japan, Germany, China, Switzerland, Belgium, the United Kingdom, Italy, South Korea and Taiwan.  Operations outside of the United States are subject to many legal and regulatory requirements, some of which are not aligned with others.  These include tariffs, quotas, taxes and other market barriers, restrictions on the export or import of technology, potentially limited intellectual property protection, customs


import and export requirements, anti-corruption and anti-bribery laws, foreign exchange controls and cash repatriation restrictions, foreign investment rules and regulations, data privacy requirements, anti-competition laws, employment and labor laws, pensions and social insurance,  and environmental health, and safety laws and regulations.

Compliance with these laws and regulations can be onerous and expensive, and requirements differ among jurisdictions.  New laws, changes in existing laws and abrogation of local regulations by national laws result in significant uncertainties in how they will be interpreted and enforced. Failure to comply with any of these foreign laws and regulations could have a material adverse effect on our business, results of operations or financial condition.

We Use and Generate Potentially Hazardous Substances that Are Subject to Stringent Environmental Regulations

Hazardous substances used or generated in some of our research and manufacturing facilities are subject to stringent environmental regulation. We believe that our handling of such substances is in material compliance with applicable local, state and federal environmental, safety and health regulations at each operating location. We invest substantially in proper personal protective equipment, process controls including monitoring and specialized training to minimize risks to employees, surrounding communities and the environment that could result from the presence and handling of such hazardous substances. When exposure problems or potential exposure problems have been uncovered, corrective actions have been implemented and re-occurrence has been minimal or non-existent.

We have in place an emergency response plan with respectlitigation related to our generation and use of the hazardous substances Hydrogen Selenide, Hydrogen Sulfide, Arsine and Phosphine. Special attention has been given to all procedures pertaining to this gaseous material to minimize the chances of its accidental release into the atmosphere.

With respect to the manufacturing, use, storage and disposal of the low-level radioactive material Thorium Fluoride, our facilities and procedures have been inspected and licensed by the Nuclear Regulatory Commission. Thorium-bearing by-products are collected and shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah.

The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy metals or airborne particulates, are believed by us to be in material compliance with regulations. We believe that we have obtained all of the permits and licenses required for operation of our business.

We do not carry environmental impairment insurance. Although we do not know of any material environmental, safety or health problems in our properties or processes or products, there can be no assurance that problems will not develop in the future which could have a material adverse effect on our business, results of operations or financial condition.

We May Be Adversely Affected by Climate Change Regulations

In many of the countries in which we operate, government bodies are increasingly enacting legislation and regulations in response to potential impacts of climate change. These laws and regulations may be mandatory. They have the potential to impact our operations directly or indirectly as a result of required compliance by our customers or our supply chain. Inconsistency of regulations may also affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change legislation, regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate.

We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations, added costs to purchase or lower profits from sales of our products, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers, and changes to profit or loss arising from increased or decreased demand for goods produced by us and indirectly, from changes in costs of goods sold.

Some Systems That Use our Products Are Complex in Design, and Our Products May Contain Defects that Are Not Detected Until Deployed Which Could Increase Our Costs, Reduce Our Revenues, Cause Us to Lose Key Customers and May Expose Us to Litigation Arising From Derivative Lawsuits Related to Consumer Products

products.


Some systems that use our products are inherently complex in design and require ongoing maintenance. Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other vendors which may contain defects. Should problems occur, it may be difficult to identify the source of the problem. If we are unable to correct defects or other problems, we could experience, among other things, loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers.


The occurrence of any one or more of the foregoing factors could have a material adverse effect on our business, results of operations, or financial condition.

Unfavorable


Foreign currency risk may negatively affect our revenues, cost of sales, and operating margins, and could result in foreign exchange losses.

We conduct our business and incur costs in the local currency of most countries in which we operate. We incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it operates, or holds assets or liabilities in a currency different from its functional currency. Changes in Tax Rates, Tax Liabilitiesexchange rates can also affect our results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S. dollars. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we may not be able to effectively manage our currency risks, and any volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers or Tax Accounting Rules Could Negatively Affect Future Results

increase the manufacturing cost of our products, either of which may have an adverse effect on our financial condition, cash flows, and profitability.


Our competitive position may still require significant investments.

We continuously monitor the marketplace for strategic opportunities, and our business strategy includes expanding our product lines and markets through both internal product development and acquisitions. Consequently, we expect to continue to consider
26

strategic acquisition of businesses, products, or technologies complementary to our business. This may require significant investments of management time and financial resources. If market demand is outside our organic capabilities, if a strategic acquisition is required and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the expected return on investment, expose us to unforeseen liabilities, or jeopardize our ability to comply with our credit facility covenants due to any inability to integrate the business, adjust to operating a larger and more complex organization, adapt to additional political and other requirements associated with the acquired business, retain staff, or work with customers, we could suffer a material adverse effect on our business, results of operations, or financial condition.

We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with existing operations.

We have in the past acquired several companies, including the completion of our acquisition of Finisar Corporation (“Finisar”) in 2019. We may continue to expand and diversify our operations with additional acquisitions, such as our pending acquisition of Coherent, Inc. (“Coherent”). We may be unable to identify or complete prospective acquisitions for many reasons, including increasing competition from other potential acquirers, the effects of consolidation in our industries, and potentially high valuations of acquisition candidates. In addition, applicable antitrust laws and other regulations may limit our ability to acquire targets or force us to divest an acquired business line. If we are unable to identify suitable targets or complete acquisitions, our growth prospects may suffer, and we may not be able to realize sufficient scale and technological advantages to compete effectively in all markets.

To the extent that we complete acquisitions, we may be unsuccessful in integrating acquired companies or product lines with existing operations, or the integration may be more difficult or more costly than anticipated. Some of the risks that may affect our ability to integrate or realize anticipated benefits from acquired companies, businesses, or assets include those associated with:

•unexpected losses of key employees of the acquired company;
•conforming the acquired company’s standards, processes, procedures, and controls with our operations, including integrating enterprise resource planning systems and other key business applications;
•coordinating new product and process development;
•increasing complexity from combining operations;
•increasing the scope, geographic diversity, and complexity of our operations;
•difficulties in consolidating facilities and transferring processes and know-how; and
•diversion of management’s attention from other business concerns.
•In connection with acquisitions, we may:
◦use a signification portion of our available cash;
◦issue equity securities, which would dilute current shareholders’ percentage ownership;
◦incur significant debt;
◦incur or assume contingent liabilities, known or unknown, including potential lawsuits, infringement actions, or similar liabilities;
◦incur impairment charges related to goodwill or other intangibles; and
◦face antitrust or other regulatory inquiries or actions.

In addition, the market prices of our outstanding securities could be adversely affected if the effect of any acquisitions on our consolidated financial results is dilutive or is below the market’s or financial analysts’ expectations, or if there are unanticipated changes in the business or financial performance of the acquired or combined company. Any failure to successfully integrate acquired businesses may disrupt our business and adversely impact our business, results of operations, or financial condition.

Although we expect that our acquisitions will result in cost savings, synergies, and other benefits, we may not realize those benefits, or be able to retain those benefits even if realized.

The success of our acquisitions will depend in large part on our success in integrating the acquired operations, strategies, technologies, and personnel. We may fail to realize some or all of the anticipated benefits of an acquisition if the integration process takes longer than expected or is more costly than expected. If we fail to meet the challenges involved in successfully integrating any acquired operations or to otherwise realize any of the anticipated benefits of an acquisition, including any expected cost savings and synergies, our operations could be impaired. In addition, the overall integration of an acquired business can be a time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt our business.

Potential difficulties that we may encounter in the integration process include:

27

•the integration of management teams, strategies, technologies and operations, products, and services;
•the disruption of ongoing businesses and distraction of their respective management teams from ongoing business concerns;
•the retention of, and possible decrease in business from, existing customers
•the creation of uniform standards, controls, procedures, policies, and information systems;
•the reduction of the costs associated with combined operations;
•the integration of corporate cultures and maintenance of employee morale;
•the retention of key employees; and
•potential unknown liabilities associated with the acquired business.

The anticipated cost savings, synergies, and other benefits of any acquisition typically assume a successful integration of the acquired business and are based on projections and other assumptions, which are inherently uncertain. Even if integration is successful, anticipated cost savings, synergies, and other benefits may not be achieved.

Our future success depends on continued international sales, and our global operations are complex and present multiple challenges to manage.

We anticipate that international sales will continue to account for a significant portion of our revenues for the foreseeable future. The failure to maintain our current volume of international sales could materially affect our business, results of operations, financial condition, and/or cash flows.

We manufacture products in Australia, China, Germany, Malaysia, the Philippines, Singapore, South Korea, Sweden, Switzerland, the United Kingdom, the United States, and Vietnam, and through a contract manufacturer in Thailand. We also maintain direct sales offices in Belgium, Canada, China, Germany, Hong Kong, Italy, Japan, South Korea, Switzerland, Taiwan, and the United Kingdom. Our operations vary by location and are influenced on a location-by-location basis by local customs, languages, and work practices, as well as different local weather conditions, management styles, and education systems. In addition, multiple complex issues may arise concurrently in different countries, potentially hampering our ability to respond in an effective and timely manner. Any inability to respond in an effective and timely manner to issues in our global operations could have a material adverse effect on our business, results of operations, or financial condition.

We are subject to complex and rapidly changing import and export regulations which could limit our sales and decrease our profitability.

We are subject to the passage of and changes in the interpretation of regulation by U.S. government entities at the federal, state, and local levels and by non-U.S. agencies, including, but not limited to, the following:

•We are required to comply with import laws and export control and economic sanctions laws, which may affect our ability to enter into or complete transactions with certain customers, business partners, and other persons. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services, and technologies. We may be required to obtain an export license before exporting a controlled item, and granting of a required license cannot be assured. Compliance with the import laws that apply to our businesses may restrict our access to, and may increase the cost of obtaining, certain products and could interrupt our supply of imported inventory.
•Exported technologies necessary to develop and manufacture certain products are subject to U.S. export control laws and similar laws of other jurisdictions. We may be subject to adverse regulatory consequences, including government oversight of facilities and export transactions, monetary penalties, and other sanctions for violations of these laws. In certain instances, these regulations may prohibit us from developing or manufacturing certain of our products for specific applications outside the United States. Failure to comply with any of these laws and regulations could result in civil and criminal, monetary, and nonmonetary penalties; disruptions to our business; limitations on our ability to import and export products and services; and damage to our reputation.

Changes in trade policies, such as increased import duties, could increase the costs of goods imported into the United States or China.

In March 2018, President Trump announced new steel and aluminum tariffs. Then, in July 2018, the United States imposed increased tariffs on products of Chinese origin, and China responded by increasing tariffs on U.S.-origin goods. On the export side, denial orders and placing companies on the U.S. entity list could decrease our access to customers and markets and materially impact our revenues in the aggregate. In April 2018, for example, the U.S. Department of Commerce issued a denial
28

order against two companies in the telecommunications market. In 2019 and 2020, the U.S. Department of Commerce placed a number of entities, including Huawei, on the U.S. Entity List. If we cannot obtain relief from, or take other action to mitigate the impact of, these additional duties and restrictions and duties, our business and profits may be materially and adversely affected. Further changes in the trade policy of the United States or of other countries in which we do cross-border business, or additional sanctions, could result in retaliatory actions by other countries that could materially and negatively impact the volume of economic activity in the United States or globally, which, in turn, may decrease our access to customers and markets, reduce our revenues, and increase our operating costs.

Our association with customers that are or become subject to U.S. regulatory scrutiny or export restrictions could negatively impact our business and create instability in our operations. Governmental actions such as these could subject us to actual or perceived reputational harm among current or prospective investors, suppliers or customers, customers of our customers, other parties doing business with us, or the general public. Any such reputational harm could result in the loss of investors, suppliers, or customers, which could harm our business, financial condition, operating results, or prospects.

Exports of certain of our products are subject to export controls imposed by the U.S. government and administered by the U.S. Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department. For products subject to the Export Administration Regulations (EAR), administered by the Department of Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the final destination, the identity of the end user, and whether a license exception might apply. Virtually all exports of products subject to the International Traffic in Arms Regulations (ITAR), administered by the Department of State’s Directorate of Defense Trade Controls, require a license. Certain of our products are subject to EAR controls.

Additionally, certain other products that we sell, including certain products developed with government funding, are subject to ITAR. Products developed and manufactured in our foreign locations are subject to export controls of the applicable foreign nation. Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses for these shipments, or having one or more of our customers be restricted from receiving exports from us, could significantly reduce our revenue and materially adversely affect our business, financial condition, and results of operations. Compliance with regulations of the United States and other governments also subjects us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.

Any inability to access financial markets from time to time to raise required capital, finance our working capital requirements or our acquisition strategies, or otherwise support our liquidity needs could negatively impact our ability to finance our operations, meet certain obligations, or implement our growth strategy.

We from time to time borrow under our existing credit facility or use proceeds from sales of our securities to fund portions of our operations, including working capital investments and financing of our acquisition strategies. In the past, market disruptions experienced in the United States and abroad have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive and, in certain cases, have resulted in the unavailability of certain types of financing. Uncertainty in the financial markets may negatively impact our ability to access additional financing or to refinance our existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future expansion as well as future acquisitions and development. These disruptions may include turmoil in the financial services industry, volatility in the markets where our outstanding securities trade, and changes in general economic conditions in the areas where we do business. If we are unable to access funds at competitive rates, or if our short-term or long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations, and implement our operating strategies could be adversely affected.
In the future, we may be required to raise additional capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms or at all, and our failure to raise capital when needed could harm our business and prospects. Additional equity financing may be dilutive to the holders of our outstanding capital stock, and debt financing, if available, may involve restrictive covenants that may limit our ability to undertake certain activities that we otherwise would find to be desirable. Further, debt service obligations associated with any debt financing could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

We may not be able to settle conversions of our convertible senior notes in cash or repurchase the notes in accordance with their terms.

Holders of our outstanding 0.25% Convertible Senior Notes due 2022 (the “2022 Notes”) and the 0.50% Convertible Senior Notes due 2036 issued by Finisar (the “2036 Notes”) have the right to require us to repurchase all or a portion of their convertible notes for cash upon the occurrence of a fundamental change (as defined in the respective indentures governing such notes) at a repurchase price equal to 100% of the principal amount of the convertible notes to be repurchased, plus accrued and unpaid interest. Holders of the 2036 Notes also have the right to require Finisar to repurchase all or a portion of their 2036 Notes for cash on certain specified dates at a repurchase price equal to 100% of the principal amount of the 2036 Notes to be
29

repurchased, plus accrued and unpaid interest.The next such repurchase date for the 2036 Notes is December 15, 2021. In addition, upon conversion of such convertible notes, we will be required to make cash payments in respect of such convertible notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of surrendered convertible notes or pay cash with respect to convertible notes being converted.

In addition, our ability to repurchase or to pay cash upon conversion of our convertible notes may be limited by law, regulatory authority, or agreements governing our future indebtedness. Our failure to repurchase convertible notes at a time when the repurchase is required or to pay any cash upon conversion of the convertible notes as required would constitute a default under the applicable indenture. A default under the applicable indenture or the fundamental change itself also could lead to a default under agreements governing our existing credit facility or any of our other current or future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the convertible notes or to pay cash upon conversion of any such convertible notes.

Our current credit agreement restricts our operations, particularly our ability to respond to changes or to take certain actions regarding our business.

Our amended and restated credit agreement, dated as of September 24, 2019, by and among us, 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”) contains a number of restrictive covenants that may impose operating and financial restrictions on us and limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur indebtedness, grant liens, undergo certain fundamental changes, dispose of assets, make certain investments, enter into certain transactions with affiliates, and make certain restricted payments, in each case subject to limitations and exceptions set forth in the Credit Agreement.

The Credit Agreement also contains customary events of default that include, among other things, certain payment defaults, covenant defaults, cross-defaults to other indebtedness, change of control defaults, judgment defaults, and bankruptcy and insolvency defaults. Such events of default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies, which could have a material adverse effect on our business, operations, and financial results. Furthermore, if we are unable to repay the amounts due and payable under the Credit Agreement, those lenders could proceed against the collateral granted to them to secure that indebtedness, which could force us into bankruptcy or liquidation. In the event that our lenders accelerated the repayment of the borrowings, we may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the Credit Agreement would likely have a material adverse effect on us. As a result of these restrictions, we may be limited in how we conduct business, unable to raise additional debt or equity financing to operate during general economic or business downturns, or unable to compete effectively or to take advantage of new business opportunities.

We may fail to accurately estimate the size and growth of our markets and our customers’ demands.

We make significant decisions based on our estimates of customer requirements. We use our estimates to determine the levels of business we seek and accept, production schedules, personnel needs, and other resource requirements.

Customers may require rapid increases in production on short notice. We may not be able to purchase sufficient supplies or allocate sufficient manufacturing capacity to meet such increases in demand. Rapid customer ramp-up and significant increases in demand may strain our resources or negatively affect our margins. Inability to satisfy customer demand in a timely manner may harm our reputation, reduce our other opportunities, damage our relationships with customers, reduce revenue growth, and/or cause us to incur contractual penalties.

Alternatively, downturns in the industries in which we compete may cause our customers to significantly reduce their demand. With respect to orders we initiate with our suppliers to address anticipated demand from our customers, certain suppliers may have required noncancellable purchase commitments or advance payments from us, and those obligations and commitments could reduce our ability to adjust our inventory or expense levels to reflect declining market demands. Unexpected declines in customer demands can result in excess or obsolete inventory and additional charges. Because certain of our sales, research and development, and internal manufacturing overhead expenses are relatively fixed, a reduction in customer demand likely would decrease our gross margins and operating income.

We may encounter increased competition, and we may fail to accurately estimate our competitors’ or our customers’ willingness and capability to backward integrate into our competencies and thereby displace us.

We may encounter substantial competition from other companies in the same market, including established companies with significant resources. Some of our competitors may have financial, technical, marketing, or other capabilities that are more extensive than ours. They may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not be able to compete successfully against our present or future competitors. Our failure to compete effectively could have a material adverse effect on our business, results of operations, or financial condition.
30


There are limitations on the protection of our intellectual property, and we may from time to time be involved in costly intellectual property litigation or indemnification.

We rely on a combination of trade secret, patent, copyright, and trademark laws, combined with employee confidentiality, noncompetition, and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps we take will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance that third parties will not assert infringement claims against us in the future.

Asserting our intellectual property rights or defending against third-party claims could involve substantial expense. In the event that a third party were successful in a claim that one of our processes infringed its proprietary rights, we could be required to pay substantial damages or royalties, or spend substantial amounts in order to obtain a license or modify processes so that they no longer infringe such proprietary rights. Any such event could have a material adverse effect on our business, results of operations, or financial condition.

The design, processes, and specialized equipment utilized in our engineered materials, advanced components, and subsystems are innovative, complex, and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology, or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a variety of materials, devices, equipment, configurations, and processes, and others could obtain patents covering technology similar to ours. We may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted that may adversely affect our results of operations. In addition, our research and development contracts with agencies of the U.S. government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled. We also enter into development projects from time to time that might result in intellectual property developed during a project that is assigned to the other party without us retaining rights to that intellectual property or is jointly owned with the other party.

A significant portion of our business is dependent on cyclical industries.

Our business is dependent on the demand for products produced by end-users of industrial lasers, optical communication products, components for semiconductor capital equipment, and components for 3D sensing. Many of these end-users are in industries that have historically experienced a highly cyclical demand for their products. As a result, demand for our products is subject to these cyclical fluctuations. Fluctuations in demand could have a material adverse effect on our business, results of operations or financial condition.

Our global operations are subject to complex legal and regulatory requirements.

We manufacture products in Australia, China, Germany, Malaysia, the Philippines, Singapore, South Korea, Sweden, Switzerland, the United Kingdom, the United States, and Vietnam, and through a contract manufacturer in Thailand. We also maintain direct sales offices in Belgium, Canada, China, Germany, Hong Kong, Italy, Japan, South Korea, Switzerland, Taiwan, and the United Kingdom. Operations inside and outside of the United States are subject to many legal and regulatory requirements, some of which are not aligned with others. These include tariffs, quotas, taxes and other market barriers, restrictions on the export or import of technology, potentially limited intellectual property protection, import and export requirements and restrictions, anti-corruption and anti-bribery laws, foreign exchange controls and cash repatriation restrictions, foreign investment rules and regulations, data privacy requirements, competition laws, employment and labor laws, pensions and social insurance, and environmental health and safety laws and regulations.

Compliance with these laws and regulations can be onerous and expensive, and requirements differ among jurisdictions. New laws, changes in existing laws, and abrogation of local regulations by national laws may result in significant uncertainties in how they will be interpreted and enforced. Failure to comply with any of these foreign laws and regulations could have a material adverse effect on our business, results of operations, or financial condition.

Changes in laws and regulations governing data privacy and data protection could have a material adverse impact on our business.

We are subject to many data privacy, data protection, and data breach notification laws, including the European Union General Data Protection Regulation (GDPR), which became effective in 2018. While we have taken measures to assess the requirements of, and to comply with, the GDPR, as well as new and existing data-related laws and regulations of other jurisdictions, these measures may be challenged, including by authorities that regulate data-related compliance. We could incur significant expense in facilitating and responding to investigations, and if the measures we have taken prove to be inadequate, we could face fines, penalties, or damages, and incur reputational harm, which could have a material adverse impact on our business.

31

Data breach incidents and breakdowns of information and communication technologies could disrupt our operations and impact our financial results.

In the course of our business, we collect and store sensitive data, including intellectual property (both our own and that of our customers), as well as proprietary business information. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can create system disruptions, shutdowns, and unauthorized disclosure of confidential information. If we are unable to prevent or contain such security or privacy breaches, our operations could be disrupted or we could suffer legal claims, loss of reputation, financial loss, property damage, or regulatory penalties.

We have entered into supply agreements that commit us to supply products on specified terms.

We have supply agreements with some customers that require us to supply products and allocate sufficient capacity to make these products. We have also agreed to pricing schedules and methodologies that could result in penalties if we fail to meet development, supply, capacity, and quality commitments. Failure to do so may cause us to be unable to generate the amount of revenue or the level of profitability we expect from these arrangements. Our ability to realize a profit under some of these agreements will be subject to the level of customer demand, the cost of maintaining facilities and manufacturing capacity, and supply chain capability. If we fail to fulfill our commitments under these supply agreements, our business, after using all remedies available, financial conditions, and results of operations may suffer a material adverse effect.

We depend on highly complex manufacturing processes that require feeder materials, components, and products from limited sources of supply.

Our operations are dependent upon a supply chain of difficult-to-make or difficult-to-refine products and materials. Some of our product inflow is subject to yield reductions from growth or fabrication losses, and thus the quantities we may receive are not consistently predictable. Customers may also change a specification for a product that our suppliers cannot meet.

We also make products of which we are one of the world’s largest suppliers. We use high-quality, optical-grade ZnSe in the production of many of our IR optical products. We are a leading producer of ZnSe for our internal use and for external sale. The production of ZnSe is a complex process requiring a highly controlled environment. A number of factors, including defective or contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high-quality ZnSe. Lack of adequate availability of high-quality ZnSe could have a material adverse effect upon our business. There can be no assurance that we will not experience manufacturing yield inefficiencies that could have a material adverse effect on our business, results of operations, or financial condition.

We produce hydrogen selenide gas, which is used in our production of ZnSe. There are risks inherent in the production and handling of such material. Our lack of proper handling of hydrogen selenide could require us to curtail our production of the gas. Our potential inability to internally produce hydrogen selenide could have a material adverse effect on our business, results of operations, or financial condition.

In addition, we produce and use other high-purity and relatively uncommon materials and compounds to manufacture our products, including, but not limited to, ZnS, GaAs, yttrium aluminum garnet, yttrium lithium fluoride, calcium fluoride, germanium, selenium, telluride, Bi2Te3, and SiC. A significant failure of our internal production processes or our suppliers to deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on our business, results of operations, or financial condition.

Increases in commodity prices may adversely affect our results of operations and financial condition.

We are exposed to a variety of market risks, including the effects of increases in commodity prices. Our businesses purchase, produce, and sell high-purity selenium and other raw materials based upon quoted market prices from minor metal exchanges. The negative impact from increases in commodity prices might not be recovered through our product sales, which could have a material adverse effect on our net earnings and financial condition.

We use and generate potentially hazardous substances that are subject to stringent environmental regulations.

Hazardous substances used or generated in some of our research and manufacturing facilities are subject to stringent environmental regulation. We believe that our handling of such substances is in material compliance with applicable environmental, safety, and health regulations at each operating location. We invest substantially in proper personal protective equipment and process controls, including monitoring and specialized training, to minimize risks to employees, surrounding communities, and the environment that could result from the presence and handling of such hazardous substances. When exposure problems or potential exposure problems have been uncovered, corrective actions have been implemented, and re-occurrence has been minimal or nonexistent.
32


We have in place an emergency response plans with respect to our generation and use of the hazardous substances hydrogen selenide, hydrogen sulfide, arsine, and phosphine. Special attention has been given to all procedures pertaining to these gaseous materials to minimize the chance of its accidental release into the atmosphere.

With respect to the manufacturing, use, storage, and disposal of the low-level radioactive material thorium fluoride, our facilities and procedures have been inspected and licensed by the Nuclear Regulatory Commission. Thorium-bearing by-products are collected and shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah.

The generation, use, collection, storage, and disposal of all other hazardous by-products, such as suspended solids containing heavy metals or airborne particulates, are believed by us to be in material compliance with regulations. We believe that we have obtained all of the permits and licenses required for operation of our business.

Although we do not know of any material environmental, safety, or health problems in our properties, processes, or products, there can be no assurance that problems will not develop in the future that could have a material adverse effect on our business, results of operations, or financial condition.

We have a substantial amount of debt, which could adversely affect our business, financial condition, or results of operations and prevent us from fulfilling our debt-related obligations.

As of June 30, 2021, we had approximately $1.4 billion of outstanding indebtedness on a consolidated basis. Our indebtedness could have important consequences for us, including:

•making it more difficult for us to satisfy our obligations with respect to our debt, or to our trade or other creditors;
•increasing our vulnerability to adverse economic or industry conditions;
•limiting our ability to obtain additional financing to fund capital expenditures and acquisitions, particularly when the availability of financing in the capital markets is limited;
•requiring us to pay higher interest rates upon refinancing or on our variable-rate indebtedness if interest rates rise;
•requiring a substantial portion of our cash flows from operations and the proceeds of any capital markets offerings or loan borrowings for the payment of interest on our debt and reducing our ability to use our cash flows to fund working capital, capital expenditures, acquisitions, and general corporate requirements;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; and
•placing us at a competitive disadvantage to less leveraged competitors.

We may not generate sufficient cash flow from operations, together with any future borrowings, to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before its maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. In addition, we may incur additional indebtedness in order to finance our operations, fund acquisitions, or repay existing indebtedness. If we cannot service our indebtedness, we may have to take actions such as selling assets, pursuing sales of additional debt or equity securities, or reducing or delaying capital expenditures, strategic acquisitions, investments, or alliances. Any such actions, if necessary, may not be able to be effected on commercially reasonable terms or at all, or on terms that would be advantageous to our stockholders, or on terms that would not require us to breach the terms and conditions of our existing or future debt agreements.

Unfavorable changes in tax rates, tax liabilities, or tax accounting rules could negatively affect future results.

As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. As such, we must exercise a level of judgment in determining our worldwide tax liabilities. Our future tax rates could be affected by changes in the composition of earnings in countries with differing tax rates or changes in tax laws. Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. For example, proposals for fundamental U.S. international tax reform, if enacted, could have a significant adverse impact on our effective tax rate.


The enactment of the Tax Cuts and Jobs Act (the “Act”“Tax Act”) in December 2017 significantly affected U.S. tax law by changing how the U.S.United States imposes tax on multinational corporations. The U.S. Department of Treasury has broad authority under the Tax Act to issue regulations and interpretive guidance. We have applied available guidance to estimate our tax obligations, but new guidance issued by the U.S. Treasury Department may cause us to make adjustments to our tax estimates in future periods. The Securities and Exchange Commission has issued Staff Accounting Bulletin No. 118 (“SAB 118”) acknowledging that companies will potentially encounter situations for which the analysis of certain income tax effects of the Act will be incomplete by the time financial statements are required to be issued for reporting periods that include the enactment date. In these situations, SAB 118 provides that reasonable estimates may be made for certain effects of the Act. We have recorded provisional amounts using reasonable estimates based on the guidance in SAB 118 and we anticipate adjustments to such estimates as additional analysis is completed and new regulations and guidance are issued.


In addition, we are subject to regular examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to
33

determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different thanfrom the treatment reflected in our historical income tax provision and accruals, which could materially and adversely affect our business, results of operation, or financial condition.

Increases in Commodity Prices May Adversely Affect Our Results of Operations


Natural disasters or other global or regional catastrophic events could disrupt our operations, give rise to substantial environmental hazards, and Financial Condition

We are exposed to a variety of market risks, including the effects of increases in commodity prices. Our businesses purchase, produce and sell high-purity selenium and other raw materials based upon quoted market prices from minor metal exchanges. The negative impact from increases in commodity prices may not be recovered throughadversely affect our product sales which could have a material adverse effect on our net earnings and financial condition.

Natural Disasters or Other Global or Regional Catastrophic Events Could Disrupt Our Operations, Give Rise to Substantial Environmental Hazards and Adversely Affect Our Results

results.


We may be exposed to business interruptions due to catastrophe,extreme weather caused by climate change and deforestation, force majeure catastrophes, natural disaster, pandemic, terrorism, or acts of war that are beyond our control. Disruptions to our facilities or systems, or to those of our key suppliers, could also interrupt operational processes and adversely impact our ability to manufacture our products and provide services and support to our customers. As a result, our business, results of operations, or financial condition could be materially adversely affected.


Our Success Dependssuccess depends on Our Abilityour ability to Attract, Retainattract, retain, and Develop Key Personneldevelop key personnel and Requires Continued Good Relations With Our Employees

requires continued good relations with our employees.


We are highly dependent upon the experience and continuing services of certain scientists, engineers, production, and management personnel. Competition for the services of these personnel is intense. There can be no assurance that we will be able to retain or attract the personnel necessary for our success. The loss of the services of our key personnel could have a material adverse effect on our business, results of operations, or financial condition.


We contract with a number of large end-user service providers and product companies that have considerable bargaining power, which may require us to agree to terms and conditions that could have an adverse effect on our business or ability to recognize revenues.

Large end-user service providers and product companies comprise a significant portion of our customer base. These customers generally have greater purchasing power than smaller entities and, accordingly, often request and receive more favorable terms from suppliers, including us. As we seek to expand our sales to existing customers and acquire new customers, we may be required to agree to terms and conditions that are favorable to our customers and that may affect the timing of our ability to recognize revenue, increase our costs, and have an adverse effect on our business, financial condition, and results of operations. Furthermore, large customers have increased buying power and ability to require onerous terms in our contracts with them, including pricing, warranties, and indemnification terms. If we are unable to satisfy the terms of these contracts, it could result in liabilities of a material nature, including litigation, damages, additional costs, loss of market share, and loss of reputation. Additionally, the terms these large customers require, such as most-favored customer or exclusivity provisions, may impact our ability to do business with other customers and generate revenues from such customers.

We may be adversely affected by climate change regulations.

In many of the countries in which we operate, government bodies are increasingly enacting legislation and regulations in response to potential impacts of climate change. These laws and regulations may be mandatory. They have the potential to impact our operations directly or indirectly as a result of required compliance by our customers or our supply chain. Inconsistency of regulations may also affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change legislation, regulation, and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate.

We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations, added costs to purchase raw materials, lower profits from sales of our products, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, changes in competitive position relative to industry peers, changes to profit or loss arising from increased or decreased demand for goods produced by us, or changes in costs of goods sold.

We depend on large purchases from a few significant customers, and any loss, cancellation, reduction, or delay in purchases by these customers could harm our business.

A small number of customers have consistently accounted for a significant portion of our revenues, although none individually represent greater than 10% of total revenues. Our Stock Price Has Been Volatilesuccess will depend on our continued ability to develop and manage relationships with our major customers. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future. We may not be able to offset any decline in revenues from our existing major customers with revenues from new customers, and our quarterly results may be volatile because we are dependent on large orders from these customers that may be reduced, delayed, or cancelled. The markets in which we have historically sold our optical subsystems and components products are dominated by a relatively small number of systems manufacturers, thereby limiting the number of our potential customers.

34

Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically important to our business. We cannot ensure that we will be able to retain our major customers, attract additional customers, or that our customers will be successful in selling their products that incorporate our products. In addition, governmental trade action or economic sanctions may limit or preclude our ability to do business with certain customers. We have in the Pastpast experienced delays and May Be Volatilereductions in orders from some of our major customers. In addition, our customers have in the Future

The marketpast sought price for our common stock on The Nasdaq Global Select Market varied between a high of $53.08concessions from us, and a low of $34.00we expect that they will continue to do so in the fiscal year ended June 30, 2018. We expectfuture. Expense reduction measures that this volatility will continue. Factorswe have implemented over the past several years, and additional action we are taking to reduce costs, may adversely affect our ability to introduce new and improved products, which may, in turn, adversely affect our relationships with some of our key customers. Further, some of our customers may in the future shift their purchases of products from us to our competitors or to joint ventures between these customers and our competitors, or may in certain circumstances produce competitive products themselves. The loss of one or more of our major customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with additional customers, or future price concessions that we may make could cause fluctuationsignificantly harm our business.


The manufacturing of our products may be adversely affected if we are unable to manufacture certain products in our stock price include,manufacturing facilities.

We manufacture some of the components that we incorporate into our subsystem products; in other cases, we provide components to contract manufacturers to produce finished goods. For some of the components and finished goods, we are the sole manufacturer. Our manufacturing processes are highly complex, and issues are often difficult to detect and correct. From time to time we have experienced problems achieving acceptable yields in our manufacturing facilities, resulting in delays in the availability of our products. In addition, if we experience problems with our manufacturing facilities, it would be costly and require a long period of time to move the manufacture of these components and finished good products to a different facility or contract manufacturer, which could result in interruptions in supply and would likely materially impact our financial condition and results of operations. In addition, for a variety of reasons, including changes in circumstances at our contract manufacturers or our own business strategies, we may voluntarily, or be required to, transfer the manufacturing of certain products to other manufacturing sites.

Changes in manufacturing processes are often required due to changes in product specifications, changing customer needs, and the introduction of new products. These changes may reduce manufacturing yields at our contract manufacturers and at our own manufacturing facilities, resulting in reduced margins on those products. In addition, many of our products are sourced from suppliers based outside of the United States, primarily in Asia. Uncertainty with respect to tax and trade policies, tariffs, and government regulations affecting trade between the United States and other countries has recently increased. Major developments in tax policy or trade relations, such as the imposition of tariffs on imported products, could increase our product and product-related costs or require us to seek alternative suppliers, either of which could result in decreased sales or increased product and product-related costs.

Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or noncancellable purchase commitments.

We base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends that are highly unpredictable. Some of our purchase commitments are not cancellable, and in some cases we are required to recognize a charge representing an amount of material or capital equipment purchased or ordered that exceeds our actual requirements. Should revenues in future periods fall substantially below our expectations, or should we fail to accurately forecast changes in demand mix, we could be required to record substantial charges for obsolete or excess inventories or noncancellable purchase commitments.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002, as amended (“the Sarbanes-Oxley Act”), and Nasdaq listing requirements. The Sarbanes-Oxley Act requires, among other things, general economicthat we maintain effective disclosure controls and market conditions, actualprocedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

Any failure to develop or anticipated variationsmaintain effective controls, or any difficulties encountered in operatingtheir implementation or improvement, could delay the reporting of our financial results changes in financial estimatesor cause us to be subject to investigations, enforcement actions by securities analysts, our inability to meet or exceed securities analysts’ estimates or expectations, conditions or trends in the industries in which our products are purchased, announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint venturesregulatory agencies, stockholder lawsuits, or other strategic initiatives, capital commitments, additionsadverse actions requiring us to incur defense costs or departures of key personnel,  salespay fines, settlements, or judgments. Any such failures or difficulties could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stockstock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Stock Market.
35


Risks Relating to Our Pending Acquisition of Coherent

The market prices of our securities after completion of our pending acquisition of Coherent may be affected by factors different from those currently affecting the markets for our securities or equity-linked securities issued by Coherent.

Our business differs from that of Coherent. Accordingly, our results of operations and the market price of our securities after the completion of our pending acquisition of Coherent may be affected by factors different from those currently affecting the independent results of operations of each company. In addition, the issuance of shares of our common stock as part of the merger consideration payable in connection with conversionsthe acquisition could on its own have the effect of depressing the market prices for our securities, including our common stock and our 6.00% Series A Mandatory Convertible Preferred Stock (“Mandatory Convertible Preferred Stock”). Further, many Coherent stockholders may decide not to hold the shares of our common stock that they receive as merger consideration. Other Coherent stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of our common stock that they receive as merger consideration. Any such sales of our common stock could have the effect of depressing the market prices for our securities

There can be no assurance that we will be able to secure the funds necessary to pay the cash portion of the merger consideration payable in our acquisition of Coherent, in a timely manner or at all.

We intend to finance part of the cash portion of the merger consideration payable in our acquisition of Coherent with the proceeds of debt financing. To this end, we have entered into a debt commitment letter (the “Debt Commitment Letter”) containing commitments for a senior secured term loan “A” facility in an aggregate principal amount of $850 million, a senior secured term loan “B” facility in an aggregate principal amount of $2,800 million, a senior secured revolving credit facility in an aggregate principal amount of $350 million and a senior unsecured bridge loan facility in an aggregate principal amount of $1,125 million. We have not entered into any definitive agreement for this debt financing or other financing arrangements in lieu thereof, and the obligation of the lender to provide the debt financing under the Debt Commitment Letter is subject to a number of customary conditions. There is a risk that these conditions will not be satisfied and the debt financing may not be available when required.

We also intend to finance part of the cash portion of the merger consideration with the proceeds of equity investments made by BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (“BCPE”). To this end, on March 30, 2021, we entered into an amended and restated investment agreement (the “Investment Agreement”) with BCPE. On March 31, 2021, we issued and sold 75,000 shares of a new Series B-1 Convertible Preferred Stock, no par value (“Series B-1 Preferred Stock”), to BCPE for an aggregate purchase price of $750 million.Subject to the terms and conditions of the Investment Agreement, we and BCPE also have agreed that we will issue and sell to BCPE, immediately prior to the closing of our acquisition of Coherent, an aggregate of 140,000 shares of a new Series B-2 Convertible Preferred Stock, no par value (“Series B-2 Preferred Stock” and together with Series B-1 Preferred Stock, the “Series B Preferred Stock”), for an aggregate purchase price of $1.4 billion. However, the issuance and sale of the Series B-2 Preferred Stock to BCPE is subject to a number of customary conditions, and there can be no assurance that this part of the equity financing will be completed.

In the event that the debt financing contemplated by the Debt Commitment Letter or the remaining investment contemplated by the Investment Agreement is not consummated, there is a risk that alternate financing may not be available on acceptable terms, in a timely manner or at all. Although our obligation to consummate our acquisition of Coherent is not conditioned upon the consummation of either of the debt financing contemplated by the Debt Commitment Letter or the remaining investment contemplated by the Investment Agreement, if we are unable to complete either of those financing transactions, the completion of our acquisition of Coherent may be delayed or not completed, in which case we would be in breach of our obligations under the merger agreement containing the terms of the acquisition.

The agreements that will govern indebtedness to be incurred or assumed in connection with our acquisition of Coherent are expected to contain various covenants that will impose restrictions on that may affect our ability to operate our businesses.

The agreements that will govern indebtedness to be incurred or assumed in connection with our acquisition of Coherent, including pursuant to the related debt financing contemplated by the Debt Commitment Letter, are expected to contain various affirmative and negative covenants that will, subject to certain significant exceptions, restrict our ability to, among other things, have liens on our property, incur additional indebtedness, enter into sale and lease-back transactions, make loans, advances or other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions with respect to equity interests, and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person, among other things. In addition, the definitive documentation governing certain of the facilities is expected to contain financial maintenance covenants that will require us to maintain a certain leverage ratio and an interest coverage ratio at the end of each fiscal quarter. Our ability to comply with these provisions may be affected by events beyond our control. Failure to comply with
36

these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations under the applicable definitive documentation or under other debt agreements.

The significant additional indebtedness that we will incur in connection with our acquisition of Coherent could adversely affect us, including by decreasing our business flexibility, increasing our interest expense and causing our credit ratings to be downgraded.

As of June 30, 2021, we had consolidated indebtedness of approximately $1.4 billion. Our pro forma consolidated indebtedness as of June 30, 2021, after giving effect to our acquisition of Coherent and the anticipated incurrence and extinguishment of indebtedness in connection therewith, would have been approximately $5.1 billion. We will have substantially increased indebtedness following completion of the acquisition in comparison to what we have had on a recent historical basis, which could have the effect, among other things, of causing or accentuating the consequences described above under “We have a substantial amount of debt, which could adversely affect our business, financial condition, or results of operations and prevent us from fulfilling our debt-related obligations.”

In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance, and ability to meet our debt obligations. In connection with the anticipated debt financing contemplated by the Debt Commitment Letter, we expect that we will seek ratings of our indebtedness from leading rating organizations. There can be no assurance that we will achieve or maintain any particular rating in the future. In addition, there can be no assurance that the credit ratings of our existing debt will not be subject to a downgrade below investment grade. If a ratings downgrade were to occur or if we fail to maintain an investment grade rating, we could experience higher borrowing costs in the future and more restrictive debt covenants which could reduce profitability and diminish operational flexibility.

Integrating Coherent may be more difficult, costly or time-consuming than expected, and we may fail to realize the anticipated benefits of the acquisition, including our expected financial and operating performance following the consummation of the acquisition.

The success of our acquisition of Coherent will depend, in part, on our ability to realize the anticipated benefits and cost savings. To do so, we must successfully integrate Coherent in a manner that permits those benefits and cost savings to be realized. Our ability to successfully manage this expanded business will depend, in part, upon our ability to implement an effective integration of the two companies and manage a combined business with significantly larger size and scope with the associated increased costs and complexity. If we are not able to successfully achieve these objectives, or are not able to achieve these objectives on a timely basis, the anticipated benefits may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings could be less than anticipated.

We and Coherent have operated and, until the completion of the acquisition, must continue to operate independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with clients, customers, suppliers and employees or to achieve the anticipated benefits and cost savings of the transaction. Integration efforts between the two companies also may divert management attention and resources. These integration matters could have an adverse effect on each company during this transition period and on us for an undetermined period after completion of the acquisition. All projections regarding the combined company’s business are, by their nature, estimates which are subject to risks and uncertainties. Business and financial measures of the combined company, including revenue, free cash flow, synergies and dividend yield, are uncertain and subject to change based on changes in assumptions underlying such measures or other changes in circumstances, many of which may be outside of our or Coherent’s control.

We and Coherent may have difficulty attracting, motivating and retaining executives and other employees in light of the pending acquisition.

Uncertainty about the effect of the pending acquisition on our and Coherent’s respective employees may have an adverse effect on us and Coherent. This uncertainty may impair our and Coherent’s ability to attract, retain and motivate personnel both before and after completion of the acquisition. We and Coherent are dependent on the experience and industry knowledge of our respective officers and other key employees to execute our business plans. The success of the acquisition will depend in part on our ability to retain the talents and dedication of key employees currently employed by Coherent. Employee retention may be particularly challenging during the pendency of the acquisition, as employees may feel uncertain about their future roles with us after completion of the acquisition. In addition, we and Coherent may have to provide additional compensation in order to retain employees.

If key employees terminate their employment with us or Coherent while the acquisition is pending, or with us after completion of the acquisition, our business activities may be adversely affected and our management’s attention may be diverted from successfully integrating Coherent to hiring suitable replacements, all of which may cause our business to suffer. In addition, we and Coherent may not be able to locate or retain suitable replacements for any key employees who leave either company.
37

Accordingly, no assurance can be given that we will be able to attract or retain key employees following the completion of the acquisition to the same extent that we or Coherent have been able to attract or retain employees in the past.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on us following the completion of the acquisition.

Before the acquisition may be completed, certain waiting periods must expire or terminate and applicable approvals must be obtained under certain antitrust, competition and foreign investment laws and regulations. In deciding whether to grant regulatory clearances and approvals, the relevant governmental entities may consider, among other things, the effect of the transaction on competition within their relevant jurisdiction. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs or place restrictions on the conduct of our business. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the acquisition or imposing additional material costs on or materially limiting our revenues following the completion of the acquisition. In addition, we cannot provide assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the transaction.

Our pending acquisition of Coherent is subject to conditions, including certain conditions that may not be satisfied, and may not be completed on a timely basis, or at all. Failure to complete the acquisition could have material and adverse effects on us.

Our acquisition of Coherent is subject to a number of conditions, which make the completion and timing of the acquisition uncertain. In addition, the governing merger agreement may be terminated in certain circumstances. If the transaction is not completed on a timely basis or at all, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the acquisition, we will be subject to a number of risks, including the following:

•we will be required to pay certain costs relating to the transaction, whether or not the transaction is completed, such as legal, accounting, financial advisor and printing fees;
•under the merger agreement, we are subject to certain restrictions on the conduct of our business prior to completing the transaction, which may adversely affect our ability to execute certain of our business strategies;
•time and resources committed by our management team to matters relating to the transaction could otherwise have been devoted to pursuing other beneficial opportunities;
•the market price of our common stock could decline to the extent that the current market prices reflect a market assumption that the transaction will be completed; and
•depending on the circumstances in which the merger agreement is terminated, we may be required to pay a termination fee of $500.0 million, which may make it more difficult for us to pursue alternatives to the acquisition of Coherent.

In addition, if the transaction is not completed, we may experience negative reactions from financial markets and from our customers and employees. We could also be subject to litigation related to any failure to complete the transaction or to enforcement proceedings commenced against us to perform our obligations under the governing merger agreement. If the acquisition is not completed, we cannot assure that the risks described above will not materialize and will not adversely affect our business or financial results or the market price of our securities.

We have incurred, and will continue to incur, significant transaction-related costs in connection with our pending acquisition of Coherent.

We have incurred, and will continue to incur, substantial expenses in connection with the negotiation and completion of our pending acquisition of Coherent, as well as the costs and expenses of filing, printing and mailing a joint proxy statement/prospectus and various fees paid or to be paid to the SEC and other regulatory agencies in connection with the transaction. These fees and costs have been, and will continue to be, significant. In addition, we will incur significant costs with respect to the expected financing transactions relating to the cash portion of the merger consideration. If the transaction is not completed, we may have to recognize these expenses without realizing the expected benefits of the transaction.

We also expect to incur a number of non-recurring transaction-related costs associated with combining the operations of the two companies and achieving desired synergies. Additional unanticipated costs may be incurred in the integration of our business with Coherent’s business. There can be no assurance that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the incremental transaction-related costs over time. Thus, any net benefit may not be achieved in the near term, the long term or at all.

The closing of our acquisition of Coherent may trigger change in control provisions in certain agreements to which Coherent is a party.

38

Certain agreements to which Coherent is a party contain change in control provisions that may be triggered when we complete our acquisition of Coherent. If we and Coherent are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we and Coherent are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to us.

We and Coherent each are subject to business uncertainties and contractual restrictions while our acquisition of Coherent is pending, which could adversely affect each of our and Coherent’s respective businesses and operations.

Under the terms of the merger agreement, we and Coherent are subject to certain restrictions on the conduct of our respective businesses prior to completing the transaction, which may adversely affect each party’s ability to execute certain of its business strategies. Such limitations could negatively affect each party’s businesses and operations prior to the completion of the transaction. Furthermore, the process of planning to integrate the two companies can divert management attention and resources and could ultimately have an adverse effect on us.

In connection with the transaction, parties with which we or Coherent do business may experience uncertainty associated with the transaction, including with respect to current or future business relationships with us, Coherent or the combined business. It is possible that some customers, suppliers and other persons with whom we or Coherent have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with us or Coherent, as applicable, as a result of the transaction, which could negatively affect our or Coherent’s revenues, earnings and cash flows, as well as the market price of shares of our common stock, regardless of whether the transaction is completed.

Holders of our capital stock will have a reduced ownership and voting interest in us after the completion of our acquisition of Coherent and the expected remaining equity financing and therefore then will have less voting influence.

Each Coherent stockholder who receives shares of our common stock as merger consideration will become a shareholder of ours. We estimate that, upon completion of the acquisition, former Coherent stockholders collectively will own approximately 15%, our shareholders as of immediately prior to the completion of the transaction (excluding as a result of the expected remaining equity financing) will own approximately 71%, and BCPE will own approximately 14% of our outstanding shares of common stock (in each case, on an as-converted and fully diluted basis and without regard to the fact that immediately prior to the completion of the transaction, certain holders may own both our common stock and Coherent’s common stock). As a result, our shareholders will have less voting influence on us and may have less influence on our management and policies than they now have on us.

Shareholder litigation could prevent or delay the closing of our acquisition of Coherent or otherwise negatively impact our business and operations.

We may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with our pending acquisition of Coherent. Such litigation could have an adverse effect on our financial condition and results of operations and could prevent or delay the consummation of the transaction.

The issuance and sale of shares of our Series B-1 Preferred Stock has reduced, and the issuance and sale of our Series B-2 Preferred Stock will reduce, the relative voting power of holders of our other capital stock, will dilute the ownership of such holders and may adversely affect the market price of our securities.

On March 31, 2021, we issued 75,000 shares of Series B-1 Preferred Stock to BCPE.Those shares of Series B-1 Preferred Stock currently have voting rights and may vote as one class with our common stock, on an as-converted basis, subject to limited exceptions. Upon completion of our acquisition of Coherent, we will issue and sell 140,000 shares of Series B-2 Preferred Stock to BCPE.Those shares of Series B-2 Preferred Stock will have voting rights, voting as one class with our common stock and our Series B-1 Preferred Stock, on an as-converted basis, subject to limited exceptions. Therefore, the issuance and sale of Series B-1 Preferred Stock resulted, and the issuance and sale of Series B-2 Preferred Stock will result, in the immediate and substantial dilution to the ownership interests of the holders of our capital stock, including our common stock and our Mandatory Convertible Preferred Stock.

Any sales in the public market of our common stock issuable upon conversion of Series B Preferred Stock could adversely affect prevailing market prices of our other outstanding securities. Similarly, the perception that such sales might occur could have a material adverse effect on such market prices.

Our Series B-1 Preferred Stock have, and the Series B-2 Preferred Stock to be issued upon completion of our pending acquisition of Coherent will have rights, preferences and privileges that are not held by, and are preferential to, the rights of holders of our other outstanding capital stock.

39

In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our Series B Preferred Stock are entitled to receive certain payments (i) prior to any amounts paid to holders of our common stock and each other class or series of our capital stock now existing or hereafter authorized, the terms of which do not expressly provide that such class or series ranks either (x) senior to the Series B Preferred Stock as to dividend rights or distribution rights upon such a liquidation event or (y) on parity with the Series B Preferred Stock as to dividend rights and distribution rights upon a such a liquidation event and (ii) on parity with our Mandatory Convertible Preferred Stock and each other class or series of our capital stock established in the future, the terms of which expressly provide that such class or series ranks on a parity basis with the Series B Preferred Stock as to dividend rights and distribution rights upon such a liquidation event. In addition, the holders of Series B Preferred Stock also have certain redemption, conversion and consent rights.

These provisions may make it more costly for a potential acquirer to engage in a business combination transaction with us. Provisions that have the effect of potentially discouraging, delaying or preventing such a transaction could limit the opportunity for our shareholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our capital stock. This could reduce the remaining amount of our assets, if any, available to distribute to holders of our capital stock.

Our obligations to the holders of Series B Preferred Stock could limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. These preferential rights could also result in divergent interests between the holders of shares of our Series B Preferred Stock and other holders of our capital stock.

The redemption rights of the holders of Series B Preferred Stock may result in the use of our cash in such a way that could adversely affect our business, financial condition or results of operations and, therefore, the interests of holders of our other capital stock.

At any time on or after the ten-year anniversary of the applicable issuance date of the shares of our Series B Preferred Stock and subject to the procedures set forth in the terms of the Series B Preferred Stock, each holder of such shares will have the right to require us to redeem all of such holder’s shares for cash at a price per share equal to the sum of the applicable stated value for such shares plus accrued or declared and unpaid dividends on such shares that had not previously been added to such stated value.This may have the effect of reducing funds available for working capital, capital expenditures, acquisitions and other general corporate purposes, thereby negatively affecting the interests of holders of our other capital stock, including our common stock and our Mandatory Convertible Preferred Stock.

Holders of our Series B Preferred Stock can exercise significant control over us, which could limit the ability of holders of our other capital stock to influence the outcome of key transactions, including a change of control.

The Series B-1 Preferred Stock has, and the Series B-2 Preferred Stock will have, voting rights, allowing holders to vote as one class with our common stock on an as-converted basis, subject to limited exceptions. As a result, the holders of Series B-1 Preferred Stock have, and the holders of Series B-2 Preferred Stock will have, the ability to significantly influence the outcome of any matter submitted for the vote of the holders of our common stock. Holders of Series B Preferred Stock are entitled to act separately in their own respective interests with respect to their ownership interests in us and have the ability to substantially influence all matters that require approval by our shareholders, including the approval of significant corporate transactions.
Additionally, we may not undertake certain actions without the prior written approval of the holders of a majority of the issued and outstanding shares of Series B Preferred Stock, voting separately from our common stock. Subject to certain exceptions, we must not: (1) alter or change the rights, preferences or privileges of our Series B Preferred Stock or amend, modify or supplement any provision of our organizational documents in a manner that adversely affects the rights, powers, preferences or privileges of our Series B Preferred Stock; (2) authorize or issue any senior stock (as defined below) (or securities convertible into senior notes.

stock), or amend or alter our articles of incorporation to increase the number of authorized or issued shares of our Series B Preferred Stock; (3) decrease the number of authorized shares of our Series B Preferred Stock (other than as permitted pursuant to a conversion, redemption or repurchase by us thereof); (4) issue any shares of our Series B Preferred Stock (other than pursuant to the Investment Agreement); and (5) effect any voluntary deregistration or delisting with Nasdaq of our common stock.


Furthermore, we may not, unless holders of Series B Preferred Stock otherwise consent in writing (or if such action is taken with respect to a Permitted Issuance (as defined in the Investment Agreement)), so long as BCPE owns at least 5% of the number of shares of Series B Preferred Stock that it held immediately following the completion of either the issuance and sale of the Series B-1 Preferred Stock on March 31, 2021 (if the issuance and sale of the Series B-2 Preferred Stock has not occurred) or the issuance and sale of the Series B-2 Preferred Stock upon completion of our pending acquisition of Coherent, (i) authorize or issue any parity stock (as defined below) and (ii) pay any cash dividend on our common stock (other than ordinary dividends (as defined below)). We also may not, unless BCPE otherwise consents in writing (or if such action is taken with respect to a Permitted Issuance (as defined in the Investment Agreement)), so long as it owns at least 25% of the number of shares of Series B Preferred Stock that it held immediately following the completion of either the issuance and sale of the Series B-1 Preferred Stock on March 31, 2021 (if the issuance and sale of the Series B-2 Preferred Stock has not occurred) or the issuance and sale of the Series B-2 Preferred Stock upon completion of our pending acquisition of Coherent, redeem,
40

repurchase or otherwise acquire (or make or declare any dividend or distribution in respect of) any junior stock (as defined below) (subject to certain exceptions, including, among other things, ordinary dividends, non-cash dividends or other distributions paid pro rata to all holders of our common stock and, if applicable, holders of Series B Preferred Stock, repurchases of junior stock of up to $100 million on an aggregate annual basis and dividends on junior stock in kind or in the form of other junior securities or securities convertible into or exchange for such junior securities). Moreover, under the terms of the Investment Agreement, following the closing of the initial investment and for so long as BCPE beneficially owns shares of Series B Preferred Stock (or shares of our common stock issued upon the conversion thereof) that represent, in the aggregate and on an as-converted basis, at least 25% of the number of shares of Series B Preferred Stock that it held immediately following the completion of either the issuance and sale of the Series B-1 Preferred Stock on March 31, 2021 (if the issuance and sale of the Series B-2 Preferred Stock has not occurred) or the issuance and sale of the Series B-2 Preferred Stock upon completion of our pending acquisition of Coherent, BCPE will have the right to nominate one designee and to designate one observer to the our board of directors. Circumstances may occur in which the interests of BCPE could conflict with the interests of holders of other outstanding capital stock, including our common stock and our Mandatory Convertible Preferred Stock.

The market prices of our securities may decline in the future as a result of our acquisition of Coherent.

The market prices of our securities, including our common stock and our Mandatory Convertible Preferred Stock, may decline in the future as a result of our acquisition of Coherent for a number of reasons, including:

•the unsuccessful integration of Coherent (including for the reasons set forth above); and
•our failure to achieve the perceived benefits of the acquisition, including financial results, as rapidly as or to the extent anticipated by financial or industry analysts.

Many of these factors are beyond our control. However,As a consequence, holders of our capital stock, including our common stock and our Mandatory Convertible Preferred Stock, could lose the value of their investment in our capital stock.
We currently anticipate that our acquisition of Coherent will be accretive to earnings per share (on an adjusted earnings basis) in the second year after the completion of the acquisition. This expectation is based on preliminary estimates which may materially change. We also could encounter additional transaction-related costs or other factors such as the failure to realize all of the benefits anticipated in the acquisition. All of these factors could cause dilution to our earnings per share or decrease or delay the expected accretive effect of the acquisition and cause a decrease in the market prices of our securities, including our common stock and our Mandatory Convertible Preferred Stock.

Our future results will suffer if we do not effectively manage our expanded operations following the completion of our acquisition of Coherent.

Following the completion of our acquisition of Coherent, the size of our business will increase significantly beyond the current size of either our or Coherent’s current businesses. Our future success depends, in part, upon our ability to manage this expanded business, which may pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurance that we will be successful or that we will realize the expected operating efficiencies, cost savings, revenue enhancements and other benefits currently anticipated from the acquisition.

We and Coherent face competition, which is expected to intensify after the closing of our acquisition of Coherent and which may reduce our market share and profits after consummation of the acquisition.

Competition in the industries in which we and Coherent operate is intense. Increased competition could hurt our and Coherent’s businesses, hinder our respective market share expansions and lead to pricing pressures that may adversely impact our respective margins and revenues. If we are unable to successfully compete following the completion of the acquisition, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.
Following the consummation of the acquisition, our competitive position could be weakened by strategic alliances or consolidation within our industries or the development of new technologies by competitors. Our ability to compete successfully will depend on how well we markets our products and services and on our ability to anticipate and respond to various competitive factors affecting our industries, including changes in customer preferences, and changes in the product offerings or pricing strategies of our competitors.

After the consummation of the acquisition, competition could materially adversely affect us in several ways, including (i) the loss of customers and market share, (ii) our need to lower prices or increase expenses to remain competitive and (iii) the loss of business relationships within our existing markets.

We expect to incur substantial expenses related to our acquisition of Coherent and the related integration.

41

We expect to incur substantial expenses in connection with our acquisition of Coherent and the related integration. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including purchasing, accounting and finance, sales, payroll, pricing and benefits.

While we have assumed that a certain level of expenses will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings. These integration expenses likely will result in us taking significant charges against earnings following the completion of the acquisition, and the amount and timing of such charges are uncertain at present.

Following the consummation of our acquisition of Coherent, we will be bound by all of the obligations and liabilities of both companies.

Following the consummation of our acquisition of Coherent, we will become bound by all of the obligations and liabilities of Coherent in addition to our obligations and liabilities existing prior to the consummation of the acquisition. We cannot predict the financial condition of the combined company at the time of the completion of the acquisition or our ability to satisfy our obligations and liabilities following the completion of the acquisition.

Our acquisition of Coherent may result in a loss of suppliers and strategic alliances and may result in the termination of existing contracts.

Following the completion of our acquisition of Coherent, some of our suppliers or suppliers of Coherent may increase prices or may terminate or scale back their business relationship with us, or even become competitors of ours. We and Coherent have contracts with suppliers, vendors, and other business partners which may require us or Coherent to obtain consents from these other parties in connection with the pending transaction, which may not be obtained at all or on favorable terms. If supplier relationships or strategic alliances are adversely affected by our acquisition of Coherent, or if we, following the completion of the transaction, lose the benefits of our or Coherent’s contracts, our business and financial performance could suffer.

Risks Relating to Our Capital Stock

The trading prices for our securities have been volatile in the past and may be volatile in the future.

The trading prices for our common stock on the Nasdaq Global Select Market Composite varied between a high of $100.44 per share and a low of $36.04 per share in the fiscal year ended June 30, 2021. Likewise, the trading prices of our Mandatory Convertible Preferred Stock varied between a high of $407.35 per share and a low of $174.38 per share in the fiscal year ended June 30, 2021. The market prices of our securities could fluctuate significantly for many reasons, including the following:

•future announcements concerning us or our competitors;
•the overall performance of equity markets;
•the trading volume of our securities;
•additions or changes to our board of directors, management, or key personnel;
•regulatory actions (including, but not limited to, developments in international trade policy) and enforcement actions bearing on manufacturing, development, marketing, or sales;
•the commencement or outcome of litigation;
•reports and recommendations of analysts and whether or not we meet the milestones, metrics, and other expectations set forth in such reports;
•gaining or losing large customers;
•the introduction of new products or services and market acceptance of such products or services;
•the impact of any public health crisis on our business, financial condition, results of operations, or prospects or those of our customers and suppliers;
•the acquisition or loss of significant manufacturers, distributors, or suppliers or an inability to obtain sufficient quantities of materials needed to provide our services;
•the issuance of common stock or other securities (including shares of common stock issued upon conversion of any shares of Mandatory Convertible Preferred Stock or Series B Preferred Stock or upon conversion of our outstanding convertible notes);
•incurrence of indebtedness;
•quarterly variations in operating results;
•our ability to accurately forecast future performance;
42

•business acquisitions or divestitures, including developments relating to our pending acquisition of Coherent;
•fluctuations in the economy, political events, or general market conditions; and
•changes in our operating industry generally.

In addition, stock markets have experienced extreme price and volume fluctuations in recent years, including as a result of the effects of the COVID-19 pandemic. Moreover, these fluctuations frequently have been unrelated to the operating performance or underlying fundamentals of the affected companies. These broad market fluctuations may adversely affect the market price of our common stockstock. These fluctuations may be unrelated to decline, regardlessour performance or out of our actual operating performance. In addition,control, and could lead to securities class action litigation that could result in recent years, the stock market in general,substantial expenses and The Nasdaq Stock Marketdiversion of management’s attention and the securitiescorporate resources, any or all of technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations have in the past, and may in the future, materially andwhich could adversely affect our stockbusiness, financial condition, and results of operations.

We expect that the market price regardless of our operating results. This volatilityMandatory Convertible Preferred Stock will be influenced by yield and interest rates in the capital markets, the time remaining to the mandatory conversion date applicable to the Mandatory Convertible Preferred Stock, our creditworthiness, and the occurrence of certain events affecting us that do not require an adjustment to the fixed conversion rates of the Mandatory Convertible Preferred Stock. Fluctuations in yield rates in particular may give rise to arbitrage opportunities based upon changes in the relative values of the Mandatory Convertible Preferred Stock and our common stock. Any such arbitrage could, in turn, affect the price at which our shareholders can sellmarket prices of our common stock and the Mandatory Convertible Preferred Stock. The market price of our common stock could also be affected by possible sales of our common stock by investors who view the Mandatory Convertible Preferred Stock as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to develop involving our common stock.

Some Anti-takeover This trading activity could, in turn, affect the market price of the Mandatory Convertible Preferred Stock.


Provisions Contained in our Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) and Amended and Restated Bylaws (the “Bylaws”) and the Pennsylvania Business Corporation Law (the “BCL”) may delay or prevent our acquisition by a third party, which could also reduce the market price of our capital stock.

Our Articles of Incorporation and By-laws, as Well as Provisions of Pennsylvania Law, Could Impair a Takeover Attempt, Which Could Also Reduce the Market Price of Our Common Stock

Our articles of incorporation and by-lawsBylaws contain provisions that could make us a less attractive target for a hostile takeover and could make more difficult or discourage a merger proposal, a tender offer, or a proxy contest. Such provisions include:


A•a requirement that shareholder-nominated director nominees be nominated in advance of the meeting at which directors are elected and that specific information be provided in connection with such nomination;

The•the ability of our board of directors to issue additional shares of common stock or preferred stock without shareholder approval; and

Certain•certain provisions requiring supermajority approval (at least two-thirds of the votes cast by all shareholders entitled to vote thereon, voting together as a single class).


In addition, the Pennsylvania Business Corporation Law (the “BCL”)BCL contains provisions that may have the effect of delaying or preventing a change in our control of us or changes in our management. Many of these provisions are triggered if any person or group acquires, or discloses the intent to acquire, 20% or more of a corporation’s voting power, subject to certain exceptions. These provisions:


•provide the other shareholders of the corporation with certain rights against the acquiring group or person;

•prohibit the corporation from engaging in a broad range of business combinations with the acquiring group or person;

•restrict the voting and other rights of the acquiring group or person; and

•provide that certain profits realized by the acquiring group or person from the sale of our equity securities belong to and are recoverable by us.


Regardless of the amount of a person’s holdings, if a shareholder or shareholder group (including affiliated persons) would be a party to certain proposed transactions with us or would be treated differently from other shareholders of ours in certain proposed transactions, the BCL requires approval by a majority of votes entitled to be cast by all shareholders other than the interested shareholder or affiliate group, unless the transaction is approved by independent directors or other criteria are satisfied. Furthermore, under the BCL, a “short-form” merger of II-VI cannot be implemented without the consent of our board of directors.


In addition, as permitted by Pennsylvania law, an amendment to our articlesArticles of incorporationIncorporation or other corporate action that is approved by shareholders may provide mandatory special treatment for specified groups of non-consentingnonconsenting shareholders of the same class. For example, an amendment to our articlesArticles of incorporationIncorporation or other corporate action may provide that shares of common stock held by designated shareholders of record must be cashed out at a price determined by the corporation,Company, subject to applicable dissenters’ rights.


43

Furthermore, the BCL provides that directors, may, in discharging their duties, may consider, to the extent they deem appropriate, the effects of any action upon shareholders, employees, suppliers, customers, and the communities in which itsthe corporation’s offices are located. Directors are not required to consider the interests of shareholders to a greater degree than other constituencies’ interests. The BCL expressly provides that directors do not violate their fiduciary duties solely by relying on “poison pills” or the anti-takeover provisions of the BCL. We do not currently have a “poison pill.”


All of these provisions may limit the price that investors may be willing to pay for shares of our capital stock.

In addition, certain rights of the holders of the Mandatory Convertible Preferred Stock could make it more difficult or more expensive for a third party to acquire us. For example, if any of certain fundamental changes were to occur on or prior to July 1, 2023, holders of the Mandatory Convertible Preferred Stock may have the right to convert their Mandatory Convertible Preferred Stock, in whole or in part, at an increased conversion rate and will also be entitled to receive a make-whole amount equal to the present value of all remaining dividend payments on their Mandatory Convertible Preferred Stock, as described in the applicable Statement with Respect to Shares governing the Mandatory Convertible Preferred Stock. Likewise, if any of certain fundamental changes were to occur, we or the surviving entity would be required to make an offer to repurchase, at the option and election of the holders thereof, for cash each share of Series B Preferred Stock then outstanding. These features of the Mandatory Convertible Preferred Stock and Series B Preferred Stock could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.

Because we do not currently intend to pay dividends on our common stock.

Because We Do Not Currently Intend to Pay Dividends, Holders of Our Common Stock Will Benefitstock, holders will benefit from an Investmentinvestment in Our Common Stock Only If It Appreciatesour common stock only if it appreciates in Value,value and by the Intended Anti-Dilution Actionsintended anti-dilution actions of Our Share-Buyback Program

our share-buyback program.


We have never declared ornor paid any dividends on our common stock and do not expect to pay cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain any future earnings to support operations and to finance the development of our business. As a result, the success of an investment in our common stock will depend entirely upon future appreciation in its value. There is no guarantee that our common stock will maintain its value or appreciate in value.



Our ability to declare and pay dividends on our capital stock may be limited, including by the terms of our existing Credit Agreement.

Our declaration and payment of dividends on our capital stock in the future will be determined by our board of directors (or an authorized committee thereof) in its sole discretion and will depend on our financial condition, earnings, growth prospects, other uses of cash, funding requirements, applicable Pennsylvania law, and other factors our board of directors deems relevant.
The terms of the Credit Agreement contain a restriction on our ability to pay cash dividends on our capital stock. If the terms of the Credit Agreement restrict our ability to pay cash dividends on the Mandatory Convertible Preferred Stock, we will pay any dividends declared by our board of directors (or an authorized committee thereof) on the Mandatory Convertible Preferred Stock in the form of shares of common stock. In addition, credit facilities, indentures, or other financing agreements that we enter into in the future may contain provisions that restrict or prohibit our ability to pay cash dividends on our capital stock.
In addition, under Pennsylvania law, our board of directors may not pay dividends if after giving effect to the relevant dividend payment we (i) would not be able to pay our debts as they become due in the usual course of our business or (ii) our total assets would not be greater than or equal to the sum of our total liabilities plus the amount that would be needed if we were to be dissolved at the time as of which the dividend is measured, in order to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend. Even if we are permitted under our contractual obligations and Pennsylvania law to pay cash dividends on the Mandatory Convertible Preferred Stock, we may not have sufficient cash to pay cash dividends on the Mandatory Convertible Preferred Stock.

Trading in preferred stock that we have issued may adversely affect the market price of our common stock.

The market price of our common stock is likely to be influenced by the Mandatory Convertible Preferred Stock and, to the extent that markets develop when applicable trading limitations no longer apply, our Series B Preferred Stock. For example, the market price of our common stock could become more volatile and could depress possible sales of our common stock to shareholders who view the Mandatory Convertible Preferred Stock or Series B Preferred Stock as more attractive means of equity participation in us than owning shares of our common stock.

Our common stock is subordinate to our existing and future indebtedness; the Mandatory Convertible Preferred Stock and Series B Preferred Stock; and any other preferred stock we may issue in the future. Our Mandatory Convertible Preferred Stock and Series B Preferred Stock rank junior to all of our and our subsidiaries’ consolidated liabilities.

Shares of our common stock are equity interests that rank junior to all indebtedness and other non-equity claims on us with respect to assets available to satisfy our claims, including in a liquidation of the Company. Additionally, holders of our common stock may be subject to prior dividend and liquidation rights of any holders of our preferred stock or depositary shares representing such preferred stock then outstanding.
44


Our common stock ranks junior to our Mandatory Convertible Preferred Stock and Series B Preferred Stock with respect to the payment of dividends and amounts payable in the event of our liquidation, dissolution, or winding-up of our affairs. This means that, unless accumulated dividends have been paid on all the Mandatory Convertible Preferred Stock and Series B Preferred Stock then outstanding through the most recently completed dividend period, no dividends may be declared or paid on our common stock and we will not be permitted to repurchase any of our common stock, subject to limited exceptions. Likewise, in the event of our voluntary or involuntary liquidation, dissolution, or winding-up of our affairs, no distribution of our assets may be made to holders of our common stock until we have paid to holders of the Mandatory Convertible Preferred Stock and Series B Preferred Stock then outstanding the applicable liquidation preferences.

In the event of a bankruptcy, liquidation, dissolution, or winding-up of our affairs, our assets will be available to pay obligations on the Mandatory Convertible Preferred Stock and Series B Preferred Stock only after all of our consolidated liabilities have been paid. In addition, the Mandatory Convertible Preferred Stock and Series B Preferred Stock rank structurally junior to all existing and future liabilities of our subsidiaries. In the event of a bankruptcy, liquidation, dissolution, or winding-up of our affairs, there may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay amounts due on any or all of the Mandatory Convertible Preferred Stock and Series B Preferred Stock then outstanding.

Our board of directors can issue, without approval of the holders of our common stock, preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of our common stock, the rights of holders of shares of our capital stock, or the market price of our capital stock.

Our Articles of Incorporation authorize our board of directors to issue one or more additional series of preferred stock and set the terms of the preferred stock without seeking any further approval from our shareholders. Any preferred stock that is issued will rank ahead of our common stock in terms of dividends and liquidation rights. If we issue additional preferred stock, it may adversely affect the market price of our common stock. Our board of directors also has the power, without shareholder approval, subject to applicable law, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends, and other terms, or upon our liquidation, dissolution, or winding-up of our affairs. If we issue additional preferred stock in the future that has a preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution, or winding-up of our affairs, or if we issue additional preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our capital stock or the market price of our capital stock could be adversely affected. The issuance of preferred stock or even the ability to issue preferred stock could also have the effect of delaying, deterring, or preventing a change of control or other corporate action.

Reports published by securities or industry analysts, freelance bloggers and credit rating agencies, including projections in those reports that exceed our actual results, could adversely affect our share price and trading volume.

Research analysts and freelance bloggers publish their own quarterly projections regarding our operating results. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our share price may decline if we fail to meet securities research analysts’ projections. Similarly, if one or more of the analysts who cover us change their recommendations regarding our common stock or publish inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, our share price or trading volume could decline.

Regulatory actions may adversely affect the trading price and liquidity of the Mandatory Convertible Preferred Stock.

Holders of Mandatory Convertible Preferred Stock who employ, or seek to employ, a convertible arbitrage strategy with respect to the Mandatory Convertible Preferred Stock may be adversely impacted by regulatory developments that may limit or restrict such a strategy. The SEC and other regulatory and self-regulatory authorities have implemented various rules and may adopt additional rules in the future that restrict and otherwise regulate short selling, over-the-counter swaps, and security-based swaps, which restrictions and regulations may adversely affect the ability of investors in, or potential purchasers of, the Mandatory Convertible Preferred Stock to conduct a convertible arbitrage strategy with respect to the Mandatory Convertible Preferred Stock. This could, in turn, adversely affect the trading price and liquidity of the Mandatory Convertible Preferred Stock.

Holders of Mandatory Convertible Preferred Stock have no voting rights with respect to the Mandatory Convertible Preferred Stock, except under limited circumstances.

Holders of Mandatory Convertible Preferred Stock have no voting rights with respect to the Mandatory Convertible Preferred Stock, except with respect to certain amendments to the terms of the Mandatory Convertible Preferred Stock, in the case of certain dividend arrearages, in certain other limited circumstances, and except as specifically required by applicable Pennsylvania law or by our amended and restated Articles of Incorporation. Holders of Mandatory Convertible Preferred Stock have no right to vote for any members of our board of directors, except in the case of certain dividend arrearages.
45


If dividends on any Mandatory Convertible Preferred Stock have not been declared and paid for the equivalent of six or more dividend periods (including, for the avoidance of doubt, the dividend period beginning on, and including, the initial issue date of the Mandatory Convertible Preferred Stock and ending on, but excluding, October 1, 2020), whether or not for consecutive dividend periods, the holders of such Mandatory Convertible Preferred Stock, voting together as a single class with holders of all other series of preferred stock ranking equally with the Mandatory Convertible Preferred Stock and having similar voting rights, will be entitled at our next special or annual meeting of shareholders to vote for the election of a total of two additional members of our board of directors, subject to certain limitations.

We depend on our subsidiaries for cash to fund our operations and expenses, including future dividend payments with respect to our outstanding preferred stock.

A significant portion of our operations is conducted through our subsidiaries, and our ability to generate cash to meet our debt service obligations or to make future dividend payments with respect to the Mandatory Convertible Preferred Stock and, to the extent we elect to make such payments in cash, our Series B Preferred Stock is highly dependent on the earnings and the receipt of funds from our subsidiaries. Our subsidiaries are separate legal entities that have no obligation to make any funds available to us, whether by dividends, loans, or other payments.
46

Item 1B.

Item 1B.    UNRESOLVED STAFF COMMENTS

None.

Item 2.

Item 2.        PROPERTIES

Information regarding our principal U.S. properties at June 30, 20182021, is set forth below:

Location

LocationPrimary Use(s)

Primary Business Segment(s)

Approximate Square
Footage

Ownership

Saxonburg, PA

Sherman, TX

Manufacturing

Compound Semiconductors700,000 Owned
Easton, PA*Manufacturing and Research and Development

II-VI Laser Solutions and II-VI Performance Products

Compound Semiconductors

230,000

281,000 

Owned
and

Leased

Warren, NJ

Saxonburg, PA

Manufacturing and
Research and Development

II-VI Laser Solutions

Compound Semiconductors

159,000

235,000 

Owned and Leased

Murrieta, CA

Warren, NJ

Manufacturing and
Research and Development

II-VI Performance Products

Compound Semiconductors

111,000

159,000 

Leased

Newark, DE

Manufacturing and
Research and Development

II-VI Performance Products

Compound Semiconductors

163,000

135,000 

Leased

Champaign, IL

Fremont, CAManufacturing and
Research and Development

II-VI Laser Solutions

Compound Semiconductors

69,000

128,000 

Leased

Dallas, TX

Murrieta, CA

Manufacturing and
Research and Development

II-VI Performance Products

Compound Semiconductors

68,000

108,000 

Owned
and
Leased

Warrendale, PA

Corporate Administrative Offices

N/A

63,000

Leased

Pine Brook, NJ

Manufacturing and
Research and Development

II-VI Performance Products

54,000

Leased

Monroe, CT

Manufacturing and
Research and Development

II-VI Performance Products

48,000

Leased

Easton, PA

Manufacturing and
Research and Development

II-VI Laser Solutions and II-VI Performance Products

48,000

Leased

Santa Rosa, CA

Manufacturing and
Research and Development

II-VI Photonics

39,000

Leased

Starkville, MS

Manufacturing

II-VI Performance Products

32,000

Leased

Tustin, CA

Manufacturing and
Research and Development

II-VI Performance Products

31,000

Leased

Philadelphia, PA

Manufacturing and
Research and Development

II-VI Performance Products

30,000

Leased

Hillsborough, NJ

Manufacturing and
Research and Development

II-VI Photonics

23,000

Leased

We also maintain some additional small research and development, distribution, and administrative facilities

*Approximately 48,000 square feet are currently used in leased space inconnection with the United States.

Company’s manufacturing operations. The remainder is subleased to a third party.


Information regarding our principal foreign properties at June 30, 20182021, is set forth below:


Location

LocationPrimary Use(s)

Primary Business Segment(s)

Approximate Square
Footage

Ownership

China

Manufacturing, Research and Development, and Distribution

II-VI LaserCompound Semiconductors and Photonic Solutions II-VI Photonics

3,138,000 Owned and II-VI Performance Products

1,556,000

Leased

Malaysia

ManufacturingPhotonic Solutions640,000 Owned
United Kingdom

Manufacturing, Research and Development

II-VI LaserCompound Semiconductors and Photonic Solutions and II-VI Photonics

319,000

Owned and Leased

Philippines

Manufacturing

II-VI Laser Solutions and II-VI Performance Products

Compound Semiconductors

314,000

318,000 

Leased

Vietnam

Manufacturing

II-VI PhotonicsCompound Semiconductors and II-VI Performance Products

Photonic Solutions

176,000

211,000 

Owned and Leased

Switzerland

Manufacturing, Research and Development, and Distribution

II-VI Laser Solutions

Compound Semiconductors

117,000

118,000 

Leased

Germany

Manufacturing and Distribution

II-VI LaserCompound Semiconductors and Photonic Solutions II-VI Photonics and II-VI Performance Products

81,000

101,000 

Owned and Leased

Singapore

Manufacturing

II-VI Laser Solutions and II-VI Performance Products

38,000

Leased

We also maintain some additional small distribution facilities in leased space in Belgium, Italy, Japan, South Korea, Taiwan, and the United Kingdom.

The square footage listed for each of the above properties represents facility square footage, except in the case of the Philippines location, which includes land.


Item 3.

Item 3.        LEGAL PROCEEDINGS

The Company and its subsidiaries are involved in various claims and lawsuits incidental to its business. The resolution of each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such legal proceedings will not materially affect the Company’s financial condition, liquidity, or results of operations.


Item 4.

Item 4.        MINE SAFETY DISCLOSURES

Not applicable.


47


PART II


Item 5.

Item 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


The Company’s common stock is traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “IIVI.” The following table sets forth the range of high and low trading prices per share of the Company’s common stock for the fiscal periods indicated, as reported by Nasdaq.  

 

 

High

 

 

Low

 

Fiscal 2018

 

 

 

 

 

 

 

 

First Quarter

 

$

41.43

 

 

$

34.00

 

Second Quarter

 

$

52.55

 

 

$

39.60

 

Third Quarter

 

$

53.08

 

 

$

36.60

 

Fourth Quarter

 

$

49.30

 

 

$

38.05

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

Low

 

Fiscal 2017

 

 

 

 

 

 

 

 

First Quarter

 

$

24.46

 

 

$

17.76

 

Second Quarter

 

$

32.45

 

 

$

23.80

 

Third Quarter

 

$

41.10

 

 

$

29.10

 

Fourth Quarter

 

$

36.35

 

 

$

27.25

 

On August 22, 2018, the last reported sale price for the Company’s common stock was $47.15 per share. As of such date,August 16, 2021, there were approximately 806 holders of record of our common stock. The Company historically has not paid cash dividends on its common stock and does not presently anticipate paying cash dividends on its common stock in the future.


Dividends on the Company’s Series A Mandatory Convertible Preferred Stock will be payable on a cumulative basis when, as and if declared by our board of directors, or an authorized committee of our board of directors, at an annual rate of 6% of the liquidation preference of $200.00 per share. The Company may pay declared dividends on the Mandatory Convertible Preferred Stock in cash or, subject to certain limitations, in shares of our common stock or in any combination of cash and shares of our common stock on January 1, April 1, July 1 and October 1 of each year, commencing on October 1, 2020 and ending on, and including, July 1, 2023.

Dividends on the Company’s Series B Convertible Preferred Stock will be payable on a cumulative basis when, as and if declared by our board of directors, or an authorized committee of our board of directors, at an annual rate of 5%, subject to increase if II-VI defaults on payment obligation with respect to these shares, not to exceed 14% per annum. Until the fourth anniversary of the issuance of the Series B Convertible Preferred Stock, dividends are payable solely in-kind. After the fourth anniversary, dividends are payable, at the Company’s option, in cash, in-kind or as a combination of both.

ISSUER PURCHASES OF EQUITY SECURITIES

In August 2017, in conjunction with the Company’s offering and sale of our 0.25% outstanding convertible senior notes, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from the offering and sale of the Notes.those convertible notes. The shares that were purchased by the Company pursuant to this authorization were retained as treasury stock and are available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for approximately $49.9$50 million pursuant to this authorization.

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and are available for general corporate purposes. The Company did not repurchase shares pursuant to this Program during the fiscal year ended June 30, 2021. During the fiscal year ended June 30, 2020, the Company purchased 50,000 shares of its common stock for $2 million under this program. As of June 30, 2018,2021, the Company has cumulatively purchased 1,316,5871,416,587 shares of its common stock pursuant to the Program for approximately $19.0$22 million. The dollar value of shares as of June 30, 20182021 that may yet be purchased under the Program is approximately $31.0$28 million.

The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended June 30, 2018.

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Dollar Value of

 

 

 

 

 

 

 

 

 

 

 

Shares Purchased

 

 

Shares That May

 

 

 

 

 

 

 

 

 

 

 

as Part of Publicly

 

 

Yet be Purchased

 

 

 

Total Number of

 

 

Average Price Paid

 

 

Announced

 

 

Under the

 

Period

 

Shares Purchased

 

 

Per Share

 

 

Programs (a)

 

 

Program

 

April 1, 2018 to April 30, 2018

 

 

516

 

(1)

$

40.40

 

 

 

-

 

 

$

30,906,904

 

May 1, 2018 to May 31, 2018

860

 

(2)

$

44.61

 

 

 

-

 

 

$

30,906,904

 

June 1, 2018 to June 30, 2018

 

 

52,947

 

(3)

$

46.55

 

 

 

-

 

 

$

30,906,904

 

(1)

Includes 516 shares of our common stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted share awards.


(2)

Includes 860 shares of our common stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted share awards.


(3)

Includes 52,947 shares of our common stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted share awards.




The information incorporated by reference in Item 12 of this Annual Report on Form 10-K, from our 2018 Proxy Statement under the heading “Equity Compensation Plan Information,” is hereby also incorporated by reference into this Item 5.








48

PERFORMANCE GRAPH

The following graph compares cumulative total shareholder return on the Company’s common stock with the cumulative total shareholder return of the Nasdaq Composite Index and with a peer group of companies constructed by the Company for the period from June 30, 2013,2016, through June 30, 2018.2021. The Company’s current fiscal year peer group includes Cabot Microelectronics Corporation,CMC Materials Inc., Coherent, Inc., Corning Incorporated, Franklin Electric Co., Inc., Lumentum Holdings Inc., MKS Instruments Inc., and Silicon Laboratories, Lumentum Holdings Inc., Finisar Corp, Coherent, Inc. and Corning Inc.



iivi-20210630_g1.jpg
49

Item 6.

Item 6.        SELECTED FINANCIAL DATA

Five-Year Financial Summary

The following selected financial data for the five fiscal years presented are derived from the Company’s audited Consolidated Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

($000 except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues from continuing operations

 

$

 

1,158,794

 

 

$

 

972,046

 

 

$

 

827,216

 

 

$

 

741,961

 

 

$

 

683,261

 

Earnings from continuing operations

 

 

 

88,002

 

 

 

 

95,274

 

 

 

 

65,486

 

 

 

 

65,975

 

 

 

 

38,316

 

Earnings from discontinued operation

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

133

 

Net earnings

 

 

 

88,002

 

 

 

 

95,274

 

 

 

 

65,486

 

 

 

 

65,975

 

 

 

 

38,449

 

Basic earnings per shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

1.41

 

 

 

 

1.52

 

 

 

 

1.07

 

 

 

 

1.08

 

 

 

 

0.62

 

Discontinued operation

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consolidated

 

 

 

1.41

 

 

 

 

1.52

 

 

 

 

1.07

 

 

 

 

1.08

 

 

 

 

0.62

 

Diluted earnings per shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

1.35

 

 

 

 

1.48

 

 

 

 

1.04

 

 

 

 

1.05

 

 

 

 

0.60

 

Discontinued operation

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Consolidated

 

 

 

1.35

 

 

 

 

1.48

 

 

 

 

1.04

 

 

 

 

1.05

 

 

 

 

0.60

 

Diluted weighted average shares outstanding

 

 

 

65,133

 

 

 

 

64,507

 

 

 

 

62,909

 

 

 

 

62,586

 

 

 

 

63,686

 

June 30,

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

 

525,370

 

 

$

 

517,344

 

 

$

 

411,721

 

 

$

 

373,812

 

 

$

 

370,666

 

Total assets

 

 

 

1,761,661

 

 

 

 

1,477,297

 

 

 

 

1,211,981

 

 

 

 

1,057,273

 

 

 

 

1,070,753

 

Long-term debt

 

 

 

419,013

 

 

 

 

322,022

 

 

 

 

215,307

 

 

 

 

155,066

 

 

 

 

220,787

 

Total debt

 

 

 

439,013

 

 

 

 

342,022

 

 

 

 

235,307

 

 

 

 

175,066

 

 

 

 

240,787

 

Retained earnings

 

 

 

836,064

 

 

 

 

748,062

 

 

 

 

652,788

 

 

 

 

587,302

 

 

 

 

521,327

 

Shareholders' equity

 

 

 

1,024,311

 

 

 

 

900,563

 

 

 

 

782,338

 

 

 

 

729,081

 

 

 

 

675,043

 



Year Ended June 30,20212020201920182017
($000 except per share data)
Statement of Earnings
Net revenues$3,105,891 $2,380,071 $1,362,496 $1,158,794 $972,046 
Net earnings (loss)297,552 (67,029)107,517 88,002 95,274 
Basic earnings (loss) per share2.50 (0.79)1.69 1.41 1.52 
Diluted earnings (loss) per share2.37 (0.79)1.63 1.35 1.48 
Diluted weighted average shares outstanding115,034 84,828 65,804 65,133 64,507 
June 30,20212020201920182017
($000)
Balance Sheet
Working capital$2,297,805 $1,116,076 $542,348 $525,370 $517,344 
Total assets6,512,650 5,234,714 1,953,773 1,761,661 1,477,297 
Long-term debt1,313,091 2,186,092 443,163 419,013 322,022 
Total debt1,375,141 2,255,342 466,997 439,013 342,022 
Mezzanine equity726,178 — — — — 
Retained earnings1,136,777 876,552 943,581 836,064 748,062 
Shareholders' equity3,406,170 2,076,803 1,133,209 1,024,311 900,563 

Item 7.

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


Forward-Looking Statements

Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management Discussion and Analysis") are forward-looking statements.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. Actual
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 couldto differ materially from those anticipateddiscussed in thesethe forward-looking statements for many reasons, including those potential risks set forth in Item 1A, of 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.

50

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 incorporated hereinbased 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 reference.

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 or report issued by any analyst irrespective of the content of the statement or report.
Overview

II-VI Incorporated (“II-VI,” the “Company,” “we,” “us” or “our”), a worldwide leader in engineered materials and optoelectronicopto-electronic components, is a vertically integrated manufacturing company that develops innovative products for diversified applications in the industrial materials processing, optical communications, military,aerospace and defense, consumer electronics, semiconductor capital equipment, life sciencesciences and automotive applications .end markets. The Company produces a wide variety of application-specific photonic and electronic materials and components, and deploys them in various forms, including integration with advanced software.

The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing engineered materials and optoelectronic components and devicesa broad portfolio of products for precision use in industrial materials processing, optical communications, consumer electronics, semiconductor equipment, life sciences and automotive applications.our end markets. We also generate revenue, earnings and cash flows from government fundedgovernment-funded research and development contracts relating to the development and manufacture of new technologies, materials and products.

Our customer base includes OEMs,original equipment manufacturers, laser end-users,end users, system integrators of high-power lasers, manufacturers of equipment and devices for the industrial, optical communications, military, semiconductor, medicalconsumer electronics, security and life science markets, consumer,monitoring applications, U.S. government prime contractors, and various U.S. Government agenciesgovernment agencies.
On July 7, 2020, the Company closed its underwritten public offering and thermoelectric integrators.

sale of 2 million shares of Series A Mandatory Convertible Preferred Stock, as well as its underwritten public offering and sale of approximately 11 million shares of its common stock. See Note 11. Equity and Redeemable Preferred Stock, to our Consolidated Financial Statements contained in this Annual Report on Form 10-K for further details.

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 competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company operates or is organized in the future to enable the most efficient implementation of our strategy.

Pending Acquisition of Coherent, Inc.

On March 25, 2021, II-VI, Coherent, Inc. (“Coherent”) and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”).

Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each share of common stock of Coherent (the “Coherent Common Stock”) issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”): (A) $220.00 in cash, without interest (the “Cash Consideration”), and (B) 0.91 of a validly issued, fully paid and nonassessable share of our common stock of II-VI.

Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement, a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent RSU multiplied by the sum of (A) 0.91, and (B) the quotient obtained by dividing the Cash Consideration by the volume weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger
51

(the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of achievement of such goals or metrics immediately prior to the Effective Time.

The converted Coherent RSUs generally will be subject to the same terms and conditions that applied to the awards immediately prior to the Effective Time, provided that any Coherent RSUs subject to performance-based vesting conditions will be subject solely to time- and service-based vesting. Each Coherent RSU that is outstanding as of the date of the Merger Agreement and as of immediately prior to the Effective Time will be entitled to certain vesting acceleration benefits.

Each Coherent RSU granted to a non-employee member of Coherent’s Board of Directors (“Director RSUs”) (whether or not vested) that is outstanding immediately prior to the Effective Time will automatically vest in full and be canceled and converted into the right to receive the Merger Consideration as if such Director RSU had been settled in shares of Coherent Common Stock immediately prior to the Effective Time.

The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger at special meetings held on June 24, 2021 by the respective companies.

The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by the end of the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.

In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21, 2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc., PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA) LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively, the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the Commitment Letter is subject to a number of customary conditions.

In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement, dated as of as of March 30, 2021, the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (the “Investor”).Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold, and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company (“II-VI Series B-1 Convertible Preferred Stock”) for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the company would issue, sell and deliver to the Investor:

•105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company (“II-VI Series B-2 Convertible Preferred Stock”) for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.1 billion, immediately prior to Closing; and

•immediately prior to Closing, the company will receive up to an additional 35,000 shares of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million. This was agreed on June 8, 2021 of its strategy.

agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.


The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other within this Annual Report on Form 10-K.

52

Critical Accounting Policies and Estimates


The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and the Company’s discussion and analysis of its financial condition and results of operations 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 11. 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 believes the Company’s critical accounting estimates are those related to revenue recognition, inventory valuation, business combinations, impairment of goodwill and indefinite-lived intangible assets, accrual of income taxes and accounting for share-based compensation. Management believes these estimates to be critical because they are both important to the portrayal of the Company’s financial condition and results of operations, and they require management to make judgments and estimates about matters that are inherently uncertain.


Management has discussed the development and selection of thesethe 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 statementsConsolidated Financial Statements that require estimation but are not deemed critical as described above.critical. Changes in estimates used in these and other items could haveimpact the Consolidated Financial Statements.

Series A Preferred Stock

As described in Note 11. Equity and Redeemable Preferred Stock, of the Notes to our Consolidated Financial Statements, on July 7, 2020, the Company issued shares of Series A Mandatory Convertible Preferred Stock. Upon conversion, on the mandatory conversion date, each outstanding share of Series A Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a material impactnumber of shares of the Company’s common stock determined based on the market value of the Company’s common stock on the mandatory conversion date, defined as July 1, 2023.

The accounting for the issuance of the Series A Mandatory Convertible Preferred Stock involved significant estimation in approximating the future market value of the Company’s common stock on the mandatory conversion date, which was used to determine whether the Series A Mandatory Convertible Preferred Stock should be classified within shareholders’ equity on the consolidated financial statements.

Revenue Recognition

Revenues for product shipments are realizable when we have persuasive evidencebalance sheet as well as the whether the Preferred Stock should be classified as a participating security.


Management estimated the future market value of its common stock on the mandatory conversion date, through development of a sales arrangement,Monte Carlo simulation model. A sensitivity analysis was also performed to confirm the product has been shipped or delivered, the sales price is fixed or determinable and collectability is reasonably assured. Title and risk of loss passes from the Company to its customer at the time of shipment in most cases, with the exception of certain customers for whom customer’s title does not pass and revenue is not recognized until the customer has received the product at its physical location.


The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical locations. Further, for the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions, credits and discounts, rebates and price protection or other similar privileges. Our distributors and agents are not granted price protection. Our distributors and agents, who generate less than 10% of consolidated revenue, have no additional product return rights beyond the right to return defective products covered by our warranty policy. We believe that our revenue recognition practices are consistent with Staff Accounting Bulletin 104 and that we have adequately considered the requirements of Accounting Standards Codification 605 Revenue Recognition. Revenues generated from transactions other than product shipments are contract-related and have historically accounted for approximately 1%reasonableness of the Company’s consolidated revenues.

Inventory

assumptions, which included volatility and cost of equity. The Company generally records an inventory adjustment as a charge against earnings for all productsbases its estimates and assumptions on hand for more than 12 to 24 months, dependinghistorical experience and on the productsvarious other factors that have not been sold to customers or cannot be further manufactured for sale to alternative customers. An additional charge may be recorded for products on hand that are in excess of product sold to customers over the same periods noted above. If actual market conditions are less favorable than projected, additional inventory adjustments may be required. The Company’s inventory adjustments have historically been provenit believes to be materially correct based upon actual write-offs incurred.

Business Acquisitions

The Company accounts for business acquisitions by establishingreasonable under the acquisition-date fair value as the measurement for all assets acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costscircumstances. Actual results could differ from acquisition accounting.

those estimates.


Goodwill and Indefinite-Lived Intangibles


The Company tests goodwill and indefinite-lived intangible assets for impairment annually, and when events or changes in circumstances indicate that goodwill or indefinite-lived intangible assets might be impaired. Other intangible assets are amortized over their estimated useful lives. The determination of the estimated useful lives of other intangible assets and whether goodwill or indefinite-lived intangibles areis 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. TheFor fiscal year 2021, the fair values of the reporting units arewere determined using a discounted cash flow analysis based on historical andwith projected financial information as well as market analysis. The annual goodwill impairment analysis considers the financial projections of the reporting unit 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 unit. Changes in our internal structuring, financial performance, judgments and projections could result in an impairment of goodwill or indefinite-lived intangible assets.units. As of June 30, 2018,2021, no reporting units are at risk for impairment, as the fair value of the reporting units substantially exceeds the carrying values.

The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative assessment described above, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the quantitative assessment. Otherwise, the Company will forego the quantitative assessment process and does not need to perform any further testing. The Company did not use the optional qualitative assessment during the years ended June 30, 2018 and 2017.

As a result of the purchase price allocations from our acquisitions, and due to our decentralized structure, our goodwill is included in multiple reporting units which are the same as the Company’s operating segments.impairment. 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. These factors may have a relatively more pronounced impact on the individual reporting units as compared to the Company as a whole, and might adversely affect the fair value of the individual reporting units. If material adverse conditions occur that impact one or moreboth of our reporting units, our determination of future fair value might not support the carrying amount of one or moreboth of our reporting units, and the related goodwill would need to be impaired. Based upon our annual quantitative goodwill and indefinite-lived intangible assets impairment tests, the Company did not record any impairments of goodwill or indefinite-lived intangible assets for the fiscal year ended June 30, 2018.


53

0.25% Convertible Senior Notes

Our 0.25% convertible senior notes are accounted for in accordance with ASC 470, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement). ASC Subtopic 470-20 requires the issuer of convertible debt that may be settled in shares or cash upon conversion at the issuer’s option, such as these notes, to account for the liability (debt) and equity (conversion option) components separately. The value assigned to the debt component is the estimated fair value as of the issuance date of a similar debt instrument without the conversion option. The amount of the equity component is calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument. The resulting debt discount is amortized as additional non-cash interest expense over the expected life of the notes utilizing the effective interest method. Although ASC 470 has no impact on our actual past or future cash flows, it requires us to record non-cash interest expense as the debt discount is amortized.



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. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation and/or as concluded through the various jurisdictions’ tax court systems. 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 yearthree-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 carry-forwardscarryforwards 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.

Share-Based Compensation

The Company recognizes share-based compensation expense over



COVID-19 Update

On March 11, 2020, the requisite service periodWorld Health Organization designated the novel coronavirus disease known as COVID-19 as a global pandemic. In response to the global spread of COVID-19, governments at various levels have implemented unprecedented response measures. Overall, the COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. Certain of the individual grantees, which generally equalsmeasures taken in response to the vesting period. The Company utilizesCOVID-19 pandemic have adversely affected, and could in the Black-Scholes valuation model for estimatingfuture materially adversely impact, our business, results of operations, financial condition and stock price. In particular, the fair valueCOVID-19 pandemic continues to have a significant impact on global markets due to resulting supply chain and production disruptions, workforce and travel restrictions.

Our focus has been on the protection of share-based equity expense, using assumptionsthe health and safety of our employees and business partners. In our facilities, we have deployed new safety measures, including guidance to employees on matters such as effective hygiene and disinfection, social distancing, limited and remote access working where feasible and use of protective equipment. We also are prioritizing efforts to understand and support the risk-free interest rate, expected stock price volatility, expected stock option lifechanging business needs of our customers and expected dividend yield. suppliers in light of restrictions that are applicable to them.

At this time, we believe that our existing balances of cash and cash equivalents, along with our existing committed borrowing availability and other short-term liquidity arrangements, will be sufficient to satisfy our working capital needs, make necessary capital asset purchases and debt repayments and meet other liquidity requirements associated with our existing operations. Likewise, our current estimates indicate that we will remain in compliance with financial covenants applicable under our debt arrangements.

The risk-free interest ratefull extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial performance is derived fromcurrently uncertain and will depend on many factors outside our control, including, without limitation, the average U.S. Treasury Note rate duringduration and severity of the period, which approximatespandemic, the rateimposition of protective public safety measures, and the impact of the pandemic on the global economy as a whole and, in effectparticular, demand for our products. Due to these uncertainties, we cannot reasonably estimate the related impact on us at this time.

54

For additional information regarding the timerisks that we face as a result of grant relatedthe COVID-19 pandemic, please see Item 1A, Risk Factors, in Part I of this Form 10-K. Further, to the expected lifeextent the COVID-19 pandemic adversely affects our business and financial results, it also may have the effect of heightening many of the options. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield is zero, based on the fact the Company has never paid cash dividends and has no current intention to pay cash dividendsother risks described in the future.

risk factors in Item 1A of this Form 10-K.

Fiscal Year 20182021 Compared to Fiscal Year 2017

2020

The Company aligns its organizational structure into the following threetwo reporting segments for the purpose of making operational decisions and assessing financial performance: (i) II-VI Laser Solutions,Compound Semiconductors and (ii) II-VI Photonics, and (iii) II-VI Performance Products.Photonic Solutions. The Company is reporting financial information (revenue throughand operating income) for these reporting segments in this Annual Report on Form 10-K.


The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 20182021 and June 30, 20172020 ($ in millions except per share information):

 

 

Year Ended

 

 

Year Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Revenues

 

Total revenues

 

$

1,158.8

 

 

 

100.0

%

 

$

972.0

 

 

 

100.0

%

Cost of goods sold

 

 

697.5

 

 

 

60.2

 

 

 

583.7

 

 

 

60.1

 

Gross margin

 

 

461.3

 

 

 

39.8

 

 

 

388.3

 

 

 

39.9

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internal research and development

 

117.2

 

 

 

10.1

 

 

 

96.8

 

 

 

10.0

 

Selling, general and administrative

 

 

208.8

 

 

 

18.0

 

 

 

176.0

 

 

 

18.1

 

Interest and other, net

 

 

13.1

 

 

 

1.1

 

 

 

(3.3

)

 

 

(0.3

)

Earnings before income tax

 

 

122.2

 

 

 

10.5

 

 

 

118.8

 

 

 

12.2

 

Income taxes

 

 

34.2

 

 

 

3.0

 

 

 

23.5

 

 

 

2.4

 

Net earnings

 

$

88.0

 

 

 

7.6

%

 

$

95.3

 

 

 

9.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

1.35

 

 

 

 

 

 

$

1.48

 

 

 

 

 


Executive Summary

Net earnings for fiscal year 2018 were $88.0 million ($1.35 per-share diluted), compared to $95.3 million ($1.48 per-share diluted) for the same period last fiscal year. The decrease in net earnings during current fiscal year from fiscal year 2017 was primarily driven by provisions under the Act and the Company’s related actions.  Under the Act, the Company’s effective tax rate for fiscal year 2018 was 28.0% compared to 19.8% in fiscal year 2017; the Company recorded an additional $8.0 million of income tax expense, primarily relating to withholding taxes on future repatriation of foreign earnings.  The Company also increased its investment in internal research and development relating to its new optoelectronic laser platform with the acquisition of Kaiam Laser Limited, and it ramped up its investment in other operations to address market shifts to new technologies driven by advanced engineered materials.  Fiscal year 2017 was favorably impacted by other income relating to earn-out and technology transfer income the Company received as part of the sale of the RF business of ANADIGICS.  The Company recognized $7.0 million or $0.09 per share diluted of other income related to these transactions in fiscal year 2017.

Year Ended June 30, 2021Year Ended June 30, 2020
% of
Revenues		% of
Revenues
Total revenues$3,106 100 %$2,380 100 %
Cost of goods sold1,890 61 %1,561 66 %
Gross margin1,216 39 820 34 
Operating expenses:    
Internal research and development330 11 339 14 
Selling, general and administrative484 16 441 19 
Interest and other, net50 2 103 4 
Earnings (Loss) before income tax353 11 (64)(3)
Income taxes55 2 3 — 
$298 10 %$(67)(3)%
Diluted earnings (loss) per share$2.37 $(0.79)

Consolidated

Revenues.Revenues for the year ended June 30, 20182021 increased 19%30% to $1,158.8$3,106 million, compared to $972.0$2,380 million for the prior fiscal year. Revenue for 2021 was a record with growth across all end markets compared to the same period last fiscal year. Communications, our largest vertical, grew 30% compared to the same period last year. This growth was due to a full year of Finisar revenue, strong demand across transceivers, including 200/400G products, as well as other optical communications products. The increasestrong demand for our 3D sensing products drove 118% growth in revenues during the current fiscal year wasrevenue for Consumer Electronics. Life Sciences grew 65%, driven by strong demand from customers across all of the Company’s business segments.  In particular, II-VI Laser Solution realized a 26% revenue growth from the prior year, driven by increased demand from industrial based customers for CO2, fiber and direct diodeour filters, optics and components.  This segment also recorded increased shipments of its VCSELs products addressingthermo-electric coolers for COVID-19 related PCR testing and sequencing instrumentation. Our Industrial business grew 11% compared to the growing consumer electronics, datacomsame period last year, due to strong growth in both "CO 2" and other developing end markets.  II-VI Performance Products recorded a 24% revenue increase during the current fiscal year, driven by strengthening demand for SiC substrate products addressing RF electronics and high-power switching and power conversion systems for automotive, communication and military markets.

one micron laser components.

Gross margin.Gross margin for the year endedJune 30, 2018 2021was $461.3$1,216 million, or 39.8%39%, of total revenues, compared to $388.3$820 million, or 39.9%, 34%of total revenues,for the same period last fiscal year. Gross margin as a percentage of revenues was consistent withincreased 470 basis points compared to the prior fiscal year due to a balance of operating efficiencies and investments to expand capacity. The Company’s II-VI Photonic’s grossyear. Gross margin was negatively impacted in the prior year by both product mix and the effects of foreign currency.

purchase accounting on inventory, an increased value of $87.7 million related to the fair value adjustment of the acquired Finisar inventory.

Internal research and development.Company-funded internal research and development (“IR&D”) expenses for the fiscal year ended June 30, 20182021 were $117.2$330 million, or 10.1%11% of revenues, compared to $96.8$339 million, or 10.0%14%. of revenues, last fiscal year. The increase in IR&D expenses isare primarily related to the result of the current year acquisition of Kaiam Laser Limited, acquired in August 2017, which contributed $14.6 million of expense.  The Company continuescontinuing to ramp its investmentinvest in new material-based technologies addressing growingproducts and processes across all its businesses including investments in high speed datacom and telecom transceivers, high speed integrated circuits (ICs), 5G technology, 3D sensing, indium phosphide semiconductor lasers, gallium arsenide semiconductor lasers, silicon carbide semiconductor technology, and other emerging market trends in consumer electronics, communications and automotive markets.  

trends. 

55

Selling, general and administrative.Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 20182021 were $208.8$484 million, or 18.0%16% of revenues, compared to $176.0$441 million, or 18.1%19% of revenues, last fiscal year. SG&A expenses includes $3.7 millionThe Company incurred transaction and $2.5 million, respectively, forintegration costs relating to the combined acquisitions of II-VI Integrated Photonics Inc. (“IPI”), acquired in June 2017,Finisar, Ascatron and Kaiam Laser Limited, acquired in August 2017.  ExclusiveInnovion, the pending acquisition of these acquisitions, the increase in SG&A is primarilyCoherent, increased stock compensation due to the increased operating costs to support the Company’s growing revenue and infrastructure base,II-VI stock price, as well as its ongoing merger and acquisition strategy. The Company is working to identify and capitalize on synergies createdthe SG&A from the Company’s recent acquisitionsoperations of Ascatron and is working to improve the SG&A leverage in the upcoming fiscal 2019 and beyond.

Innovion.

Interest and other, net.Interest and other, net for the year ended June 30, 20182021 was expense of $13.1$50 million compared to incomeexpense of $3.3$103 million last fiscal year, or a decrease of $53 million year over year.  Included in interestInterest and other, net wereprimarily includes $60 million for interest expense on long-term borrowings, earnings from equity investments, interest income on excess cash reserves, unrealized gains and losses on the Company’s deferred compensation plan, and$6 million of foreign currency gains and losses. Interest expense increased $11.5 millionThe decrease compared to prior fiscal year is driven by lower levels of debt outstanding, due to the higher levelsTerm Loan B being repaid with funds from the July 2020 equity raise, as well as gains of $7 million and $11 million recognized in relation to the Innovion acquisition and the Preferred Series B forward sale agreement, respectively. These gains were offset by $25 million of debt issuance costs recognized in conjunction with the repayment of the Company’s outstanding debt. The majorityCompany's Term Loan B Facility in fiscal 2021.


There were foreign currency losses of $6 million for the interest expense increase was relatedyear ended June 30, 2021 due to the Company’s $345.0 million convertible debt issuedvolatility in August 2017. The Company recognized $10.8the foreign exchange market, compared to $8 million of interest and amortization of debt discounts and issuance costs. Other income last fiscallosses for the year included approximately $7.0 million of income from earn-out and technology transfer agreements from the Company’s sale of its ANADIGICS’ RF business.

ended June 30,2020.

Income taxes.The Company’s year-to-date effective income tax rate at June 30, 20182021 was 28.0%16%, compared to an effective tax rate of 19.8%(5)% last fiscal year. The variation between the Company’s effective tax rate and the U.S. statutory rate was primarily due to the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The increase in the current fiscal year’s effective tax rate iswas lower than statutory rates because of favorable research and development incentives in certain jurisdictions and stock option exercise benefits from the result of approximately $8.0 million of increased income tax expense relating to repatriation on foreign source earnings.

strong II-VI stock price.

Segment Reporting

Revenues and operating income for each of the Company’s reportable segments are discussed below. Operating income differs from income from operations in that operating income excludes certain operational expenses included in interest and other expense (income) – net,(net), as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See “Note 12.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.

II-VI Laser

Photonic Solutions ($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

%

 

 

June 30,

 

 

Increase

 

Year Ended
June 30,		%
Increase/(Decrease)

 

2018

 

 

2017

 

 

 

 

 

20212020

Revenues

 

$

428.0

 

 

$

339.3

 

 

 

26

%

Revenues$2,038 $1,537 33 %

Operating income

 

$

36.8

 

 

$

30.9

 

 

 

19

%

Operating income$208 $50 316 %

The Company’s II-VI Laser Solutions segment includes the combined operations of II-VI Infrared Optics, II-VI HIGHYAG, II-VI Laser Enterprise, II-VI Laser Systems Group, II-VI OED, II-VI EpiWorks, and Kaiam Laser Limited (now operating under II-VI Compound Semiconductors, Ltd.). The Company acquired II-VI Compound Semiconductors, Ltd. in August 2017.

Revenues for the fiscal year ended June 30, 2018 for II-VI Laser Solutions increased 26% to $428.0 million, compared to revenues of $339.3 million last fiscal year. The increase in revenues during the current fiscal year was the result of increased demand from industrial based customers for the Company’s CO2, fiber and direct diode laser optics and components.  In addition, the segment has also seen increased demand for its CVD diamond optics used in the EUV lithography markets, as well as VCSELs used in consumer electronics, datacom and other end markets.

Operating income for the fiscal year ended June 30, 2018 for II-VI Laser Solutions increased 19% to $36.8 million, compared to $30.9 million last fiscal year. The increase in operating income during the current fiscal year was the result of incremental margins realized from increased capacity utilization, increase in mix of higher margin products, offset somewhat by greater investment in growth markets.

II-VI Photonics ($ in millions)

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2018

 

 

2017

 

 

 

 

 

Revenues

 

$

464.4

 

 

$

418.5

 

 

 

11

%

Operating income

 

$

67.7

 

 

$

63.0

 

 

 

7

%



The Company’s II-VI Photonics segment includes the combined operations of II-VI Photop and II-VI Optical Communications. The above operating results for the year ended June 30, 20182021 include the Company’s recent acquisition of IPI which was acquiredFinisar in June 2017.

September 2019.

Revenues for the year ended June 30, 20182021 for II-VI PhotonicsPhotonic Solutions increased 11%33% to $464.4$2,038 million, compared to $418.5$1,537 million for last fiscal year. IncludedThe largest driver of the increase is the inclusion of four full fiscal quarters of revenue from Finisar compared to 6 days and three quarters of revenue in the current year’s revenues were $19.3 million of revenues fromprior year. Our transceiver business grew across all product lines including the above acquisition.  Exclusive of IPI, the increase in revenues was primarily attributed to increased demand of optics200G and optic assemblies for applications for industrial laser products.  In addition, the segments realized increase demand for transport and amplification component products, including its 980 nm pumps.

400G modules.

Operating income for the year ended June 30, 20182021 for II-VI PhotonicsPhotonic Solutions increased 7%316% to $67.7$208 million, compared to an operating income of $63.0$50 million last fiscal year. The increase indrivers of the increased operating income was primarily duewere higher sales volume, and improved operating performance and the absence of costs related to incremental margin realized on increased revenues but significantly offset by mix shifts and negative foreign exchange effects.  

II-VI Performance Productspurchase accounting that were present in fiscal year 2020.

Compound Semiconductors ($ in millions)

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2018

 

 

2017

 

 

 

 

 

Revenues

 

$

266.4

 

 

$

214.2

 

 

 

24

%

Operating income

 

$

30.8

 

 

$

21.6

 

 

 

43

%


56

Year Ended
June 30,		%
Increase/(Decrease)
20212020
Revenues$1,068 $821 30 %
Operating income$221 $62 255 %

The Company’s II-VI Performance Products segment includes the business units of II-VI Marlow, II-VI M Cubed, II-VI Advanced Materials, II-VI Optical Systems and II-VI Performance Metals.

Revenuesabove operating results for the year ended June 30, 20182021 include the Company’s acquisition of Finisar in September 2019.


Revenues for II-VI Performance Productsthe fiscal year ended June 30, 2021 for Compound Semiconductors increased 24%30% to $266.4$1,068 million, compared to $214.2revenues of $821 million for last fiscal year. The increase in revenues during the current fiscal year was primarily driven by over a 100% increase in VCSEL product shipments addressing the 3D sensing consumer market, and increased demand for SiC products addressing RF electronics and high-power switching and power conversion systems for automotive and communication markets.  In addition, the segment has seen increased demand for products and components for the semiconductor capital equipment and military markets. 

revenues to customers in all of our other markets with significant growth in our Life Sciences business.

Operating income for the fiscal year ended June 30, 20182021 for II-VI Performance ProductsCompound Semiconductors increased 43%255% to $30.8$221 million, compared to $21.6operating income of $62 million for last fiscal year. The increase in operating income during the current fiscal year was primarily driven by incremental margin realized by increased sales volume, as well as favorable product mix towardand improved absorption of operating costs due to higher marginvolumes and shipping 3D sensing products.

In addition, the expenses associated with the fair value inventory write-up and other related acquisition expenses for Finisar did not repeat in the current year.

Fiscal Year 20172020 Compared to Fiscal Year 2016

2019

The Company aligned its organizational structure into the following two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report on Form 10-K.
The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 20172020 and 2016.2019 ($ in millions except per share information):

 

 

Year Ended

 

 

Year Ended

 

 

 

June 30, 2017

 

 

June 30, 2016

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Revenues

 

Total revenues

 

$

972.0

 

 

 

100.0

%

 

$

827.2

 

 

 

100.0

%

Cost of goods sold

 

 

583.7

 

 

 

60.1

 

 

 

514.4

 

 

 

62.2

 

Gross margin

 

 

388.3

 

 

 

39.9

 

 

 

312.8

 

 

 

37.8

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internal research and development

 

 

96.8

 

 

 

10.0

 

 

 

60.4

 

 

 

7.3

 

Selling, general and administrative

 

 

176.0

 

 

 

18.1

 

 

 

160.6

 

 

 

19.4

 

Interest and other, net

 

 

(3.3

)

 

 

(0.3

)

 

 

1.9

 

 

 

0.2

 

Earnings before income tax

 

 

118.8

 

 

 

12.2

 

 

 

90.0

 

 

 

10.9

 

Income taxes

 

 

23.5

 

 

 

2.4

 

 

 

24.5

 

 

 

3.0

 

Net earnings

 

$

95.3

 

 

 

9.8

%

 

$

65.5

 

 

 

7.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per shares

 

$

1.48

 

 

 

 

 

 

$

1.04

 

 

 

 

 



Year Ended
June 30, 2020		Year Ended
June 30, 2019
% of
Revenues		% of
Revenues
Total revenues$2,380 100 %$1,362 100 %
Cost of goods sold1,561 66 841 62 
Gross margin820 34 521 38 
Operating expenses:    
Internal research and development339 14 139 10 
Selling, general and administrative441 19 234 17 
Interest and other, net103 4 20 1 
Earnings before income tax(64)(3)129 9 
Income taxes3 — 21 2 
Net earnings$(67)(3)%$108 8 %
Diluted earnings per share$(0.79)$1.63 

57

Consolidated

Revenues.

Revenues. Revenues for the year ended June 30, 20172020 increased 18%75% to $972.0$2,380 million, compared to $827.2$1,362 million for the fiscal year ended June 30, 2016.2019. The Company had seen continued increased demand from the optical communications customer base as a result of the continuation of the China broadband initiative, datacenter and U.S. metro upgrade cycles (including cable television). In addition, the Company’s II-VI Laser Solutions segment saw increased demand for its products addressing CO2, laser optics, one-micron laser and diamond optic products.   

Gross margin. Gross margin as a percentage ofincrease in revenues for the year ended June 30, 2017 was $388.3 million or 39.9%, compared to $312.8 million or 37.8% for the fiscal year ended June 30, 2016. The improvement in gross margin was primarily driven by incremental margins realized onattributed to the Company’s higher revenue levels,acquisition of Finisar, which increased approximately $145.0contributed $938 million from the prior year, as well as favorable product mix primarily in the II-VI Photonics segment.

Internal research and development. Company-funded internal research and development expenses for the year ended June 30, 2017 were $96.8 million, or 10.0% of revenues, compared to $60.4 million, or 7.3% of revenues for the fiscal year ended June 30, 2016. The2020. In addition to the acquisition of Finisar, the increase in internal researchrevenues within Photonic Solutions was driven by increased demand from customers in the optical communication market, ROADM and development expense forother optical communication products addressing the growing deployment of 5G optical networks. Compound Semiconductors recorded a 13% revenue increase during fiscal year 20172020, which in addition to revenues from Finisar, was driven by strengthening demand for SiC substrate products addressing RF electronics and high-power switching systems. This segment also realized increased revenues from its aerospace and defense products addressing strengthening demand from customers in the intelligence, surveillance and reconnaissance markets.


Gross margin. Gross margin for the year endedJune 30, 2020was $820 million, or34%, of total revenues, compared to $521 million, or38%of total revenues,for the same period fiscal year 2019. Gross margin as a percentage of revenues decreased 380 basis points compared to fiscal year 2019 despite the 75% increase in revenues during this same fiscal year. Gross margin was negatively impacted by additional cost of goods sold of $88 million related to the fair value adjustment of the acquired Finisar inventory, and as the result of product mix relating to Finisar's Transceiver product line which has a lower gross margin profile than the Company’s continued investments in the development of the technology required to produce new optoelectronic devices in large volume for future applications, as well as new product introductions across the Company’s segments.

Selling, generalCompany's historical margins.


Internal research and administrative. SG&Adevelopment. Company-funded IR&D expenses for the fiscal year ended June 30, 20172020 were $176.0$339 million, or 18.1%14% of revenues, compared to $160.6$139 million, or 19.4%10% of revenues, fiscal year 2019. The increase in IR&D expenses was primarily due to the Company continuing to invest in new products and processes across all its businesses including investments in 5G technology, 3D Sensing, indium phosphide, LIDAR and other emerging market trends.

Selling, general and administrative. SG&A expenses for the fiscal year ended June 30, 2016.2020 were $441 million, or 19% of revenues, compared to $234 million, or 17% of revenues, fiscal year 2019. The increase in SG&A in absolute dollars was primarily the result of a higher revenue base requiring moretransaction costs incurred relating to the acquisition of Finisar as well as the SG&A support. The Company experienced favorable leverage as a result of capitalizing on synergies created from the Company’s acquisitions over the past several years.   

Finisar acquisition.


Interest and other, net. Interest and other, net for the year ended June 30, 20172020 was incomeexpense of $3.3$103 million compared to expense of $1.9$20 million for thefiscal year ended June 30, 2016. Included in interest2019. Interest and other, net wereprimarily includes $89 million for interest expense on borrowings, interest income on excess cash reserves, foreign currency gains and losses and contingent earnout and technology transfer income from the sale of the ANADIGICS RF business that occurred in June 2016. In particular, for the fiscal year ended June 30, 2017, other income consisted primarily$14 million of foreign currency gains of $1.3 million, income from the residual agreements on the sale of the RF business noted above of $7.0 million,losses, and interest income of $0.9 million on the Company’s excess cash reserves, offset by interest expense of $6.8 million on outstanding borrowings. The fiscal year ended June 30, 2016 expense of $1.9 million included $3.1$3 million of interestequity earnings from unconsolidated investments.Interest expense onincreased due to the Company’s outstanding borrowings, offset by $1.2 million of interest income on the Company’s excess cash reserves. The increase in interest expense in fiscal year 2017 was the result of higher levels of outstanding borrowings.

debt incurred in conjunction with the acquisition of Finisar. In addition, the Company expensed $4 million of debt extinguishment costs during fiscal year 2020 and recorded a $5 million impairment charge for an unconsolidated investment as its carrying value was determined to be unrecoverable.


Income taxes.The Company’s year-to-date effective income tax rate at June 30, 20172020 was 19.8%,a (5)% benefit, compared to an effective tax rate of 27.3%17% fiscal year 2019. Fiscal year 2020’s effective tax rate was negatively impacted by the U.S. enacted tax legislation related to GILTI partially offset by research and development incentives in certain jurisdictions.
Photonic Solutions ($ in millions)

Year Ended
June 30,		%
Increase
20202019
Revenues$1,537 $639 141 %
Operating income$50 $82 (39)%

The above operating results for the fiscal year ended June 30, 2016. The variation between2020 include the Company’s effective tax rate and the U.S. statutory rateacquisitions of 35% was primarily due to the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The lower year-to-date effective tax rate was primarily driven by the reversal of certain valuation allowances triggered by the acquisition of IPI, which generated deferred tax liabilities that offset the previously reserved deferred tax asset.

II-VI Laser Solutions ($Finisar in millions)

September 2019.

 

 

 

 

 

 

 

 

 

 

%

 

 

 

Year Ended

 

 

Increase

 

 

 

June 30,

 

 

(Decrease)

 

 

 

2017

 

 

2016

 

 

 

 

 

Revenues

 

$

339.3

 

 

$

303.0

 

 

 

12

%

Operating income

 

$

30.9

 

 

$

36.2

 

 

 

(15

%)

Revenues for the year ended June 30, 20172020 for II-VI LaserPhotonic Solutions increased 12%141% to $339.3$1,537 million, compared to $303.0$639 million for fiscal year ended June 30, 2016. Revenues included $24.0 million for fiscal 2017 and $13.9 million2019. Included in revenue for fiscal year 2016, respectively, attributed to2020 was $904 million of revenues from the acquisitions.Finisar acquisition. Exclusive of acquisitions,the acquisition, the increase in revenues forwas attributed to increased demand of our 5G optical networks driven by the fiscal year ended June 30, 2017 was the result of higher demand for high- and low-power laser optics, one-micron laser applications, and semiconductor photolithography tools and precision optics in laser applications up to 1 kilowatt for marking and engraving.  

China broadband initiative.

Operating income for the year ended June 30, 20172020 for II-VI LaserPhotonic Solutions decreased 15%39% to $30.9$50 million, compared to $36.2an operating income of $82 million for fiscal year June 30, 2016. Operating2019. The decrease in operating income was impactedprimarily due to acquisition related expenses related to amortization expense on acquired intangible assets and the expensing of acquired inventory fair value step-up partially offset by incremental margin realized on increased revenues during the segment’s ongoing internal research and development investments for its new optoelectronic laser platform. During fiscal year 2017, this expense increased approximately $30.2 million over fiscal year 2016.

year.

58

II-VI Photonics


Compound Semiconductors ($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

 

 

 

Revenues

 

$

418.5

 

 

$

325.9

 

 

 

28

%

Operating income

 

$

63.0

 

 

$

37.8

 

 

 

67

%


Revenues

Year Ended
June 30,		%
Increase
20202019
Revenues$821 $724 13 %
Operating income$62 $82 (24)%

The above operating results for the year ended June 30, 2017 for II-VI Photonics increased 28% to $418.5 million, compared to $325.9 million2020 include the Company's acquisition of Finisar in September 2019.

Revenues for the fiscal year ended June 30, 2016. The Company realized2020 for Compound Semiconductors increased revenues from the broadband China initiative as China continued expansion of its geographical broadband networks. In addition, increased market share gains in the datacenter communications market and undersea fiber optic networks and new product introductions fueled the higher revenues during the fiscal year ended June 30, 2017.

Operating income for the year ended June 30, 2017 for II-VI Photonics increased 67%13% to $63.0$821 million, compared to an operatingrevenues of $724 million for fiscal year 2019. The increase in revenues during fiscal year 2020 was primarily driven by increased VCSEL product shipments addressing the 3D Sensing consumer market, and increased revenues to customers in the aerospace and defense market.

Operating income of $37.8 million for the fiscal year ended June 30, 2016. The increase in operating income was primarily due2020 for Compound Semiconductors decreased 24% to incremental margin realized on the higher revenue volume as well as higher margin product mix, including terrestrial and submarine 980nm pumps and amplifiers, and new product introductions which have higher margin profiles.

II-VI Performance Products ($ in millions)

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

 

 

 

Revenues

 

$

214.2

 

 

$

198.3

 

 

 

8

%

Operating income

 

$

21.6

 

 

$

17.8

 

 

 

21

%

Revenues for the year ended June 30, 2017 for II-VI Performance Products increased 8% to $214.2$62 million, compared to $198.3operating income of $82 million for fiscal year June 30, 2016.2019. The increasedecrease in revenues for theoperating income during fiscal year ended June 30, 20172020 was primarily driven by continued growth in the 4G base station marketacquisition of Finisar, which was expanding geographically. Revenue growth was also driven by increasing demand for 150mm power device products asincludes unabsorbed operating costs incurred at the market enteredsegment's Sherman, Texas wafer fabrication facility during the manufacturing phase in the transition from 100mm to 150mm SiC substrates.qualification phase. In addition, the segment’s semiconductor product offerings experienced increased demands as EUV lithography ramped as partsegment incurred acquisition related expenses associated with expensing of its anticipated adoption. 

Operating income for the year ended June 30, 2017 for II-VI Performance Products increased 21% to $21.6 million, compared to $17.8 million for fiscal year June 30, 2016. Incremental margins on higher segment revenues led by SiC substrate revenues contributed to the increased operating income. 

fair value inventory write-up and other related acquisition expenses.


LIQUIDITY AND CAPITAL RESOURCES

Historically,

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

Sources (uses) of Cash (millions):

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Year Ended June 30,202120202019

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

161.0

 

 

$

118.6

 

 

$

123.0

 

Net cash provided by operating activities$574 $297 $179 

Net proceeds on long-term borrowings

 

 

153.0

 

 

 

104.0

 

 

 

59.5

 

Net proceeds from equity issuanceNet proceeds from equity issuance1,611 — — 

Proceeds from exercises of stock options

 

 

10.5

 

 

 

15.1

 

 

 

9.7

 

Proceeds from exercises of stock options32 14 9 
Proceeds on new long-term borrowingsProceeds on new long-term borrowings— 2,121 — 
Proceeds from prior credit facility and other borrowingsProceeds from prior credit facility and other borrowings— 10 150 
Payments on Finisar NotesPayments on Finisar Notes— (560)— 
Payments under prior term loan and credit facilityPayments under prior term loan and credit facility— (177)(135)
Debt issuance costsDebt issuance costs— (64)(6)
Common stock repurchasesCommon stock repurchases— (2)(2)
Payments under new long-term borrowings and credit facilityPayments under new long-term borrowings and credit facility(926)(138)— 

Additions to property, plant & equipment

 

 

(153.4

)

 

 

(138.5

)

 

 

(58.2

)

Additions to property, plant & equipment(146)(137)(137)

Purchases of businesses, net of cash acquired

 

 

(80.5

)

 

 

(40.0

)

 

 

(122.2

)

Purchases of businesses, net of cash acquired(34)(1,037)(83)

Purchases of equity investments

 

 

(52.1

)

 

 

-

 

 

 

-

 

Purchases of treasury stock

 

 

(49.9

)

 

 

-

 

 

 

(6.3

)

Debt issuance costs

 

 

(10.1

)

 

 

-

 

 

 

-

 

Payment of dividendsPayment of dividends(20)— — 

Payments in satisfaction of employees' minimum tax obligations

 

 

(6.6

)

 

 

(4.1

)

 

 

(2.0

)

Payments in satisfaction of employees' minimum tax obligations(20)(29)(7)

Payment on earnout consideration

 

 

-

 

 

 

(2.0

)

 

 

-

 

Proceeds from the sale of business

 

 

-

 

 

 

-

 

 

 

45.0

 

Other financing activities

 

 

-

 

 

 

-

 

 

 

0.6

 

Effect of exchange rate changes on cash and cash equivalents and other

 

 

3.2

 

 

 

0.3

 

 

 

(4.3

)

Other investing and financingOther investing and financing5 — — 
Effect of exchange rate changes on cash and cash equivalents and other itemsEffect of exchange rate changes on cash and cash equivalents and other items22 (12)(10)



59

Net cash provided by operating activities:

Net cash provided by operating activities was $161.0$574 million during the current fiscal year ended June 30, 2021 compared to $297 million of cash provided by operating activities during the same period last fiscal year. The increase in cash flows provided by operating activities during the year ended June 30, 2021 compared to the same period last fiscal year was primarily driven by additional net earnings of $277 million in the year ended June 30, 2021 compared to the same period last fiscal year.
Net cash provided by operating activities was $297 million and $118.6$179 million for the fiscal years ended June 30, 20182020 and 2017,2019, respectively. The increase in cash provided by operations during the current fiscal year was due to a combination of higher non-cash items such as depreciation, amortization, and share-based compensation expense and better working capital management of accounts payable, income tax payable and other operating net assets.

Net cash provided by operating activities was $118.6 million and $123.0 million for the fiscal years ended June 30, 2017 and 2016, respectively. The decrease in cashflows provided by operating activities during the fiscal year 2017ended June 30, 2020 compared to fiscal year ended June 30, 2019 was due toprimarily driven by increased working capital requirements to support higher revenue growth mainly relating to increased inventory build to address product demandnon-cash charges for depreciation and amortization as well as higher levelsoverall favorable changes in working capital offset by lower earnings as a result of accounts receivable fromacquisition-related expenses incurred for the revenue growth.  

acquisition of Finisar. Acquisition-related expenses include transaction expenses, expensing of the fair value write-up of acquired inventory and increased depreciation and amortization charges for acquired property, plant and equipment and intangible assets.

Net cash used in investing activities:

Net cash used in investing activities was $285.0 million and $177.2$173 million for the fiscal yearsyear ended June 30, 2018 and 2017, respectively. The increase in2021, compared to net cash used of $1,179 million for the same period last fiscal year. Net cash used in investing activities wasduring the resultcurrent period primarily included $34 million for net cash paid for the acquisitions of a higher levelAscatron AB and INNOViON Corporation and $146 million of investments in property, plant & equipmentcapital expenditures to continue to buildincrease capacity to meet the growing demand for the Company’s product portfolio.  In addition, the Company completed several strategic investments in both wholly- and majority-owned investments during the current fiscal year, totaling approximately $132.6 million.

Net cash used in investing activities was $177.2$1,179 million and $135.2$224 million for the fiscal years ended June 30, 20172020 and 2016,2019, respectively. The increase inNet cash used in investing activities wasduring the result of increased levels of capital expenditures of $138.5 million in fiscal year 2017 compared to $58.2ended June 30, 2020 primarily included $1,037 million in fiscal year 2016 was primarily driven by additional capital expendituresfor net cash paid for the acquisition of Finisar, and $137 million of cash paid for property, plant and equipment to increase capacity to meet the growing demand for the Company’s capability to produce new optoelectronic devices as it accelerates its new technology investment platform. Additionally, during fiscal year 2017, the Company purchased IPI, located in Hillsborough, New Jersey, for $39.4 million, net of cash acquired and certain assets of DirectPhotonics Industries GmbH, located in Berlin, Germany, for $0.6 million.

product portfolio.

Net cash provided by financing activities:

Net cash provided by financing activities was $97.0$676 million for the fiscal year ended June 30, 20182021, compared to net cash provided by financing activities of $111.6$1,174 million for the same period last fiscal year. Net cash provided by financing activities was primarily impacted by $1,611 million of net proceeds from the Company's underwritten public offering in July 2020 as well as the issuance of the Series B Preferred Stock in March 2021, offset by cash used to repay borrowings of $926 million.
Net cash provided by financing activities was $1,174 million for the year ended June 30, 2017. During2020 compared to net cash provided by financing activities of $5 million for the currentyear ended June 30, 2019. Net cash provided by financing activities during the fiscal year the Company completed its offering and saleended June 30, 2020 included net borrowings on long-term debt of $345$1,256 million aggregate principal amount of convertible notes.  In addition, the Company borrowed $100 million on its revolving credit facilityprimarily to fund its investments in capital expendituresthe acquisition of Finisar, and research and development to address new and growing technology platforms.  The net proceeds from the convertible debt offering as well as cash generated from operations was used to repay $272 million on the revolver, $20 million on the term loan and $10.1$14 million of convertiblecash received from exercises of stock options. Net cash provided by financing activities was offset by $64 million of debt issuance costs.  The Company also utilized $49.9 million of convertible debt proceeds to repurchase 1,414,900 of its common stock.  The Company realized $10.5 million of proceeds received fromcosts associated with the exercise of stock options offset, by $6.6increased borrowings, $29 million of cash payments in satisfaction of employees’ minimum tax obligations onfrom the vesting of equity awards and a $2 million payment to repurchase common stock through the Company’s restrictedCompany's share repurchase program.

Senior Credit Facilities

The Company currently has Senior Credit Facilities with Bank of America, N.A., as Administrative Agent, Swing Line Lender and performance sharesan L/C Issuer, and the other lenders party thereto.

The credit agreement governing the Senior Credit Facilities (the "Credit Agreement") provides 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 “Term A Facility”),
(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”), which was repaid in full during the current fiscal year.

Net cash provided by financing activities was $111.6quarter ended September 30, 2020, and

60

(iii)Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit facility (the “Revolving Credit Facility” and together with the year ended June 30, 2017 comparedTerm Loan Facilities, the “Senior Credit Facilities”).
The Credit Agreement also provides for a letter of credit sub-facility not to net cash providedexceed $25 million and a swing loan sub-facility initially not to exceed $20 million.
The Term B Facility was repaid in full by financing activities of $61.5 million for the year ended June 30, 2016. During fiscal year 2017, the Company borrowed $129.0subsequent to the public offerings that closed on July 7, 2020. In conjunction with the repayment, the Company paid $1 million to finance its current year acquisitionsin associated interest and investments in capital expenditures for its new VCSEL investment platform and other growth platforms. The Company also received $15.1 million of proceeds from stock option exercises. Offsetting the increase in cash were payments made on outstanding borrowings of $25.0 million, $4.1 million of minimum tax withholding obligations on the vesting of employees’ restricted and performance shares, $2.0 million of payments on contingent earnout arrangements and $1.4expensed $25 million of debt issuance costs associatedrelated to the Term B Facility.

The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25% of the initial aggregate principal amount of the Term A Facility, with the Amendedremaining outstanding balance due and payable on the fifth anniversary of September 24, 2019 (the "Finisar Closing Date").

The Company’s obligations under the Senior Credit Facility (as defined below) entered into on July 28, 2016.

Facilities are guaranteed by each of the Company’s existing or future direct and indirect domestic subsidiaries (collectively, the “Guarantors”). Borrowings under the Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and the Guarantors, except that no real property is collateral under the Senior Credit Facilities.

All amounts outstanding under the Senior Credit Facilities become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25% Convertible Senior Notes

On due 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI Notes.

Amounts outstanding under the Senior Credit Facilities bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances relating to events of default.  The Company has entered into an interest rate swap contract to hedge its exposure to interest rate risk on its variable rate borrowings under the Senior Credit Facilities.  Refer to Note 15 for further information regarding this interest rate swap.
The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00 to 1.00. The Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Finisar Closing Date, commencing with the first full fiscal quarter after the Finisar Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Finisar Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.
0.50% Finisar Convertible Notes
Finisar’s outstanding 0.50% Convertible Senior Notes due 2036 (the “Finisar Notes”) may be redeemed at any time on or after December 22, 2021 in whole or in part at the option of the Company at a redemption price equal to one hundred percent (100%) of the principal amount of such Finisar Notes plus accrued and unpaid interest. Each holder of Finisar Notes also may require Finisar to repurchase all or any portion of such holder’s outstanding Finisar Notes for cash on December 15, 2021, December 15, 2026 and December 15, 2031 at a repurchase price equal to one hundred percent ( 100%of the principal amount of such Finisar Notes plus accrued and unpaid interest. The Finisar Notes will mature on December 15, 2036. Interest on the Finisar Notes accrues at 0.50% per annum, paid semi-annually, in arrears, on June 15 and December 15 of each year.
In connection with the acquisition of Finisar, the Company, Finisar and the trustee entered into a First Supplemental Indenture, dated as of September 24, 2019 (the “First Supplemental Indenture”). The First Supplemental Indenture supplements the base indenture (as supplemented, the “Finisar Indenture”), which governs the Finisar Notes. Pursuant to the terms of the First Supplemental Indenture, the Company has fully and unconditionally guaranteed, on a senior unsecured basis, the due and punctual payment and performance of all obligations of Finisar to the holders of the Finisar Notes. The First Supplemental Indenture also provides that the right of holders of Finisar Notes to convert Finisar Notes into cash and/or shares of Finisar’s
61

common stock, is changed to a right to convert Finisar Notes into cash and shares of the Company’s common stock, subject to the terms of the Finisar Indenture.
0.25% Convertible Senior Notes
In August 24, 2017, the Company entered into a purchase agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein (collectively, the “Initial Purchasers”), to issueissued and sell $300sold $345 million aggregate principal amount of our 0.25% convertible senior notes due 2022 (the "Notes")the II-VI Notes in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. In addition, we granted the Initial Purchasers a 30-day option to purchase up to an additional $45 million aggregate principal amount of the Notes (the “Over-Allotment Option”).

On August 29, 2017, the Initial Purchasers exercised their Over-Allotment Option to purchase the entire $45 million in aggregate principal amount of additional Notes. The Notes mature on September 1, 2022, unless earlier repurchased by the Company or converted by holders in accordance with the terms of the Notes. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2018.

The sale of the Notes to the Initial Purchasers settled on August 29, 2017, and resulted in approximately $336 million in net proceeds to the Company after deducting the initial purchasers’ discount and the offering expenses. The net proceeds from the offering and sale of the Notes were used, in part, to repurchase approximately $49.9 million of our common stock. The Company used the remaining net proceeds to repay $252 million on its revolving credit facility and to pay debt issuance costs of $10.1 million.

The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of our indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure secured debt will be available to pay obligations on the Notes only after all indebtedness under such secured debt has been repaid in full from such assets. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election.

As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount.discount, which was $58 million as of June 30, 2021. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the II-VI Notes using the effective interest method with an effective interest rate of 4.5% per annum.

method.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is 21.25 shares of common stock per $1,000 principal amount of II-VI Notes, which is equivalent to an initialconversion price of $47.06 per share of II-VI common stock. Throughout the term of the II-VI Notes, the conversion rate may be adjusted upon the occurrence of


certain events. The if-converted value of the II-VI Notes amounted to $318.5$532 million as of June 30, 20182021 and $346 million as of June 30, 2020 (based on the Company’s closing stock price on the last trading day of the year ended June 30, 2018)fiscal periods then ended).

Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.


Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only upon satisfactionunder the following circumstances:

(i) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2017 (and only during such fiscal quarter), if the last reported sale price of the II-VI Common Stock for at least one20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the conditions as follows:

a)

During any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

b)

During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or


c)

Upon the occurrence of specified corporate events.

(ii) during the five business day period immediately after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the II-VI Common Stock and the conversion rate on each such trading day; or


(iii) upon the occurrence of certain specified corporate events.

On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes in multiplesat any time, regardless of $1,000 principal amount,the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the Company’s election.

Because the last reported sale price of II-VI Common Stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended June 30, 2021 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the II-VI Notes are convertible at the option of the holder regardlessholders thereof during the fiscal quarter ending September 30, 2021.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the Company’s election.

Holders of the foregoing circumstances.

AsII-VI Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited. II-VI Notes were convertible during the quarters ended March 31, and June 30, 2018, the Notes are not convertible. The Notes will become convertible upon the satisfaction of at least one of the above conditions. In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount of offering costs incurred to the debt and equity components based on their relative values. Offering costs attributable to the debt component, totaling $8.4 million, are being amortized as non-cash interest expense over the term of the Notes, and offering costs attributable to the equity component, totaling $1.7 million,2021; conversions were recorded within Shareholders' equity.

The Company was in compliance with all the covenants set forth under the indenture.

immaterial.

62

The following table sets forth total interest expense recognized related to the II-VI Notes for the fiscal yearyears ended June 30, 2018 (representing an2021, 2020 and 2019 ($000):

Year Ended June 30, 2021Year Ended June 30, 2020Year Ended June 30, 2019
0.25% contractual coupon$874 $876 $874 
Amortization of debt discount and debt issuance costs including initial purchaser discount13,748 13,172 12,550 
Interest expense$14,622 $14,048 $13,424 



The effective interest rate of 4.5%):

Year ended June 30,

 

2018

 

0.25% contractual coupon

 

$

731

 

Amortization of debt discount and debt issuance costs including initial purchaser discount

 

 

10,058

 

Interest expense

 

$

10,789

 

on the liability component for the periods presented was 5%. The unamortized discount amounted to $49.3$15 million as of June 30, 20182021, and is being amortized over 4 years.

Amended Credit Facility

On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 million, as well as a $100 million term loan. The term loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July and October, with the first payment having commenced on October 1, 2016, as follows: (i) twenty consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 27, 2021. Amounts borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiarylife of the Company. The Company has the option to request an increase to the size of the revolving credit facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through July 27, 2021 and has an interest rate of either a Base Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility. If the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.25% and if the Euro-Rate Option is selected for a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the ratio of the Company’s consolidated indebtedness to consolidated EBITDA. Additionally, the Credit Facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company was in compliance with all financial covenants under its Amended Credit Facility.

notes

Yen Loan

The Company’s yen denominated line of credit is a 500 million Yen ($4.5 million) facility. The Yen line of credit matures in August 2020. The interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.75%. At June 30, 2018 and 2017, the Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company had $2.7 million outstanding and was in compliance with all covenants under its Yen facility.

Aggregate Availability

The Company had aggregate availability of $246.4 million and $73.5$449 million under its lines of creditRevolving Credit Facility as of June 30, 2018 and 2017, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 2018 and 2017, total outstanding letters of credit supported by the credit facilities were $0.4 million and $1.3 million, respectively.

2021.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 1.3%1% and 2.2%3% for the years ended June 30, 20182021 and 2017,2020, respectively. The weighted average of total borrowings for the fiscal years ended June 30, 2018 and 2017 was $476.6 million and $272.1 million, respectively.

Share Repurchase Programs

In August 2017, in conjunction with the Company’s offering and sale of the ConvertibleII-VI Notes, the Company’s Board of DirectorsCompany was authorized the Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from the offering and sale of the Notes.those convertible notes. The shares that were purchased by the Company pursuant to this authorization were retained as treasury stock and are available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for approximately $49.9$50 million pursuant to this authorization.

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common Stockstock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase shares pursuant to this Program during the fiscal year ended June 30, 2021. During the fiscal year ended June 30, 2020, the Company purchased 50,000 shares of its common stock for $2 million under this program. As of June 30, 2018,2021, the Company has cumulatively purchased 1,316,5871,416,587 shares of its common stock pursuant to the Program for approximately $19.0 million

$22 million. The dollar value of shares as of June 30, 2021 that may yet be purchased under the Program is approximately $28 million.

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

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

247.0

 

 

$

271.9

 

Available borrowing capacity

 

 

246.4

 

 

 

73.5

 

Total debt obligations

 

 

439.0

 

 

 

342.0

 


June 30, 2021June 30, 2020
Cash and cash equivalents$1,592 $493 
Available borrowing capacity449 375 
Total debt obligations1,375 2,255 

The Company believes cash flow from operations, existing cash reserves and available borrowing capacity from its credit facilities and its recent equity raise will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and capital lease obligations, investments in internal research and development, share repurchases, and internal and external growth objectives at least through fiscal year 2019. The Company expects to complete its acquisition of CoAdna, Inc., a publically traded company on the Taiwan Stock Exchange, on or about September 1, 2018. The purchase price will be approximately $85.0 million, net of any cash acquired and will be financed by a combination of cash on hand and borrowings on the Company’s Amended Credit Facility.

2022.

63

The Company’s 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, 2018,2021, the Company held approximately $218approximately $406 million of cash cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the United States. The recently enacted Act created significant changes to the taxation of undistributed foreign earnings and has changed our future intentions regarding repatriation of earnings. The Company is currently evaluating the full impact of the Act and may update future cash repatriation intentions.


64


Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements include the operating lease obligations and the purchase obligations disclosed in the contractual obligations table below, as well as letters of credit as discussed in Note 7 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.below. The Company enters into these off-balance sheet arrangements to acquire goods and services used in its business.

Tabular Disclosure of Contractual Obligations

 

 

Payments Due By Period

 

 

 

 

 

 

 

Less Than 1

 

 

1-3

 

 

3-5

 

 

More Than 5

 

Contractual Obligations

 

Total

 

 

Year

 

 

Years

 

 

Years

 

 

Years

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations

 

$

496,548

 

 

$

20,000

 

 

$

46,548

 

 

$

430,000

 

 

$

-

 

Interest payments(1)

 

 

28,181

 

 

 

7,368

 

 

 

12,244

 

 

 

3,591

 

 

 

4,978

 

Capital lease obligation

 

 

24,940

 

 

 

579

 

 

 

2,168

 

 

 

2,703

 

 

 

19,490

 

Operating lease obligations(2)

 

 

127,900

 

 

 

20,100

 

 

 

33,600

 

 

 

21,500

 

 

 

52,700

 

Purchase obligations(3)(4)(5)

 

 

118,351

 

 

 

114,307

 

 

 

4,044

 

 

 

-

 

 

 

-

 

Total

 

$

795,920

 

 

$

162,354

 

 

$

98,604

 

 

$

457,794

 

 

$

77,168

 

(1)

Interest payments represent both variable and fixed rate interest obligations based on the interest rate in place at June 30, 2018, relating to the Amended Credit Facility, the Notes and interest relating to the Company’s capital lease obligation.  

(2)

Includes an obligation for the use of two parcels of land related to II-VI Performance Metals. The lease obligations extend through years 2039 and 2061, respectively.

Payments Due By Period
Less Than 11-33-5More Than 5
Contractual ObligationsTotalYearYearsYearsYears
($000)
Long-term debt obligations$1,417,270 $62,050 $469,069 $871,263 $14,888 
Interest payments (1)
53,255 16,577 30,415 6,263 — 
Operating lease obligations, including imputed interest193,027 34,076 58,397 41,964 58,590 
Finance lease obligations, including imputed interest29,780 2,486 5,178 5,468 16,648 
Purchase and sponsorship obligations (2)
386,980 351,525 32,685 1,231 1,539 
Total$2,080,312 $466,714 $595,744 $926,189 $91,665 

(3)

A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including fixed or minimum quantities to be purchased; minimum or variable price provisions, and the approximate timing of the transaction. These amounts are primarily comprised of open purchase order commitments to vendors for the purchase of supplies and materials.

(1)Interest payments represent both variable and fixed rate interest obligations based on the interest rates in effect at June 30, 2021 relating to the Senior Credit Facilities, the currently outstanding 0.50% convertible senior notes assumed in the Finisar Acquisition, and the currently outstanding 0.25% Convertible Senior Notes due 2022.  These interest payments do not reflect the impact of the interest rate swap that hedges our variable interest payments to fixed interest payments.

(4)

Includes cash earnout opportunities based on II-VI EpiWorks and IPI for the achievement of certain agreed-upon financial and operational targets.

(2)A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including fixed or minimum quantities to be purchased, minimum or variable price provisions, and the approximate timing of the transaction. These amounts are primarily composed of open purchase order commitments to vendors for the purchase of supplies and materials.

(5)

Includes the Company’s intention to acquire CoAdna Inc., during the first quarter of fiscal year 2019, in a cash transaction valued at approximately $85.0 million, net of any cash acquired.

Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $2.7 million in 2019. Estimated funding obligations are determined by asset performance, workforce and retiree demographics, tax and employment laws and other actuarial assumptions which may change the annual funding obligations. The funded status of our defined benefit plans is disclosed in Note 1517 to the Company’s Consolidated Financial Statements.

Statements included in Item 8 of this Annual Report on Form 10-K.

The Company’s gross unrecognized income tax benefitsbenefit at June 30, 2018, which are2021 has been excluded from the table above table, were $10.3 million. Thebecause the Company is not currently able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect a significant payment related to these obligations within the next fiscal year.

time.

65

Item 7A.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISKS

The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates and interest rates. In the normal course of business, the Company uses certaina variety of techniques and derivative financial instruments as part of its overall risk management strategy, which is primarily focused on its exposure in relation to the Japanese Yen, Chinese Renminbi, Swiss Franc, Malaysian Ringgit and the Euro. The Company also has transactions denominated in Euros, British Pounds Sterling, Chinese Renminbi and Swiss Francs.Japanese Yen. No significant changes have occurred in the techniques and instruments used other than those described below.

Foreign Exchange Risks

In the normal course of business, the Company enters into foreign currency forward exchange contracts with its financial institutions. The purpose of these contracts is to hedge ordinary business risks regarding foreign currencies on product sales and other transactions denominated in currencies other than the U.S. dollar. Foreign currency exchange contracts are used to limit transactional exposure to changes in currency rates.

used.

Japanese Yen

The Company enters into foreign currency forward contracts that permit it to sell specified amounts of Japanese Yen expected to be received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which export sales are denominated. These contracts provide the Company with an economic hedge in which settlement will occur in future periods, thereby limiting the Company’s exposure. These contracts had a total notional amount of $12.0 million and $12.7 million at June 30, 2018 and 2017, respectively.

A 10% change in the yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of approximately $8.1 million to an increase of approximately $9.9 million for the year ended June 30, 2018.

During June 2018, the Company entered into a $7.0 million month-to-month forward contract that matured on June 29, 2018, to limit exposure to the Yen. Upon expiration of this contract, the Company recorded a loss of $0.2 million in the Consolidated Statement of Earnings.

Chinese Renminbi

During June 2018, the Company entered into a $43.5 million month-to-month forward contract that matured on June 29, 2018, to limit exposure to the Chinese Renminbi. Upon expiration of this contract, the Company recorded a loss of $1.2 million in the Consolidated Statement of Earnings.

Euro

The Company has short-term intercompany notes that are denominated in U.S. dollars with certain European subsidiaries. A 10% change in the Euro to dollar exchange rate would have changed net earnings in the range from a decrease of $0.5 million to an increase of $0.6 million for the year ended June 30, 2018.

The Company monitors its positions and the credit ratings of the parties to these contracts. While the Company may be exposed to potential losses due to risk in the event of non-performance by the counterparties to these financial instruments, it does not currently anticipate such losses.

Assets and liabilities of foreign operations are translated into U.S. dollars using the period-end exchange rates, while income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income within shareholders’ equity.

Interest Rate Risks

Risk

As of June 30, 2018,2021, the Company’s total borrowings of $496.5 million consisted of $147.7 millioninclude variable rate debt borrowings, from a line of credit of $80.0 million denominated in U.S. dollars, a term loan denominated in U.S. dollars of $65.0 million, a line of credit borrowing of $2.7 million denominated in Japanese yen. As such,which exposes the Company is exposed to changes in interest rates. AIn November 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable interest rate debt by effectively converting a portion of interest payments to fixed interest rate debt. However in March of 2020, the Federal Reserve lowered the interest rates, putting our hedge in a negative position.With the hedge in place, a change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $1.5$12 million for the fiscal year ended June 30, 2018.

Discount Rate Risks

As of June 30, 2018, a 10% change in the Company’s discount rate used to determine the pension benefit obligation of the Switzerland Defined Benefit Plan would have had an immaterial impact on the Consolidated Financial Statements.


2021.

66

Item 8.

Item 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management’s Responsibility for Preparation of the Financial Statements

Management is responsible for the preparation of the consolidated financial statementsConsolidated Financial Statements included in this Annual Report on Form 10-K. The consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management. The other financial information contained in this Annual Report on Form 10-K is consistent with the consolidated financial statements.

Consolidated Financial Statements.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance concerning the reliability of the financial data used in the preparation of the Company’s consolidated financial statements,Consolidated Financial Statements, as well as reasonable assurance with respect to safeguarding the Company’s assets from unauthorized use or disposition.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement presentation and other results of such systems.

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018.2021. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included reviewing the documentation of its controls, evaluating the design effectiveness of controls and testing their operating effectiveness. Management excluded from the scope of its assessment of internal control over financial reporting the operations and related assetsinternal controls of Kaiam Laser Limited, Inc.,Ascatron, which was acquired in August 2017.2020, and Innovion, which was acquired in October 2020. The recent acquisitionacquisitions excluded from management’s assessment of internal controls over financial reporting represented approximately $107.2$141.4 million and $98.1million$117.4 million of total assets and net assets, respectively, as of June 30, 20182021 and approximately $3.4$22.4 million and $12.5$2.5 million of total revenues and net loss, respectively, for the fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2018,2021, the Company’s internal controls over financial reporting were effective.

Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal control over financial reporting as of June 30, 2018.2021. Its report is included herein.



67

Report of Independent Registered Public Accounting Firm


To the Shareholders and the Board of Directors and Shareholdersof II-VI Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries

(the Company) as of June 30, 2021 and 2020, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 20, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

  Accounting for Series A Mandatory Convertible Preferred Stock
Description of the Matter
As described in Note 11 to the consolidated financial statements, on July 7, 2020, the Company issued shares of Series A Mandatory Convertible Preferred Stock. Upon conversion, on the mandatory conversion date, each outstanding share of Series A Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a number of shares of the Company’s common stock determined based on the market value of the Company’s common stock on the mandatory conversion date.

Auditing the Company’s accounting for the Series A Mandatory Convertible Preferred Stock was complex due to the significant estimation uncertainty involved in estimating the future market value of the Company’s common stock on the mandatory conversion date, which was used to determine whether the Series A Mandatory Convertible Preferred Stock should be classified within shareholders’ equity on the consolidated balance sheet as well as the related impact to the Company’s earnings per share.The Company used a Monte Carlo simulation model to estimate the future market value of its common stock on the mandatory conversion date, which considers inputs such as volatility and cost of equity, which are forward-looking and could be affected by future economic and market conditions.
68

How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls relating to management’s accounting for the Series A Mandatory Convertible Preferred Stock. For example, we tested controls that address the risks of material misstatement relating to the estimation of the future market value of the Company’s common stock on the mandatory conversion date, including management’s review of the estimation methodology and significant inputs.

To test the Company’s accounting for the Series A Mandatory Convertible Preferred Stock, our audit procedures included, among others, reading the relevant agreements and the Company’s accounting analysis and evaluating the Company’s conclusions as compared to the relevant accounting guidance. To test the estimated future market value of the Company’s common stock, our audit procedures included, among others, assessing the appropriateness of the estimation methodology used and evaluating the significant inputs. We compared the forecasted volatility of the Company’s common stock price to its historical volatility and compared the cost of equity to prior valuations performed by the Company. We also performed sensitivity analyses to evaluate the changes in the estimated future market value of the Company’s common stock that would result from changes in the significant inputs. We involved our valuation specialist to assist in evaluating the methodology used, to test certain significant inputs and to perform comparative calculations.
  Accounting for Series B Convertible Preferred Stock
Description of the MatterAs described in Notes 3, 11 and 16 to the consolidated financial statements, the Company entered into an investment agreement, dated March 25, 2021, and amended and restated as of March 30, 2021, pursuant to which: (1) on March 31, 2021, the Company issued shares of Series B-1 Convertible Preferred Stock; and (2) the Company agreed to issue, immediately prior to the closing of the Company’s acquisition of Coherent, Inc., additional shares of Series B-2 Convertible Preferred Stock. The Series B-1 and B-2 Convertible Preferred Stock are contingently redeemable at the option of the holder on or after the tenth anniversary of the issuance or upon a certain change in control. The Company has concluded that (1) the obligation to issue the shares of Series B-1 Convertible Preferred Stock was required to be measured at fair value as an asset or liability with changes in fair value recognized in earnings; and (2) the obligation to issue the shares of Series B-2 Convertible Preferred Stock is an embedded feature that does not require bifurcation for separate accounting.

Auditing the Company’s accounting for the obligations to issue shares of Series B-1 and B-2 Convertible Preferred Stock was complex due to the significant judgments made by management in determining whether each obligation should be classified and measured as an asset or liability on the consolidated balance sheet or comprises an embedded feature requiring bifurcation and separate accounting.
How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design and tested the operating effectiveness of controls relating to management’s accounting for the Series B Convertible Preferred Stock, including management’s review of the relevant agreements and evaluation of the accounting guidance.

To test the Company’s accounting for the obligations to issue shares of Series B-1 and B-2 Convertible Preferred Stock, our audit procedures included, among others, reading the relevant agreements and the Company’s accounting analysis, assessing the pertinent provisions of the Series B-1 and B-2 Convertible Preferred Stock, and evaluating the Company’s conclusions as compared to the relevant accounting guidance.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2008.

Pittsburgh, Pennsylvania
August 20, 2021
69

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of II-VI Incorporated

Opinion on Internal Control over Financial Reporting


We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2018,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, II-VI Incorporated and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018,2021, based on the COSO criteria.


As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Kaiam Laser Limited, Inc.Ascatron AB (“Ascatron”) and INNOViON Corporation (“Innovion”), which isare included in the June 30, 20182021 consolidated financial statements of the Company and constituted $107.2$141.4 million and $98.1$117.4 million of total and net assets, respectively, as of June 30, 20182021 and $3.4$22.4 million and $12.5$2.5 million of revenues and net loss, respectively, for the fiscal year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Kaiam Laser Limited, Inc.  

Ascatron and Innovion.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 20182021 and 2017,2020, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2018,2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 28, 201820, 2021 expressed an unqualified opinion thereon.


Basis for Opinion


The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.


Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


Definition and Limitations of Internal Control Over Financial Reporting


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


70

/s/ Ernst & Young LLP


Pittsburgh, Pennsylvania


August 28, 2018

20, 2021


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of


71

II-VI Incorporated and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries (the Company) as of June 30, 2018 and 2017, the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with U.S. generally accepted accounting principles.  

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 28, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP  

We have served as the Company’s auditor since 2008.

Pittsburgh, Pennsylvania

August 28, 2018


II-VI Incorporated and Subsidiaries

Consolidated Balance Sheets

($000)

June 30,

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

247,038

 

 

$

271,888

 

Accounts receivable - less allowance for doubtful accounts of $837 at June 30, 2018 and $1,314 at June 30, 2017

 

 

215,032

 

 

 

193,379

 

Inventories

 

 

248,268

 

 

 

203,695

 

Prepaid and refundable income taxes

 

 

7,845

 

 

 

6,732

 

Prepaid and other current assets

 

 

43,654

 

 

 

26,602

 

Total Current Assets

 

 

761,837

 

 

 

702,296

 

Property, plant & equipment, net

 

 

524,890

 

 

 

367,728

 

Goodwill

 

 

270,678

 

 

 

250,342

 

Other intangible assets, net

 

 

125,069

 

 

 

133,957

 

Investments

 

 

69,215

 

 

 

11,727

 

Deferred income taxes

 

 

2,046

 

 

 

3,023

 

Other assets

 

 

7,926

 

 

 

8,224

 

Total Assets

 

$

1,761,661

 

 

$

1,477,297

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

89,774

 

 

 

65,540

 

Accrued compensation and benefits

 

 

66,322

 

 

 

58,178

 

Accrued income taxes payable

 

 

17,392

 

 

 

12,178

 

Other accrued liabilities

 

 

42,979

 

 

 

29,056

 

Total Current Liabilities

 

 

236,467

 

 

 

184,952

 

Long-term debt

 

 

419,013

 

 

 

322,022

 

Deferred income taxes

 

 

27,241

 

 

 

15,345

 

Other liabilities

 

 

54,629

 

 

 

54,415

 

Total Liabilities

 

 

737,350

 

 

 

576,734

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, no par value; authorized - 5,000,000 shares; none issued

 

 

-

 

 

 

-

 

Common stock, no par value; authorized - 300,000,000 shares; issued - 75,692,683 shares at June 30, 2018; 74,081,451 shares at June 30, 2017

 

 

351,761

 

 

 

269,638

 

Accumulated other comprehensive income (loss)

 

 

(3,780

)

 

 

(13,778

)

Retained earnings

 

 

836,064

 

 

 

748,062

 

 

 

 

1,184,045

 

 

 

1,003,922

 

Treasury stock, at cost - 12,395,791 shares at June 30, 2018 and 10,940,062 shares at June 30, 2017

 

 

(159,734

)

 

 

(103,359

)

Total Shareholders' Equity

 

 

1,024,311

 

 

 

900,563

 

Total Liabilities and Shareholders' Equity

 

$

1,761,661

 

 

$

1,477,297

 


June 30,20212020
Assets
Current Assets
Cash and cash equivalents$1,591,892 $493,046 
Accounts receivable - less allowance for doubtful accounts of $924 at June 30, 2021 and $1,698 at June 30, 2020658,962 598,124 
Inventories695,828 619,810 
Prepaid and refundable income taxes13,095 12,279 
Prepaid and other current assets67,617 65,710 
Total Current Assets3,027,394 1,788,969 
Property, plant & equipment, net1,242,906 1,214,772 
Goodwill1,296,727 1,239,009 
Other intangible assets, net718,460 758,368 
Deferred income taxes33,498 22,938 
Other assets193,665 210,658 
Total Assets$6,512,650 $5,234,714 
Liabilities. Mezzanine Equity and Shareholders' Equity
Current Liabilities
Current portion of long-term debt$62,050 $69,250 
Accounts payable294,486 268,773 
Accrued compensation and benefits181,491 157,557 
Operating lease current liabilities25,358 24,634 
Accrued income taxes payable20,295 33,341 
Other accrued liabilities145,909 119,338 
Total Current Liabilities729,589 672,893 
Long-term debt1,313,091 2,186,092 
Deferred income taxes73,962 45,551 
Operating lease liabilities125,541 94,701 
Other liabilities138,119 158,674 
Total Liabilities2,380,302 3,157,911 
Mezzanine Equity
Series B redeemable convertible preferred stock, no par value, 5% cumulative; authorized - 215,000 shares; issued - 75,000 shares at June 30, 2021, redemption value - $759,583726,178 — 
Shareholders' Equity
Series A preferred stock, no par value, 6% cumulative; authorized - 5,000,000 shares; issued - 2,300,000 shares at June 30, 2021445,319 — 
Common stock, no par value; authorized - 300,000,000 shares; issued - 119,126,585 shares at June 30, 2021; issued - 105,916,068 shares at June 30, 20202,028,273 1,486,947 
Accumulated other comprehensive income (loss)14,267 (87,383)
Retained earnings1,136,777 876,552 
3,624,636 2,276,116 
Treasury stock, at cost - 13,640,555 shares at June 30, 2021 and 13,356,447 shares at June 30, 2020(218,466)(199,313)
Total Shareholders' Equity3,406,170 2,076,803 
Total Liabilities, Mezzanine Equity and Shareholders' Equity$6,512,650 $5,234,714 
See Notes to Consolidated Financial Statements.



72

II-VI Incorporated and Subsidiaries

Consolidated Statements of Earnings

(Loss)

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

($000, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,158,794

 

 

$

972,046

 

 

$

827,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

697,506

 

 

 

583,693

 

 

 

514,403

 

Internal research and development

 

 

117,244

 

 

 

96,810

 

 

 

60,354

 

Selling, general and administrative

 

 

208,757

 

 

 

176,002

 

 

 

160,646

 

Interest expense

 

 

18,352

 

 

 

6,809

 

 

 

3,081

 

Other expense (income), net

 

 

(5,259

)

 

 

(10,056

)

 

 

(1,223

)

Total Costs, Expenses and Other Expense (Income)

 

 

1,036,600

 

 

 

853,258

 

 

 

737,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

122,194

 

 

 

118,788

 

 

 

89,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

34,192

 

 

 

23,514

 

 

 

24,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

88,002

 

 

$

95,274

 

 

$

65,486

 

 

 

 

 

 

 

 

��

 

 

 

 

 

Basic Earnings Per Share

 

$

1.41

 

 

$

1.52

 

 

$

1.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

1.35

 

 

$

1.48

 

 

$

1.04

 


Year Ended June 30,202120202019
($000, except per share data)
Revenues$3,105,891 $2,380,071 $1,362,496 
Costs, Expenses and Other Expense (Income)
Cost of goods sold1,889,678 1,560,521 841,147 
Internal research and development330,105 339,073 139,163 
Selling, general and administrative483,989 440,998 233,518 
Interest expense59,899 89,409 22,417 
Other expense (income), net(10,370)13,998 (2,562)
Total Costs, Expenses and Other Expense (Income)2,753,301 2,443,999 1,233,683 
Earnings (Loss) Before Income Taxes352,590 (63,928)128,813 
Income Tax Expense55,038 3,101 21,296 
Net Earnings (Loss)$297,552 $(67,029)$107,517 
Less: Dividends on Preferred Stock$37,231 $— $— 
Net Earnings (Loss) available to the Common Shareholder$260,321 $(67,029)$107,517 
Basic Earnings (Loss) Per Share$2.50 $(0.79)$1.69 
Diluted Earnings (Loss) Per Share$2.37 $(0.79)$1.63 
See Notes to Consolidated Financial Statements.





73

II-VI Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income

(Loss)

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

88,002

 

 

$

95,274

 

 

$

65,486

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

7,152

 

 

 

(2,275

)

 

 

(15,651

)

Pension adjustment, net of taxes of $763, $674, and ($1,886) for the years ended June 30, 2018, 2017, and 2016, respectively

 

 

2,846

 

 

 

2,514

 

 

 

(7,031

)

Other comprehensive income (loss)

 

 

9,998

 

 

 

239

 

 

 

(22,682

)

Comprehensive income

 

$

98,000

 

 

$

95,513

 

 

$

42,804

 


Year Ended June 30,202120202019
($000)
Net earnings (loss)$297,552 $(67,029)$107,517 
Other comprehensive income (loss):
Foreign currency translation adjustments86,991 (15,969)(14,319)
Change in fair value of interest rate swap, net of taxes of $3,372 and $0 for the years ended June 30, 2021 and 2020, respectively12,312 (44,085)— 
Pension adjustment, net of taxes of $576, ($851) and ($1,642) for the years ended June 30, 2021, 2020, and 2019, respectively2,347 (3,108)(6,122)
Other comprehensive income (loss)101,650 (63,162)(20,441)
Comprehensive income (loss)$399,202 $(130,191)$87,076 

See Notes to Consolidated Financial Statements.


74


II-VI Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Comprehensive

 

 

Retained

 

 

Treasury Stock

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Total

 

(000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2015

 

 

71,780

 

 

$

 

226,609

 

 

$

 

8,665

 

 

$

 

587,302

 

 

 

(10,565

)

 

$

 

(93,495

)

 

$

 

729,081

 

Share-based and deferred compensation activities

 

 

1,060

 

 

 

 

17,790

 

 

 

 

-

 

 

 

 

-

 

 

 

(20

)

 

 

 

(466

)

 

 

 

17,324

 

Net earnings

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

65,486

 

 

 

-

 

 

 

 

-

 

 

 

 

65,486

 

Purchases of treasury stock

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

(381

)

 

 

 

(6,284

)

 

 

 

(6,284

)

Foreign currency translation adjustments

 

 

-

 

 

 

 

-

 

 

 

 

(15,651

)

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(15,651

)

Pension adjustment, net of taxes of ($1,886)

 

 

-

 

 

 

 

-

 

 

 

 

(7,031

)

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(7,031

)

Tax deficiency from share-based compensation expense

 

 

-

 

 

 

 

(587

)

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(587

)

Balance - June 30, 2016

 

 

72,840

 

 

$

 

243,812

 

 

$

 

(14,017

)

 

$

 

652,788

 

 

 

(10,966

)

 

$

 

(100,245

)

 

$

 

782,338

 

Share-based and deferred compensation activities

 

 

1,241

 

 

 

 

25,826

 

 

 

 

-

 

 

 

 

-

 

 

 

26

 

 

 

 

(3,114

)

 

 

 

22,712

 

Net earnings

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

95,274

 

 

 

-

 

 

 

 

-

 

 

 

 

95,274

 

Foreign currency translation adjustments

 

 

-

 

 

 

 

-

 

 

 

 

(2,275

)

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(2,275

)

Pension adjustment, net of taxes of $674

 

 

-

 

 

 

 

-

 

 

 

 

2,514

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

2,514

 

Balance - June 30, 2017

 

 

74,081

 

 

$

 

269,638

 

 

$

 

(13,778

)

 

$

 

748,062

 

 

 

(10,940

)

 

$

 

(103,359

)

 

$

 

900,563

 

Share-based and deferred compensation activities

 

 

1,612

 

 

 

 

25,717

 

 

 

 

-

 

 

 

 

-

 

 

 

(41

)

 

 

 

(6,500

)

 

 

 

19,217

 

Net earnings

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

88,002

 

 

 

-

 

 

 

 

-

 

 

 

 

88,002

 

Purchases of treasury stock

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

(1,415

)

 

 

 

(49,875

)

 

 

 

(49,875

)

Foreign currency translation adjustments

 

 

-

 

 

 

 

-

 

 

 

 

7,152

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

7,152

 

Equity portion of convertible debt, net of issuance costs of $1,694

 

 

-

 

 

 

 

56,406

 

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

56,406

 

Pension adjustment, net of taxes of $763

 

 

-

 

 

 

 

-

 

 

 

 

2,846

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

2,846

 

Balance - June 30, 2018

 

 

75,693

 

 

$

 

351,761

 

 

$

 

(3,780

)

 

$

 

836,064

 

 

 

(12,396

)

 

$

 

(159,734

)

 

$

 

1,024,311

 


Accumulated
Other
Common StockPreferred StockComprehensiveRetainedTreasury StockMezzanine Equity
SharesAmountSharesAmountIncome (Loss)EarningsSharesAmountTotalPreferred SharesAmount
(000, including share amounts)
Balance - June 30, 201875,693 $351,761 — $— $(3,780)$836,064 (12,396)$(159,734)$1,024,311 — $— 
Share-based and deferred compensation activities622 30,662 — — — — (158)(7,224)23,438 — — 
Net earnings— — — — — 107,517 — — 107,517 — — 
Purchases of treasury stock— — — — — — (50)(1,616)(1,616)— — 
Foreign currency translation adjustments— — — — (14,319)— — — (14,319)— — 
Pension adjustment, net of taxes of ($1,642)— — — — (6,122)— — — (6,122)— — 
Balance - June 30, 201976,315 $382,423 — — $(24,221)$943,581 (12,604)$(168,574)$1,133,209 — $— 
Share-based and deferred compensation activities2,888 116,817 — — — — (702)(29,114)87,703 — — 
Purchases of treasury stock— — — — — — (50)(1,625)(1,625)— — 
Shares issued related to Finisar acquisition26,713 987,707 — — — — — — 987,707 — — 
Net loss— — — — — (67,029)— — (67,029)— — 
Foreign currency translation adjustments— — — — (15,969)— — — (15,969)— — 
Change in fair value of interest rate swap— — — — (44,085)— — — (44,085)— — 
Balance - Balance - Pension adjustment, net of taxes of ($851)— $— — — (3,108)— — — (3,108)— — 
Balance - June 30, 2020105,916 $1,486,947 — — $(87,383)$876,552 (13,356)$(199,313)$2,076,803 — $— 
Share-based and deferred compensation activities2,512 102,737 — — — — (284)(19,153)83,584 — — 
Shares issued in underwritten public offering10,698 438,589 2,300 445,319 — — — — 883,908 — — 
Net earnings— — — — — 297,552 — — 297,552 — — 
Series B shares issued in March 2021— — — — — — — — — 75 716,087 
Accretion to redemption value of Series B shares issued in March 2021— — — — — (508)— — (508)— 508 
Foreign currency translation adjustments— — — — 86,991 — — — 86,991 — — 
Change in fair value of interest rate swap, net of taxes of $3,372— — — — 12,312 — — — 12,312 — — 
Pension adjustment, net of taxes of $576— — — — 2,347 — — — 2,347 — — 
Dividends— — — — — (36,819)— — (36,819)— 9,583 
Balance - June 30, 2021119,127 2,028,273 2,300 445,319 14,267 1,136,777 (13,640)(218,466)3,406,170 75 726,178 

See Notes to Consolidated Financial Statements.



75

II-VI Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Year Ended June 30,202120202019

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities

Net earnings

 

$

88,002

 

 

$

95,274

 

 

$

65,486

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)Net earnings (loss)$297,552 $(67,029)$107,517 
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

Depreciation

 

 

66,202

 

 

 

50,894

 

 

 

44,324

 

Depreciation187,803 156,690 75,745 

Amortization

 

 

14,568

 

 

 

12,743

 

 

 

12,339

 

Amortization82,266 64,192 16,620 

Share-based compensation expense

 

 

15,312

 

 

 

11,756

 

 

 

9,675

 

Share-based compensation expense70,953 68,480 21,946 

Losses (gains) on foreign currency remeasurements and transactions

 

 

850

 

 

 

(1,275

)

 

 

(51

)

Amortization of discount on convertible debt and debt issuance costsAmortization of discount on convertible debt and debt issuance costs20,732 22,150 12,550 
Debt extinguishment expenseDebt extinguishment expense24,747 3,960 — 
Losses (gains) on disposals of property, plant and equipmentLosses (gains) on disposals of property, plant and equipment2,537 (1,461)— 
Losses on foreign currency remeasurements and transactionsLosses on foreign currency remeasurements and transactions5,545 14,442 3,155 

Earnings from equity investments

 

 

(3,594

)

 

 

(744

)

 

 

(29

)

Earnings from equity investments(14,246)(2,775)(3,214)

Deferred income taxes

 

 

945

 

 

 

(1,184

)

 

 

977

 

Deferred income taxes(371)(42,454)(10,462)

Increase (decrease) in cash from changes in (net of effects of acquisitions and dispositions):

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of investmentImpairment of investment— 4,980 — 
Increase (decrease) in cash from changes in (net of effects of acquisitions):Increase (decrease) in cash from changes in (net of effects of acquisitions):

Accounts receivable

 

 

(21,044

)

 

 

(26,247

)

 

 

(20,770

)

Accounts receivable(51,697)(91,981)(50,764)

Inventories

 

 

(38,732

)

 

 

(24,992

)

 

 

(8,650

)

Inventories(44,645)112,572 (36,392)

Accounts payable

 

 

17,436

 

 

 

6,704

 

 

 

5,715

 

Accounts payable2,266 45,026 15,999 

Income taxes

 

 

7,380

 

 

 

735

 

 

 

13,416

 

Income taxes(18,086)40,061 366 

Other operating net assets

 

 

13,689

 

 

 

(5,048

)

 

 

538

 

Accrued compensation and benefitsAccrued compensation and benefits23,934 — — 
Other operating net assets (liabilities)Other operating net assets (liabilities)(14,937)(29,561)25,409 

Net cash provided by operating activities

 

 

161,014

 

 

 

118,616

 

 

 

122,970

 

Net cash provided by operating activities574,353 297,292 178,475 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

Additions to property, plant & equipment

 

 

(153,438

)

 

 

(138,517

)

 

 

(58,170

)

Additions to property, plant & equipment(146,337)(136,877)(137,122)

Purchases of equity investments

 

 

(52,056

)

 

 

-

 

 

 

-

 

Proceeds from the sale of business

 

 

-

 

 

 

-

 

 

 

45,000

 

Purchases of businesses, net of cash acquired

 

 

(80,503

)

 

 

(40,015

)

 

 

(122,157

)

Purchases of businesses, net of cash acquired(34,394)(1,036,609)(83,067)

Other investing activities

 

 

1,047

 

 

 

1,291

 

 

 

161

 

Other investing activities7,774 (5,804)(3,787)

Net cash used in investing activities

 

 

(284,950

)

 

 

(177,241

)

 

 

(135,166

)

Net cash used in investing activities(172,957)(1,179,290)(223,976)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

Proceeds from issuance of 0.25% convertible senior notes due 2022

 

 

345,000

 

 

 

-

 

 

 

-

 

Proceeds from borrowings under Credit Facility

 

 

100,000

 

 

 

129,000

 

 

 

125,200

 

Payments on borrowings under Credit Facility

 

 

(292,000

)

 

 

(25,000

)

 

 

(65,700

)

Payment on earnout consideration

 

 

-

 

 

 

(2,000

)

 

 

-

 

Proceeds from exercises of stock options

 

 

10,469

 

 

 

15,092

 

 

 

9,653

 

Proceeds from issuance of common sharesProceeds from issuance of common shares460,000 — — 
Proceeds from issuance of Series A preferred sharesProceeds from issuance of Series A preferred shares460,000 — — 
Proceeds from issuance of Series B preferred sharesProceeds from issuance of Series B preferred shares750,000 — — 
Proceeds from borrowings of Term A FacilityProceeds from borrowings of Term A Facility— 1,241,000 — 
Proceeds from borrowings of Term B FacilityProceeds from borrowings of Term B Facility— 720,000 — 
Proceeds from borrowings of Revolving Credit FacilityProceeds from borrowings of Revolving Credit Facility— 160,000 — 
Proceeds from borrowings under prior Credit FacilityProceeds from borrowings under prior Credit Facility— 10,000 150,000 
Payment of Finisar NotesPayment of Finisar Notes— (560,112)— 
Payments on borrowings under prior Term Loan, Credit Facility, and other loansPayments on borrowings under prior Term Loan, Credit Facility, and other loans— (176,618)(135,000)
Payments on borrowings under Term A FacilityPayments on borrowings under Term A Facility(137,050)(46,538)— 
Payments on borrowings under Term B FacilityPayments on borrowings under Term B Facility(714,600)(5,400)— 
Payments on borrowings under Revolving Credit FacilityPayments on borrowings under Revolving Credit Facility(74,000)(86,000)— 
Debt issuance costsDebt issuance costs— (63,510)(5,589)
Equity issuance costsEquity issuance costs(58,596)— — 
Proceeds from exercises of stock options and purchases of stock under employee stock purchase planProceeds from exercises of stock options and purchases of stock under employee stock purchase plan32,360 13,467 8,698 
Common stock repurchasesCommon stock repurchases— (1,625)(1,616)

Payments in satisfaction of employees' minimum tax obligations

 

 

(6,564

)

 

 

(4,136

)

 

 

(2,004

)

Payments in satisfaction of employees' minimum tax obligations(19,701)(28,700)(7,092)

Debt issuance costs

 

 

(10,061

)

 

 

(1,384

)

 

 

-

 

Purchases of treasury stock

 

 

(49,875

)

 

 

-

 

 

 

(6,284

)

Payment of dividendsPayment of dividends(20,319)— — 

Other financing activities

 

 

-

 

 

 

-

 

 

 

587

 

Other financing activities(2,367)(2,339)(4,524)

Net cash provided by financing activities

 

 

96,969

 

 

 

111,572

 

 

 

61,452

 

Net cash provided by financing activities675,727 1,173,625 4,877 

Effect of exchange rate changes on cash and cash equivalents

 

 

2,117

 

 

 

496

 

 

 

(4,445

)

Effect of exchange rate changes on cash and cash equivalents21,723 (3,453)(1,542)

Net (decrease) increase in cash and cash equivalents

 

 

(24,850

)

 

 

53,443

 

 

 

44,811

 

Net increase (decrease) in cash and cash equivalentsNet increase (decrease) in cash and cash equivalents1,098,846 288,174 (42,166)

Cash and Cash Equivalents at Beginning of Period

 

 

271,888

 

 

 

218,445

 

 

 

173,634

 

Cash and Cash Equivalents at Beginning of Period493,046 204,872 247,038 

Cash and Cash Equivalents at End of Period

 

$

247,038

 

 

$

271,888

 

 

$

218,445

 

Cash and Cash Equivalents at End of Period$1,591,892 $493,046 $204,872 

Non cash transactions:

 

 

 

 

 

 

 

 

 

 

 

 

Non cash transactions:

Purchases of business - earnout consideration recorded in Other liabilities

 

$

-

 

 

$

-

 

 

$

2,417

 

Purchases of business - earnout consideration recorded in Other accrued liabilities

 

$

-

 

 

$

2,250

 

 

$

1,935

 

Capital lease obligation incurred on facility lease

 

$

-

 

 

$

25,000

 

 

$

-

 

Additions to property, plant & equipment included in accounts payable

 

$

12,313

 

 

$

4,428

 

 

$

-

 

Additions to property, plant & equipment included in accounts payable$32,028 $21,801 $10,986 

See Notes to Consolidated Financial Statements.


76




II-VI Incorporated and Subsidiaries

Notes to the Consolidated Financial Statements


Note 1.

Note 1.        Nature of Business and Summary of Significant Accounting Policies

Nature of Business. II-VI Incorporated and its subsidiaries (the “Company,” “we,” “us,” or “our”), a global leader in engineered materials and optoelectronic components and devices, is a vertically-integrated manufacturing company that develops, manufactures and markets engineered materials and optoelectronic components and devices for precision use in industrial materials processing, optical communications, military,aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive applications. The Company markets its products through its direct sales force and through distributors and agents.

The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company’s manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the Company does occasionally experience problems associated with vendor-supplied materials not meeting specifications for quality or purity. A significant failure of the Company’s suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a material adverse effect on the Company’s results of operations.


In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and world. The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business including the impact to our suppliers and customers as well as the impact to the countries and markets in which II-VI operates. At the onset of the COVID-19 outbreak, the Company began focusing intensely on mitigating the adverse impacts of COVID-19 on foreign and domestic operations starting by protecting its employees, suppliers and customers.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company. All intercompany transactions and balances have been eliminated.

Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation. For II-VI Singapore Pte., Ltd. and itsall foreign subsidiaries II-VI Laser Enterprise of the II-VI Laser Solutions segment, II-VI Network Solutions Division of the II-VI Photonics segment, and II-VI Performance Metals of the II-VI Performance Products segment, thewhose functional currency is not the United States (U.S.) dollar. The determination of the functional currency is made based on the appropriate economic and management indicators.

For all other foreign subsidiaries,U.S. dollar, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates while income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income (loss) within shareholders’ equity in the accompanying Consolidated Balance Sheets.

Cash and Cash Equivalents. The Company considers highly liquid investment instruments with an original maturity of three months or less to be cash equivalents. We place our cash and cash equivalents with high credit quality financial institutions and to date have not experienced credit losses in these instruments. Cash of foreign subsidiaries is on deposit at banks in China, Vietnam, Singapore, Japan, Switzerland, the Netherlands, Germany, the Philippines, Belgium, Italy, Hong Kong, the United Kingdom, South Korea and Taiwan.

Accounts Receivable.The Company establishes anmakes estimates evaluating its allowance for doubtful accountsaccounts. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based onupon its historical experience, current market conditions and believes theany specific customer collection of revenues, net of this allowance, is reasonably assured.

issues that it has identified.

Inventories. Inventories are valued at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis. Inventory costs include material, labor and manufacturing overhead. In evaluating the net realizable value of inventory, management also considers, if applicable, other factors, including known trends, market conditions, currency exchange rates and other such issues. The Company generally records ana reduction to the carrying value of inventory adjustment as a charge against earnings for all products on hand more than 12 to 24 months, depending on the nature of the products that have not been sold to customers or cannot be further manufactured for sale to alternative customers. An additional charge may be recorded for product on hand that is in excess of product sold to customers over the same periods noted above. The cumulative adjustments to the carrying value of inventory totaled $22.5 million and $18.5 million at June 30, 2018 and 2017, respectively.

Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair value upon acquisition. Major improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its
77

property, plant and equipment and other long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. Depreciation on property, plant and equipment and amortization on finance lease right-of-use assets for financial reporting purposes is computed primarily by the straight-line method over the estimated useful lives for building, building improvements and land improvements of 10 to 20 years and three3 to 20 years for machinery and equipment.


Leases. Leases are recognized under Accounting Standards Codification 842, Leases. The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments, unless the implicit rate is readily determinable. If lease terms include options to extend or terminate the lease, the ROU asset and lease liability are measured based on the reasonably certain decision. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all classes of leased assets for which the Company is the lessee. Additionally, for certain equipment leases, the portfolio approach is applied to account for the operating lease ROU assets and lease liabilities. In the Consolidated Statements of Earnings (Loss), lease expense for operating lease payments is recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the ROU asset is amortized over the lease term. Some leasing arrangements require variable payments that are dependent upon usage or output, or may vary for other reasons, such as insurance or tax payments. Variable lease payments are recognized as incurred and are not presented as part of the ROU asset or lease liability. See Note 13 for additional information.

Business Combinations. The Company accounts for businessacquisitions by establishing the acquisition-date fair value as the measurement for all assets acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting. The
On August 20, 2020, the Company accountsacquired all of the outstanding shares of Ascatron AB ("Ascatron"), located in Sweden and on October 1, 2020, the Company acquired the remaining 6.1% interest in INNOViON Corporation ("Innovion"). Refer to Note 4 Acquisitions for contingent consideration received in accordance withfurther information regarding the “Loss Recovery Approach” under U.S. GAAP. Contingent consideration is accounted for as a gain contingencyInnovion and not recognized in other expense (income), net until all contingencies have been satisfied.

Ascatron acquisitions.

Goodwill. The excess purchase price over the fair value allocated to identifiable tangible and intangible net assets of businesses acquired is reported as goodwill in the accompanying Consolidated Balance Sheets. The Company tests goodwill for impairment at least annually as of April 1, or when events or changes in circumstances indicate that goodwill might be impaired. The evaluation of impairment involves comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill). The Company uses a discounted cash flow (“DCF”) model and/or a market analysis to determine the current fair value of its reporting units. A number of significant assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical experience and all available information at the time the fair values of the reporting units are estimated. Goodwill impairment is now measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative assessment described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the quantitative assessment. Otherwise, the Company will forego the quantitative assessment and does not need to perform any further testing. As of April 1 of fiscal years 20182021 and 2017,2020, the Company completed its annual impairment tests of its reporting units using the quantitative assessment. Based on the results of these analyses the Company’s goodwill was not impaired.

Intangibles. Intangible assets are initially recorded at their cost or fair value upon acquisition. Finite-lived intangible assets are amortized for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from five3 to 20 years. Indefinite-lived intangible assets are not amortized but tested annually for impairment at April 1, or when events or changes in circumstances indicate that indefinite-lived intangible assets might be impaired.

78

Investments in Other Entities. In the normal course of business, the Company enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by the Company in business entities, including general or limited partnerships, contractual ventures, or other forms of equity participation. The Company determines whether such investments involve a variable interest entity (“VIE”) based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management determines if the Company is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. When the Company is deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a noncontrolling interest.

The Company generally accounts for investments it makes in VIEs in which it has determined that it does not have a controlling financial interest but has significant influence over andor holds at least a 20% ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for using the cost method unless the investment had a readily determinable fair value, at which it would then be reported.

under ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. If an entity fails to meet the characteristics of a VIE, management then evaluates such entity under the voting model. Under the voting model, management consolidates the entity if they determine that the Company, directly or indirectly, has greater than 50% of the voting shares and determines that other equity holders do not have substantive participating rights.


Series A Mandatory Convertible Preferred Stock. The II-VI Series A Mandatory Convertible Preferred Stock is initially measured at fair value, less underwriting discounts and commissions and offering expenses paid by the Company. The Preferred Stock’s dividends are cumulative, at 6% per annum.

Series B Convertible Preferred Stock. The II-VI Series B-1 Convertible Preferred Stock is initially measured at fair value less issuance costs, accreted to its redemption value over a ten-year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings Available to the Common Shareholder.

Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Such accruals are adjusted as further information develops or circumstances change. Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. If we are unable to correct defects or other problems, we could experience, among other things, loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers. The Company had no material loss contingency liabilities at June 30, 20182021 related to commitments and contingencies.



Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the consolidated financial statementConsolidated Financial Statements and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount more likely than not to be realized.

The Company’s accounting policy is to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets.

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.

Revenue Recognition. Revenue is recognized under Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606), when or as obligations under the terms of a contract with the Company’s customer have been satisfied and control has transferred to the customer. The Company recognizes revenues for product shipments when persuasive evidencehas elected the practical expedient to exclude all taxes from the measurement of the transaction price.
For contracts with commercial customers, which comprise the majority of the Company’s performance obligations, ownership of the goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a sales arrangement exists,product to the
79

customer or receipt of the product has been shippedby the customer and without significant judgments. The majority of contracts typically require payment within 30 to 90 days after transfer of ownership to the customer.
Contracts with the U.S. government through its prime contractors are typically for products or delivered, the sale price is fixed or determinable and collectability is reasonably assured. Title and risk of loss passes fromservices with no alternative future use to the Company with an enforceable right to itspayment for performance completed to date, whereas commercial contracts typically have alternative use. Customized products with no alternative future use to the Company with an enforceable right to payment for performance completed to date are recorded over time utilizing the output method of units delivered. The Company considers this to be a faithful depiction of the transfer to the customer of revenue over time due to short cycle time and immaterial work-in-process balances. The majority of contracts typically require payment within 30 to 90 days after transfer of ownership to the customer.
Service revenue includes repairs, non-recurring engineering, tolling arrangements and installation. Repairs, tolling and installation activities are usually completed in a short period of time (normally less than one month) and therefore recorded at a point in time when the services are completed. Non-recurring engineering arrangements are typically recognized over time under the time of shipmentand material practical expedient, as the entity has a right to consideration from a customer, in most casesan amount that corresponds directly with the exception of certain customers. For these customers, title does not pass and revenue is not recognized untilvalue to the customer has receivedof the product at its physical location.  

entity’s performance completed to date. The Company’smajority of contracts typically require payment within 90 days.

The Company's revenue recognition policy is consistently applied across the Company’sCompany's segments, product lines, services, and geographical locations. Further forFor the periods covered herein, we did not have post shipment obligations such as trainingthe Company measures revenue based on the amount of consideration it expects to be entitled to in exchange for products or installation, customer acceptance provisions, creditsservices, reduced by the amount of variable consideration related to products expected to be returned. The Company determines variable consideration, which primarily consists of product returns and discounts, rebates anddistributor sales price reductions resulting from price protection or other similar privileges. Our distributors and agents are not granted price protection. Our distributors and agents, which comprise less than 10%agreements, by estimating the impact of consolidated revenues, have no additional product return rights beyond the right to return defective products covered by our warranty policy. Revenues generated from transactions other than product shipments are contract related and have historically accounted for approximately 1%such reductions based on historical analysis of consolidated revenues. We believe our revenue recognition practices have adequately considered the requirements under U.S. GAAP.

Shipping and Handling Costs. Shipping and handling costs billed to customers are included in revenues. Shipping and handling costs incurred bysuch activity.

Under ASC 606, the Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are included inrecorded within selling, general and administrative expenses. The Company has elected to recognize the costs for freight and shipping when control over products has transferred to the customer as an expense in cost of goods sold.
The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of future returns, based on historical experience.
The Company offers an assurance-type limited warranty that products will be free from defects in materials and workmanship. The Company establishes an accrual for estimated warranty expenses inat the accompanying Consolidated Statementstime revenue is recognized. The warranty is typically one year, although can be longer periods for certain products, and is limited to either (1) the replacement or repair of Earnings. Total shippingthe product or (2) a credit against future purchases.
The Company believes that disaggregating revenue by end market provides the most relevant information regarding the nature, amount, timing, and handling revenueuncertainty of revenues and cash flows. See Note 5. Revenue from Contracts with Customers.
Research and Development. Research and development expenses include salaries, contractor and consultant fees, supplies and materials, as well as costs related to other overhead such as depreciation, facilities, utilities and other departmental expenses. The costs we incur with respect to internally developed technology, including allocations of our wafer fabrication and other manufacturing facilities and resources utilized to support R&D programs, are included in revenues and in selling, general and administrative expenses were not significant for the fiscal years ended June 30, 2018, 2017 and 2016.

Research and Development. Internal research and development costs and costs not related to customer and government funded research and development contracts are expensedexpenses as incurred.

Share-Based Compensation. Share-based compensation arrangements require the recognition in net earnings (loss) of the grant-dategrant date fair value of stock compensation in net earnings.(for equity-classified awards). The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period.

period, net of forfeitures. The estimated annualized forfeitures are based on the Company’s historical experience of pre-vesting cancellations. The Company will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future periods if the actual forfeitures are higher than estimated.

Accumulated Other Comprehensive Income.Income (Loss). Accumulated other comprehensive income (loss) is a measure of all changes in shareholders’ equity that result from transactions and other economic events in the period other than transactions with owners. Accumulated other comprehensive income (loss) income is a component of shareholders’ equity and consists of accumulated foreign currency translationstranslation adjustments, changes in the fair value of interest rate swap derivative instruments, and pension adjustments.

80

Fair Value Measurements. The Company applies fair value accounting for all financial assets and liabilities that are required to be recognized or disclosed at fair value in the financial statements.Consolidated Financial Statements. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which the Company would transact, and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

Operating Leases. The Company classifies operating leases in accordance with the provisions of lease accounting. Rent expense under noncancelable operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess straight-line rent expense over scheduled payments is recorded as a deferred liability. The current portion of unamortized deferred lease costs is included in other accrued liabilities and the long-term portion is included in other liabilities in the Consolidated Balance Sheets.


CapitalLeases. The Company accounts for capital leases at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments. The current and long-term portion of the capital lease obligation is recorded in Other accrued liabilities and other liabilities, respectively, in the Consolidated Balance Sheet. Capital lease assets are included in property, plant & equipment and are generally depreciated over the term of the lease. Interest expense on capital leases are included in interest expense in the Consolidated Statements of Earnings.

Note 2.        Recently Issued Financial Accounting Standards

Adopted Pronouncements

Financial Instruments - Credit Losses
In January 2017,June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASU 2017-04, Intangibles – Goodwill and OtherAccounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 350): Simplifying326), which modifies the Accounting for Goodwill Impairment. This standard removes the second stepmeasurement of the goodwill impairment test, where a determinationexpected credit losses on certain types of the fair value of individual assets and liabilities of a reporting unit were needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.financial instruments, including trade receivables. The Company has adopted this standard for any impairment test that is performed afteron July 1, 2017 as permitted under the standard.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, and classification in the statement of cash flows. Under this ASU, excess tax benefits or deficiencies are recognized in income tax expense in the Consolidated Statement of Earnings. Upon adoption of this ASU, the Company had a valuation allowance for its U.S. deferred tax assets and did not recognize any tax benefit. Had the Company not had a valuation allowance, the Company would have recognized a tax benefit of $2.4 million. The impact to the Company’s dilutive shares under this new standard was immaterial.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update simplifies the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.2020. The adoption of this standard did not have a material effectimpact on the Company’s Consolidated Financial Statements.

Company's consolidated financial statements.

Pronouncements Currently Under Evaluation
In March 2016,August 2020, the FASB issued ASU 2016-07, Investments –2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This(Subtopic 815-40) ("ASU 2020-06"). The update eliminates the requirement to retrospectively apply the equity method in previous periods when an investor obtains significant influence over an investee. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

Revenue Recognition Pronouncement

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09: Revenue from Contracts with Customers (Topic 606), that outlines a five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This new standard became effective for the Company on July 1, 2018, and will be adopted using the modified retrospective transition method.

Based on review and analysis of our contracts, the standard primarily impacts our II-VI Performance Product segment, which has long-term production contracts with customers that sell to the U.S. Government.  Prior to adoption of the new standard, revenue was generally recognized for these contracts at a point-in-time as units were shipped, while under the new standard, revenue will be recognized over time, principally under the units-of-delivery method which faithfully depicts the transfer of control to the customers. This change will result in an immaterial change in revenue for these contracts and no transition adjustment is anticipated for July 1, 2018. 

We have updated the accounting policies affected by this standard, redesigned our related internal controls over financial reporting and are expanding the disclosures to be included in our first quarter 2019 Condensed Consolidated Financial Statements to meet the new requirements.

Other Pronouncements Currently Under Evaluation

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployeesconvertible instruments by eliminating two accounting models (i.e., the cash conversion model and beneficial conversion feature model) and reducing the number of embedded conversion features that could be recognized separately from the host contract. ASU 2020-06 also enhances transparency and improves disclosures for goodsconvertible instruments and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The standard will beearnings per share guidance. ASC 2020-06 is effective for the Company’s 2020annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal year.years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. We plan to adopt this ASU as of July 1, 2021. We estimate the impact of adopting ASU 2020-06 will result in an entity’sincrease in net debt of $15 million, a decrease in the deferred tax liability of $3 million, a decrease in common stock of $56 million, and an increase in retained earnings of $45 million. The adoption datewill result in a decrease of Topic 606.interest expense of approximately $12 million in fiscal year 2022.


In March 2020, 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. The Company is in the process of evaluating the impact of this guidancethe pronouncement.


Note 3. Pending Coherent Acquisition

On March 25, 2021, II-VI, Coherent, Inc., and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”).

Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each share of common stock of Coherent, par value $0.01 per share (the “Coherent Common Stock”), issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”):

(A) $220.00 in cash, without interest (the “Cash Consideration”), and

(B) 0.91 of a validly issued, fully paid and nonassessable share of common stock of II-VI, no par value per share (“II-VI Common Stock”)

Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into
81

time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement, a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent RSU multiplied by the sum of (A) 0.91, and (B) the quotient obtained by dividing the Cash Consideration by the volume weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger (the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of achievement of such goals or metrics immediately prior to the Effective Time.

The converted Coherent RSUs generally will be subject to the same terms and conditions that applied to the awards immediately prior to the Effective Time, provided that any Coherent RSUs subject to performance-based vesting conditions will be subject solely to time- and service-based vesting. Each Coherent RSU that is outstanding as of the date of the Merger Agreement and as of immediately prior to the Effective Time will be entitled to the following vesting acceleration benefits:

(A) for any holder of Coherent RSUs who is a participant under Coherent’s Change of Control and Leadership Change Severance Plan (the “CIC Plan”), the acceleration benefits under the CIC Plan upon such participant’s involuntary termination of employment in accordance with the terms and conditions set forth therein; and

(B) for any holder who is not a participant in the CIC Plan, the following vesting acceleration benefits upon his or her termination of employment by Coherent, II-VI, or their respective subsidiaries without “cause” within the period beginning immediately following the date of the Closing and ending on the date that is 12 months following the date of the Closing (or, if earlier, December 31, 2022) (a “Qualifying Termination”), (1) if such holder’s Qualifying Termination occurs during calendar year 2021, the sum of: (x) 100% of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2021 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2021 (and reduced by the total number of converted Coherent RSUs that vested in calendar year 2021 prior to such Qualifying Termination) plus(y) 50% of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2022 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2022, or (2) if such holder’s Qualifying Termination occurs during calendar year 2022, 50% of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2022 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2022 (and reduced by the total number of converted Coherent RSUs that vested in calendar year 2022 prior to such Qualifying Termination).

Each Coherent RSU granted to a non-employee member of Coherent’s Board of Directors (“Director RSUs”) (whether or not vested) that is outstanding immediately prior to the Effective Time will automatically vest in full and be canceled and converted into the right to receive the Merger Consideration as if such Director RSU had been settled in shares of Coherent Common Stock immediately prior to the Effective Time.

The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger at special meetings held on June 24, 2021 by the respective companies.

The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by year-end 2021 or at the beginning of the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.

In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21, 2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc., PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA) LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively, the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt
82

financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the Commitment Letter is subject to a number of customary conditions.

In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement, dated as of March 30, 2021, (the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (the “Investor”).Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold, and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company,no par value per share (“II-VI Series B-1 Convertible Preferred Stock”), for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the Company would issue, sell and deliver to the Investor:

•105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company, no par value per share (“II-VI Series B-2 Convertible Preferred Stock,” and together with the II-VI Series B-1 Convertible Preferred Stock, “New II-VI Convertible Preferred Stock”), for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.1 billion, immediately prior to Closing; and

•immediately prior to Closing, if elected by the Company and agreed by the Investor, up to an additional 35,000 shares of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million.

Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.

The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other in Note 15, Segment and Geographic Reporting.


Note 4.        Acquisitions
Acquisition of Ascatron AB
On August 20, 2020, the Company acquired all of the outstanding shares of Ascatron, located in Sweden. The acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform. Purchase price consideration totaled $37 million.
The Company utilized the widely accepted income-based approach (relief-from-royalty method) to perform the preliminary purchase price allocation.
The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisitions ($000):
Previously Reported September 30, 2020
Measurement Period Adjustments (a)
As Adjusted
Assets
Developed technology$20,000 $(3,622)$16,378 
Goodwill18,922 3,018 21,940 
Other assets2,511 683 3,194 
Total assets acquired$41,433 $79 $41,512 
Liabilities
Non-interest bearing liabilities$(203)$(1,101)$(1,304)
Deferred tax liability(4,526)1,022 (3,504)
Total liabilities assumed(4,729)(79)(4,808)
Net assets acquired$36,704 $— $36,704 
83


(a) 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 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.

The goodwill is recorded in the Compound Semiconductors segment and is attributed to the workforce acquired as part of the transaction. The goodwill is non-deductible for income tax purposes. Transaction expenses related to the acquisition totaled $2 million for the year ended June 30, 2021 and are included in Selling, General and Administrative expenses in the Consolidated Financial Statements.

Statements of Earnings (Loss). Technology is being amortized with a useful life of approximately 17 years.


In August 2017,

The revenues and net loss from Ascatron included in the FASB issued ASU 2017-12, DerivativesCompany's Consolidated Statement of Earnings (Loss) for the year ended June 30, 2021 were $1 million and Hedging (Topic 815): Targeted Improvements$3 million, respectively.

Certain data necessary to Accountingcomplete the purchase price allocation remains preliminary, including, but not limited to, finalization
of certain income tax computations and other assumed liabilities. The Company expects to complete the purchase price allocation within 12 months from the Closing Date, at which time the purchase price allocation set forth herein may be revised.

Purchase of Equity Investment in INNOViON Corporation

On October 1, 2020, II-VI acquired the remaining 6.1% interest in Innovion for Hedging Activities.$4 million. Innovion is a provider of ion implantation services supporting unique capabilities in semiconductor materials processing. This acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform.

Through the period ended December 31, 2020, the Company held a 93.9% investment in Innovion which was accounted for as an equity method investment. The guidance eliminatesCompany accounted for the requirementacquisition of the remaining equity of Innovion as a step acquisition, which required remeasurement of the Company's previous ownership interest to separately measurefair value prior to completing purchase accounting. Using step acquisition accounting the Company increased the value of its previously held equity investment to its fair value of $67 million, which resulted in a gain of approximately $7 million, recorded in other expense (income), net in the Consolidated Statements of Earnings (Loss) in the second quarter of fiscal year 2021.

The Company utilized widely accepted income-based, market-based, and report hedge ineffectivenesscost-based valuation approaches to perform the preliminary purchase price allocation and generally requires the entire change indetermine the fair value of a hedging instrument to be presented in the same income statement line aspreviously held equity method investment. Income-based valuation approaches included the hedged item. The standard will be effective for the Company’s 2019 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU 2017-07, Compensation (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update affects employers’ presentation of defined benefit retirement plan costs. Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This update changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This update requires that when intra-entity asset transfers occur, the entity must recognize tax effects in the period in which the transfer occurs. The standard will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flow. The update will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The adoptionuse of the ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update is intended to provide financial statement users with more decision-useful information about expected credit lossesmulti-period excess earnings and other commitments to extend credit held by the reporting entity. The standard replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update will be effectiverelief-from-royalty methods for the Company’s 2021 fiscal year. Early adoption is permitted. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The new standard will become effective for the Company’s fiscal year 2020, which begins on July 1, 2019. The Company will adopt the new guidance utilizing the modified retrospective transition method. We have reviewed the requirements of this standard and have formulated a plan for implementation. We are currently working on accumulating a complete population of leases from all of our locations and have selected a software repository to track all of our lease agreements and to assist in the reporting and disclosure requirements required by the standard. We will continue to assess and disclose the impact that this new guidance will have on our consolidated financial statements, disclosures and related controls, when known.

Note 2.

Acquisitions

CoAdna, Inc.

In March 2018, the Company announced its intention to acquire CoAdna, Inc. (“CoAdna”), a publically traded company on the Taiwan Stock Exchange and based in Sunnyvale, CA, in a cash transaction valued at approximately $85.0 million, net of any cash acquired. The transaction is expected to close during the first quarter of fiscal year 2019 and will be subject to regulatory approvals and customary closing conditions.

Kaiam Laser Limited, Inc.

In August 2017, the Companycertain acquired Kaiam Laser Limited, Inc. (“Kaiam”), a privately held company based in Newton Aycliffe, United Kingdom. Under the terms of the merger agreement, the consideration consisted of cash paid at the acquisition date of $79.5 million, net of cash acquired and an adjustment for a purchase price reduction of $0.5 million. The acquisition of Kaiam provides the Company with a 150mm wafer fabrication platform to significantly expand the Company’s capacity for the production of vertical cavity surface emitting lasers (“VCSELs”) for the 3D sensing market and broadens the capability to address new market opportunities in other compound semiconductor materials. Kaiam now operates under the name II-VI Compound Semiconductor Ltd., within the Company’s II-VI Laser Solutions operating segment.

intangible assets.


The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):

Assets

Accounts receivable

$

79

Inventories

4,559

Prepaid and other assets

1,246

Property, plant & equipment

63,899

Intangible assets

4,046

Goodwill

18,956

Total assets acquired

$

92,785

Liabilities

Accounts payable

$

751

Other accrued liabilities

2,486

Deferred tax liabilities

10,555

Total liabilities assumed

13,792

Net assets acquired

$

78,993



84

Previously Reported December 31, 2020
Measurement Period Adjustments (a)
As Adjusted
Assets
Developed technology$15,000 $(240)$14,760 
Customer lists10,000 (1,003)8,997 
Goodwill29,478 3,216 32,694 
Property, plant, & equipment16,556 (1,832)14,724 
ROU Asset10,644 1,893 12,537 
Other assets12,450 (643)11,807 
Total assets acquired$94,128 $1,391 $95,519 
Liabilities
Non-interest bearing liabilities$(14,050)$(1,788)$(15,838)
Interest bearing liabilities(3,430)— (3,430)
Deferred tax liabilities(5,743)397 (5,346)
Total liabilities assumed$(23,223)$(1,391)$(24,614)
Net assets acquired$70,905 $— $70,905 

(a) 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 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.

The goodwill of $19.0 million is includedrecorded in the II-VI Laser SolutionsCompound Semiconductor segment and is attributed to the expected synergies and the assembled workforce of II-VI Compound Semiconductor Ltd. Noneacquired as part of the transaction. The goodwill is deductiblenon-deductible for income tax purposes. The Company expensed transaction costsTechnology is being amortized with a useful life of $0.6 millionapproximately 16 years. Customer lists are being amortized with a useful life of approximately 14 years. Transaction expenses for the year ended June 30, 2018.

2021 were insignificant.


The amount of revenues of II-VI Compound Semiconductor Ltd.from Innovion included in the Company’sCompany's Consolidated Statement of Earnings for the year ended June 30, 20182021 was $3.4$21 million. The amount of net losses of II-VI Compound Semiconductor Ltd. included in the Company’s Consolidated Statements of Earningsincome for the year ended June 30, 2018same period was $12.5$1 million.

Integrated Photonics, Inc.

In June 2017, the Company acquired Integrated Photonics, Inc. (“IPI”), a privately held company based in New Jersey. IPI is a leader in engineered magneto-optic materials that enable high-performance directional components such as optical isolators for the optical communications market. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $40.1 million, net of cash acquired and a final working capital adjustment of $0.8 million. In addition, the agreement provides up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving certain agreed-upon financial and transitional objectives, which if earned would be payable in the amount of $2.5 million for the achievement of the annual target. 


Note 5.        Revenue from Contracts with Customers

The following table presents the final purchase price at the date of acquisition ($000):

Net cash paid at acquisition

 

$

40,098

 

Working capital adjustment

 

 

848

 

Fair value of cash earnout arrangement

 

 

2,215

 

Purchase price

 

$

43,161

 


The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):

Assets

 

 

 

 

Accounts receivable

 

$

2,083

 

Inventories

 

 

3,968

 

Prepaid and other assets

 

 

322

 

Property, plant & equipment

 

 

11,235

 

Intangible assets

 

 

23,554

 

Goodwill

 

 

17,514

 

Total assets acquired

 

$

58,676

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

847

 

Other accrued liabilities

 

 

1,032

 

Long-term debt assumed

 

 

3,834

 

Deferred tax liabilities

 

 

9,802

 

Total liabilities assumed

 

 

15,515

 

Net assets acquired

 

$

43,161

 

The goodwill of $17.5 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled workforce of IPI. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1 million, with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $0.3 million during the year ended June 30, 2017.

The amount of revenues of IPI included in the Company’s Consolidated Statements of Earningssummarizes disaggregated revenue by market for the years ended June 30, 20182021, 2020 and 2017 was $19.3 million and $1.3 million, respectively. The amount of net earnings of IPI2019 ($000):

Year Ended June 30, 2021
Photonic SolutionsCompound SemiconductorsTotal
Industrial$50,181 $275,698 $325,879 
Communications1,917,697 134,969 2,052,666 
Aerospace & Defense— 201,845 201,845 
Consumer9,138 277,319 286,457 
Other61,268 177,776 239,044 
Total Revenues$2,038,284 $1,067,607 $3,105,891 

85

Year Ended June 30, 2020
Photonic
Solutions		Compound
Semiconductors		Unallocated & OtherTotal
Industrial$52,806 $240,475 $— $293,281 
Communications1,437,377 125,527 21,557 1,584,461 
Aerospace & Defense— 175,097 — 175,097 
Consumer4,620 126,227 494 131,341 
Other41,987 153,904 — 195,891 
Total Revenues$1,536,790 $821,230 $22,051 $2,380,071 


Year Ended June 30, 2019
Photonic
Solutions		Compound
Semiconductors		Total
Industrial$58,621 $283,422 $342,043 
Communications526,420 92,812 619,232 
Aerospace & Defense— 152,702 152,702 
Consumer2,300 46,826 49,126 
Other51,548 147,845 199,393 
Total Revenues$638,889 $723,607 $1,362,496 

"Other" revenue included in the Company’s Consolidated Statementstables above include revenue from the life science/medical, semiconductor and automotive end markets.
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 Earnings forperformance under the years ended June 30, 2018 and 2017 was $3.8 million and $0.1 million, respectively.

Note 3.

Other Investments

Purchase of Equity Investment

In November 2017, the Company acquired a 93.8% equity investment in a privately-held company for $51.5 million. In addition, the Company paid $0.2 million for a working capital adjustment to that purchase price. The Company’s pro-rata share of earnings from this investment since the acquisition date was $2.4 million forcontracts. Contract liabilities are recognized as revenue when performance obligations have been performed. During the year ended June 30, 2018 and was recorded in other expense (income), net2021, the Company recognized revenue of $4 million related to customer payments that were included in the Consolidated Statementconsolidated balance sheet as of Earnings.

This investment is accounted for under the equity method of accounting (“Equity Investment”). The following table summarizes the Company's equity in this nonconsolidated investment:

 

 

Interest

 

Ownership % as of

 

 

Equity as of

 

Location

 

Type

 

June 30, 2018

 

 

June 30, 2018 ($000)

 

USA

 

Equity Investment

 

93.8%

 

 

$

56,331

 

The Equity Investment has been determined to be a variable interest entity because the Company has an overall 93.8% economic position in the investee, comprising a significant portion of its capitalization, but has only a 25% voting interest. The Company’s obligation to receive rewards and absorb expected losses is disproportionate to its voting interest. The Company is not the primary beneficiary because it does not have the power to direct the activities of the equity investment that most significantly impact its economic performance. Certain business decisions, including decisions with respect to operating budgets, material capital expenditures, indebtedness, significant acquisitions or dispositions, and strategic decisions, require the approval of owners holding a majority percentage in the Equity Investment. Beginning on the date it was acquired, the Company accounted for its interest as an equity method investment as the Company has the ability to exercise significant influence over operating and financial policies of the Equity Investment.

June 30, 2020. As of June 30, 2018, the Company’s maximum financial statement exposure related to the Equity Investment was approximately $56.3 million, which is included in Investments on the Consolidated Balance Sheet as of June 30, 2018.


The Company has the right to purchase all of the outstanding interest of each of the minority equity holders and the minority equity holders have the right to cause the Company to purchase all of their outstanding interests at any time on or after the third anniversary of the investment, or earlier upon certain events. The purchase price is equal to the greater of: (a) (i) the product of the aggregate trailing 12-month revenues of the equity investment preceding the date of purchase, multiplied by (ii) a factor of 2.9 multiplied by (iii) a factor of 0.723, multiplied by (iv) the percentage interest owned by each minority equity holder and (b) $966,666. The Company performed a Monte Carlo simulation to estimate the fair value of the net put option at the investment date and recorded a liability of $2.2 million in Other long-term liabilities in the Consolidated Balance Sheet in accordance with ASC 815-10, Derivatives and Hedging. The fair value of the net put option is adjusted as necessary on a quarterly basis, with any changes in the fair value recorded through earnings. The change in fair value of the net purchase option from the investment date to June 30, 2018 was not material.

Guangdong Fuxin Electronic Technology Equity Investment

The Company has an equity investment of 20.2% in Guangdong Fuxin Electronic Technology, based in Guangdong Province, China, which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at June 30, 20182021 and June 30, 2017 was $12.92020, the Company had $40 million and $11.7 million, respectively. During the years ended June 30, 2018, 2017 and 2016, the Company’s pro-rata share of earnings from this investment was $1.2 million, $0.7 million and $0.1$39 million, respectively, and wasof contract liabilities recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years ended June 30, 2018, 2017 and 2016, the Company received dividends from this equity investment of $0.4 million, $0.4 million and $0.6 million, respectively.

consolidated balance sheet.

Note 4.

Inventories


Note 6.        Inventories
The components of inventories were as follows:

June 30,

 

2018

 

 

2017

 

June 30,20212020

($000)

 

 

 

 

 

 

 

 

($000)

Raw materials

 

$

97,502

 

 

$

78,979

 

Raw materials$211,890 $190,237 

Work in progress

 

 

83,002

 

 

 

61,679

 

Work in progress336,391 298,577 

Finished goods

 

 

67,764

 

 

 

63,037

 

Finished goods147,547 130,996 

 

$

248,268

 

 

$

203,695

 

Total InventoriesTotal Inventories$695,828 $619,810 

Note 5.

Property, Plant & Equipment



Note 7.        Property, Plant & Equipment
Property, plant & equipment consistconsists of the following:

June 30,

 

2018

 

 

2017

 

($000)

 

 

 

 

 

 

 

 

Land and land improvements

 

$

9,072

 

 

$

5,667

 

Buildings and improvements

 

 

216,507

 

 

 

144,293

 

Machinery and equipment

 

 

633,934

 

 

 

492,042

 

Construction in progress

 

 

88,350

 

 

 

88,458

 

 

 

 

947,863

 

 

 

730,460

 

Less accumulated depreciation

 

 

(422,973

)

 

 

(362,732

)

 

 

$

524,890

 

 

$

367,728

 

86

Depreciation expense


June 30,20212020
($000)
Land and land improvements$20,454 $18,396 
Buildings and improvements419,157 345,736 
Machinery and equipment1,483,183 1,352,835 
Construction in progress136,544 111,394 
Finance lease right-of-use asset25,000 25,000 
2,084,338 1,853,361 
Less accumulated depreciation(841,432)(638,589)
Property, plant, and equipment, net$1,242,906 $1,214,772 
Included in the table above is a building acquired under a finance lease. As of June 30, 2021 and June 30, 2020, the accumulated depreciation of the finance lease ROU asset was $66.2 million, $50.9$7 million and $44.3$6 million, for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.


Note 6.

Note 8.        Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable intangible assets acquired in business combinations are recorded based upon fair value at the date of acquisition.


Changes in the carrying amount of goodwill were as follows ($000):

 

Year Ended June 30, 2018

 

 

II-VI Laser

 

 

II-VI

 

 

II- VI

Performance

 

 

 

 

 

Year Ended June 30, 2021Year Ended June 30, 2020

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Photonic SolutionsCompound SemiconductorsTotalPhotonic SolutionsCompound SemiconductorsTotal

Balance-beginning of period

 

$

84,180

 

 

$

113,272

 

 

$

52,890

 

 

$

250,342

 

Balance-beginning of period$1,052,494 $186,515 $1,239,009 $134,057 $185,721 $319,778 

Goodwill acquired

 

 

18,956

 

 

 

-

 

 

 

-

 

 

 

18,956

 

Goodwill acquired— 54,634 54,634 919,192 — 919,192 

Goodwill adjustment for prior year acquisition - IPI

 

 

-

 

 

 

407

 

 

 

-

 

 

 

407

 

Finisar measurement period adjustmentsFinisar measurement period adjustments(4,901)— (4,901)— — — 

Foreign currency translation

 

 

254

 

 

 

719

 

 

 

-

 

 

 

973

 

Foreign currency translation5,435 2,550 7,985 (755)794 39 

Balance-end of period

 

$

103,390

 

 

$

114,398

 

 

$

52,890

 

 

$

270,678

 

Balance-end of period$1,053,028 $243,699 $1,296,727 $1,052,494 186,515 1,239,009 

 

 

Year Ended June 30, 2017

 

 

 

II-VI Laser

 

 

II-VI

 

 

II- VI

Performance

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Balance-beginning of period

 

$

84,105

 

 

$

96,760

 

 

$

52,890

 

 

$

233,755

 

Goodwill acquired

 

 

-

 

 

 

17,107

 

 

 

-

 

 

 

17,107

 

Foreign currency translation

 

 

75

 

 

 

(595

)

 

 

-

 

 

 

(520

)

Balance-end of period

 

$

84,180

 

 

$

113,272

 

 

$

52,890

 

 

$

250,342

 


The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 20182021 and 20172020 were as follows ($000):

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

66,812

 

 

$

(32,979

)

 

$

33,833

 

 

$

65,438

 

 

$

(27,313

)

 

$

38,125

 

Trade Names

 

 

15,882

 

 

 

(1,471

)

 

 

14,411

 

 

 

15,806

 

 

 

(1,340

)

 

 

14,466

 

Customer Lists

 

 

127,603

 

 

 

(50,792

)

 

 

76,811

 

 

 

123,058

 

 

 

(41,740

)

 

 

81,318

 

Other

 

 

1,573

 

 

 

(1,559

)

 

 

14

 

 

 

1,571

 

 

 

(1,523

)

 

 

48

 

Total

 

$

211,870

 

 

$

(86,801

)

 

$

125,069

 

 

$

205,873

 

 

$

(71,916

)

 

$

133,957

 


June 30, 2021June 30, 2020
Gross
Carrying
Amount		Accumulated
Amortization		Net
Book
Value		Gross
Carrying
Amount		Accumulated
Amortization		Net
Book
Value
Technology$476,200 $(106,802)$369,398 $444,315 $(68,048)$376,267 
Trade Names22,660 (6,233)16,427 22,369 (3,669)18,700 
Customer Lists469,154 (136,519)332,635 456,223 (92,822)363,401 
Other1,576 (1,576)— 1,570 (1,570)— 
Total$969,590 $(251,130)$718,460 $924,477 $(166,109)$758,368 

Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2018, 20172021, 2020 and 20162019 was $14.6$82 million, $12.7$64 million, and $12.3$17 million, respectively. The technology and patentsintangible assets are being amortized over a range of 60 to 240 months with a weighted-average remaining life of approximately 91147 months. The customer lists are being amortized over 60 to 240 months with a weighted-average remaining life of approximately 140135 months.

In conjunction with the acquisition of II-VI Compound Semiconductor Ltd., the Company recorded $0.4 million attributed to the value of technology and patents and $3.6 million of customer lists. The intangibles were recorded based on the Company’s final purchase price allocation utilizing either a discounted cash flow or relief from royalty method to derive the fair value.


In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade names of $14.3$14 million as of June 30, 20182021 is not amortized but tested annually for impairment. The Company completed its impairment test of these trade names with indefinite lives in the fourth quarter of fiscal years 20182021 and 2017.2020. Based on the results of these tests, the trade names were not impaired in fiscal years 2018 and 2017.  

impaired.

87

The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows ($000):

Year Ending June 30,

 

 

 

 

2019

 

$

12,400

 

2020

 

 

14,000

 

2021

 

 

12,600

 

2022

 

 

10,900

 

2023

 

 

10,700

 


Note 7.

Debt

Year Ending June 30,
2022$83,463 
202382,558 
202480,684 
202579,196 
202673,466 


88

Note 9.        Debt
The components of debt for the periods indicated were as follows ($000):

June 30,

 

2018

 

 

2017

 

0.25% Convertible senior notes

 

$

345,000

 

 

$

-

 

Convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount

 

 

(56,409

)

 

 

-

 

Term loan, interest at LIBOR, as defined, plus 1.75% and 1.50%, respectively

 

 

65,000

 

 

 

85,000

 

Line of credit, interest at LIBOR, as defined, plus 1.75% and 1.50%, respectively

 

 

80,000

 

 

 

252,000

 

Credit facility unamortized debt issuance costs

 

 

(1,126

)

 

 

(1,491

)

Yen denominated line of credit, interest at LIBOR, as defined, plus 1.75% and 0.625%, respectively

 

 

2,714

 

 

 

2,679

 

Note payable assumed in IPI acquisition

 

 

3,834

 

 

 

3,834

 

Total debt

 

 

439,013

 

 

 

342,022

 

Current portion of long-term debt

 

 

(20,000

)

 

 

(20,000

)

Long-term debt, less current portion

 

$

419,013

 

 

$

322,022

 


June 30, 2021June 30, 2020
Term A Facility, interest at LIBOR, as defined, plus 1.38%$1,057,412 $1,194,463 
Revolving Credit Facility, interest at LIBOR, as defined, plus 1.38%— 74,000 
Debt issuance costs, Term A Facility and Revolving Credit Facility(25,191)(32,174)
Term B Facility, interest at LIBOR, as defined, plus 3.50%— 714,600 
Debt issuance costs, Term B Facility— (24,747)
0.50% convertible senior notes, assumed in the Finisar acquisition14,888 14,888 
0.25% convertible senior notes344,969 345,000 
0.25% convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount(16,937)(30,688)
Total debt1,375,141 2,255,342 
Current portion of long-term debt(62,050)(69,250)
Long-term debt, less current portion$1,313,091 $2,186,092 
The scheduled maturities of principal amounts of debt obligations for the next five years and thereafter is as follows ($000):

Year Ending
June 30,
2022$62,050 
2023407,019 
202462,050 
2025871,263 
2026— 
Thereafter14,888 
Total$1,417,270 

Senior Credit Facilities

The Company currently has 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 "Credit Agreement") provides 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 “Term A Facility”),
(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “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 “Revolving Credit Facility” and together with the Term Loan Facilities, the “Senior Credit Facilities”).
The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility initially not to exceed $20 million.
89

The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. In conjunction with the repayment, the Company paid $1 million in associated interest and expensed $25 million of debt issuance costs related to the Term B Facility.

The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of September 24, 2019 (the "Finisar Closing Date").

The Company’s obligations under the Senior Credit Facilities are guaranteed by each of the Company’s existing or future direct and indirect domestic subsidiaries (collectively, the “Guarantors”). Borrowings under the Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and the Guarantors, except that no real property is collateral under the Senior Credit Facilities.
All amounts outstanding under the Senior Credit Facilities become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25% Convertible Senior Notes

On due 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI Notes.

Amounts outstanding under the Senior Credit Facilities bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances relating to events of default.  The Company has entered into an interest rate swap contract to hedge its exposure to interest rate risk on its variable rate borrowings under the Senior Credit Facilities.  Refer to Note 15 for further information regarding this interest rate swap.
The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00 to 1.00. The Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Finisar Closing Date, commencing with the first full fiscal quarter after the Finisar Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Finisar Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.
0.50% Finisar Convertible Notes
Finisar’s outstanding 0.50% Convertible Senior Notes due 2036 (the “Finisar Notes”) may be redeemed at any time on or after December 22, 2021 in whole or in part at the option of the Company at a redemption price equal to one hundred percent (100%) of the principal amount of such Finisar Notes plus accrued and unpaid interest. Each holder of Finisar Notes also may require Finisar to repurchase all or any portion of such holder’s outstanding Finisar Notes for cash on December 15, 2021, December 15, 2026 and December 15, 2031 at a repurchase price equal to one hundred percent ( 100%) of the principal amount of such Finisar Notes plus accrued and unpaid interest. The Finisar Notes will mature on December 15, 2036. Interest on the Finisar Notes accrues at 0.50% per annum, paid semi-annually, in arrears, on June 15 and December 15 of each year.
In connection with the acquisition of Finisar, the Company, Finisar and the trustee entered into a First Supplemental Indenture, dated as of September 24, 2019 (the “First Supplemental Indenture”). The First Supplemental Indenture supplements the base indenture (as supplemented, the “Finisar Indenture”), which governs the Finisar Notes. Pursuant to the terms of the First Supplemental Indenture, the Company has fully and unconditionally guaranteed, on a senior unsecured basis, the due and punctual payment and performance of all obligations of Finisar to the holders of the Finisar Notes. The First Supplemental Indenture also provides that the right of holders of Finisar Notes to convert Finisar Notes into cash and/or shares of Finisar’s common stock, is changed to a right to convert Finisar Notes into cash and shares of the Company’s common stock, subject to the terms of the Finisar Indenture.
0.25% Convertible Senior Notes
In August 24, 2017, the Company entered into a purchase agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein (collectively, the “Initial Purchasers”), to issueissued and sell $300sold $345 million aggregate principal amount of our 0.25% convertible senior notes due 2022 (the "Notes")the II-VI Notes in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. In addition, we granted the Initial Purchasers a 30-day option to purchase up to an additional $45 million aggregate principal amount of the Notes (the “Over-Allotment Option”).

On August 29, 2017, the Initial Purchasers exercised their Over-Allotment Option to purchase the entire $45 million in aggregate principal amount of additional Notes. The Notes mature on September 1, 2022, unless earlier repurchased by the Company or converted by holders in accordance with the terms of the Notes. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2018.

The sale of the Notes to the Initial Purchasers settled on August 29, 2017, and resulted in approximately $336 million in net proceeds to the Company after deducting the initial purchasers’ discount and the estimated offering expenses. The net proceeds from the offering and sale of the Notes were used, in part, to repurchase approximately $49.9 million of our common stock. The Company used the remaining net proceeds to repay $252 million on its revolving credit facility and to pay debt issuance costs of $10.1 million.

The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of our indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure secured debt will be available to pay obligations on the Notes only after all indebtedness under such secured debt has been repaid in full from such assets. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election.

90

As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount.discount, which was $58 million as of June 30, 2021. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the II-VI Notes using the effective interest method with an effective interest rate of 4.5% per annum.

method.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is 21.25 shares of common stock per $1,000 principal amount of II-VI Notes, which is equivalent to an initialconversion price of $47.06 per share of II-VI common stock. Throughout the term of the II-VI Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Notes amounted to $318.5$532 million as of June 30, 20182021 and $346 million as of June 30, 2020 (based on the Company’s closing stock price on the last trading day of the year ended June 30, 2018)fiscal periods then ended).



Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.

Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only upon satisfactionunder the following circumstances:

(i) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2017 (and only during such fiscal quarter), if the last reported sale price of the II-VI Common Stock for at least one20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the conditions as follows:

a)

During any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

b)

During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or


c)

Upon the occurrence of specified corporate events.

(ii) during the five business day period immediately after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the II-VI Common Stock and the conversion rate on each such trading day; or


(iii) upon the occurrence of certain specified corporate events.

On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes in multiplesat any time, regardless of $1,000 principal amount,the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the Company’s election.

Because the last reported sale price of II-VI Common Stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended June 30, 2021 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the II-VI Notes are convertible at the option of the holder regardlessholders thereof during the fiscal quarter ending September 30, 2021.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the Company’s election.

Holders of the foregoing circumstances.

AsII-VI Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.II-VI Notes were convertible during the quarters ended March 31, and June 30, 2018, the Notes are not yet convertible. The Notes will become convertible upon the satisfaction of at least one of the above conditions. In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount of offering costs incurred to the debt and equity components based on their relative values. Offering costs attributable to the debt component, totaling $8.4 million, are being amortized as non-cash interest expense over the term of the Notes, and offering costs attributable to the equity component, totaling $1.7 million,2021; conversions were recorded within Shareholders' Equity.

The Company was in compliance with all the covenants set forth under the indenture.

immaterial.

The following table sets forth total interest expense recognized related to the II-VI Notes for the fiscal yearyears ended June 30, 2018 (representing an2021, 2020 and 2019 ($000):
Year Ended June 30, 2021Year Ended June 30, 2020Year Ended June 30, 2019
0.25% contractual coupon$874 $876 $874 
Amortization of debt discount and debt issuance costs including initial purchaser discount13,748 13,172 12,550 
Interest expense$14,622 $14,048 $13,424 

The effective interest rate of 4.5%):

Year ended June 30,

 

2018

 

0.25% contractual coupon

 

$

731

 

Amortization of debt discount and debt issuance costs including initial purchaser discount

 

 

10,058

 

Interest expense

 

$

10,789

 

on the liability component for the periods presented was 5%. The unamortized discount amounted to $49.3$15 million as of June 30, 20182021, and is being amortized over 4 years.

Amended Credit Facility

On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 million, as well as a $100 million term loan. The term loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July and October, with the first payment having commenced on October 1, 2016, as follows: (i) twenty consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 27, 2021. Amounts borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiarylife of the Company. The Company has the option to request an increase to the size of the revolving credit facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through July 27, 2021 and has an interest rate of either a Base Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility. If the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.25% and if the Euro-Rate Option is selected for a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the ratio of the Company’s consolidated indebtedness to consolidated EBITDA. Additionally, the Credit Facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company was in compliance with all financial covenants under its Amended Credit Facility.

Yen Loan

The Company’s yen denominated line of credit is a 500 million Yen ($4.5 million) facility. The Yen line of credit matures in August 2020. The interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.75%. At June 30, 2018 and 2017, the Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including

notes.

91

those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company had $2.7 million outstanding and was in compliance with all covenants under its Yen facility.

Note Payable

In conjunction with the acquisition of IPI, the Company assumed a non-interest bearing note payable owed to a major customer of IPI. The agreement, if not terminated early by either party, is payable in full in January 2020.

Singapore Line of Credit

The Company has a line of credit facility with a Singapore bank which permits maximum borrowings in the local currency of approximately $0.6 million for the fiscal years ended June 30, 2018 and 2017, respectively. Borrowings are payable upon demand with interest charged at the rate of 1.00% above the bank’s prevailing prime lending rate. The interest rate was 5.25% at June 30, 2018 and June 30, 2017. At June 30, 2018 and 2017, there were no outstanding borrowings under this facility. The Company had $0.3 million and $0.2 million of letters of credit supported by the Singapore line of credit facility as of June 30, 2018 and 2017, respectively.


Aggregate Availability

The Company had aggregate availability of $246.4 million and $73.5$449 million under its lines of creditRevolving Credit Facility as of June 30, 2018 and 2017, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 2018 and 2017, total outstanding letters of credit supported by the credit facilities were $0.4 million and $1.3 million, respectively.

2021.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 1.3%1% and 2.2%3% for the years ended June 30, 20182021 and 2017,2020, respectively. The weighted average of total borrowings for the fiscal years ended June 30, 2018 and 2017 was $476.6 million and $272.1 million, respectively.There are no interim maturities or minimum payment requirements related to the credit facilities before their respective expiration dates. Interest and commitment fees paid during the fiscal year ended June 30, 2018, 2017 and 2016 were $6.6 million, $6.1 million and $3.1 million, respectively.

Remaining Annual Principal Payments

Remaining annual principal payments under the Company’s existing credit facilities and notes payable as of June 30, 2018 were as follows ($000):

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term

 

 

Yen Line

 

 

Line of

 

 

Note

 

 

Convertibles

 

 

 

 

 

Period

 

Loan

 

 

of Credit

 

 

Credit

 

 

Payable

 

 

Notes

 

 

Total

 

June 30, 2019

 

$

20,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

20,000

 

June 30, 2020

 

 

20,000

 

 

 

-

 

 

 

-

 

 

 

3,834

 

 

 

-

 

 

$

23,834

 

June 30, 2021

 

 

20,000

 

 

 

2,714

 

 

 

-

 

 

 

-

 

 

 

-

 

 

$

22,714

 

June 30, 2022

 

 

5,000

 

 

 

-

 

 

 

80,000

 

 

 

-

 

 

 

-

 

 

$

85,000

 

June 30, 2023

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

345,000

 

 

$

345,000

 

Total

 

$

65,000

 

 

$

2,714

 

 

$

80,000

 

 

$

3,834

 

 

$

345,000

 

 

$

496,548

 


Note 8.

Income Taxes

Note 10.        Income Taxes

The components of earnings (losses)(loss) before income taxes were as follows:

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Year Ended June 30,202120202019

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

U.S. loss

 

$

(15,207

)

 

$

(6,944

)

 

$

(5,809

)

U.S. income (loss)U.S. income (loss)$21,692 $(302,027)$(34,241)

Non-U.S. income

 

 

137,401

 

 

 

125,732

 

 

 

95,764

 

Non-U.S. income330,898 238,099 163,054 

Earnings before income taxes

 

$

122,194

 

 

$

118,788

 

 

$

89,955

 

Earnings (loss) before income taxesEarnings (loss) before income taxes$352,590 $(63,928)$128,813 


The components of income tax expense were as follows:

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Year Ended June 30,202120202019

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Current:

Federal

 

$

699

 

 

$

2,133

 

 

$

3,704

 

Federal$415 $7 $1,755 

State

 

 

401

 

 

 

253

 

 

 

5

 

State1,632 496 472 

Foreign

 

 

32,147

 

 

 

22,312

 

 

 

19,783

 

Foreign53,362 45,052 29,531 

Total Current

 

$

33,247

 

 

$

24,698

 

 

$

23,492

 

Total Current$55,409 $45,555 $31,758 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred:

Federal

 

$

(3,064

)

 

$

(6,963

)

 

$

2,759

 

Federal$13,744 $(43,955)$(3,764)

State

 

 

1,615

 

 

 

(1,251

)

 

 

1,302

 

State(431)1,007 (2,010)

Foreign

 

 

2,394

 

 

 

7,030

 

 

 

(3,084

)

Foreign(13,684)494 (4,688)

Total Deferred

 

$

945

 

 

$

(1,184

)

 

$

977

 

Total Deferred$(371)$(42,454)$(10,462)

Total Income Tax Expense

 

$

34,192

 

 

$

23,514

 

 

$

24,469

 

Total Income Tax Expense$55,038 $3,101 $21,296 


Principal items comprising deferred income taxes were as follows:

June 30,

 

2018

 

 

2017

 

($000)

 

 

 

 

 

 

 

 

Deferred income tax assets

 

 

 

 

 

 

 

 

Inventory capitalization

 

$

5,267

 

 

$

6,338

 

Non-deductible accruals

 

 

1,125

 

 

 

1,705

 

Accrued employee benefits

 

 

7,614

 

 

 

9,738

 

Net-operating loss and credit carryforwards

 

 

48,738

 

 

 

53,048

 

Share-based compensation expense

 

 

7,925

 

 

 

12,386

 

Other

 

 

3,242

 

 

 

1,761

 

Valuation allowances

 

 

(21,797

)

 

 

(42,562

)

Total deferred income tax assets

 

$

52,114

 

 

$

42,414

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

Tax over book accumulated depreciation

 

$

(24,174

)

 

$

(7,803

)

Intangible assets

 

 

(24,649

)

 

 

(38,108

)

Tax on unremitted earnings

 

 

(13,090

)

 

 

(6,210

)

Convertible debt

 

 

(11,376

)

 

 

-

 

Other

 

 

(4,020

)

 

 

(2,615

)

Total deferred income tax liabilities

 

$

(77,309

)

 

$

(54,736

)

Net deferred income taxes

 

$

(25,195

)

 

$

(12,322

)

92


June 30,20212020
($000)
Deferred income tax assets
Inventory capitalization$20,753 $19,372 
Interest rate swap6,347 9,847 
Non-deductible accruals7,437 9,325 
Accrued employee benefits14,025 11,095 
Net-operating loss and credit carryforwards163,717 182,625 
Share-based compensation expense8,400 8,110 
Other8,956 9,736 
Right of use asset33,341 31,573 
Valuation allowances(53,765)(54,559)
Total deferred income tax assets$209,211 $227,124 
Deferred income tax liabilities
Tax over book accumulated depreciation$(32,692)$(25,926)
Intangible assets(153,582)(160,577)
Tax on unremitted earnings(21,569)(21,785)
Convertible debt(3,321)(6,006)
Lease liability(32,053)(29,768)
Other(6,458)(5,676)
Total deferred income tax liabilities$(249,675)$(249,738)
Net deferred income taxes$(40,464)$(22,614)




The reconciliation of income tax expense at the statutory U.S. federal rate to the reported income tax expense is as follows:

Year Ended June 30,

 

2018

 

 

%

 

 

2017

 

 

%

 

 

2016

 

 

%

 

Year Ended June 30,2021%2020%2019%

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($000)     

Taxes at statutory rate

 

$

34,284

 

 

 

28

 

 

$

41,576

 

 

 

35

 

 

$

31,484

 

 

 

35

 

Taxes at statutory rate$74,044 21 $(13,425)21 $27,051 21 

Increase (decrease) in taxes resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in taxes resulting from:

State income taxes-net of federal benefit

 

 

1,426

 

 

 

1

 

 

 

(641

)

 

 

-

 

 

 

864

 

 

 

1

 

State income taxes-net of federal benefit1,246 — 1,194 (2)(1,212)(1)

Taxes on non U.S. earnings

 

 

(16,058

)

 

 

(13

)

 

 

(12,907

)

 

 

(11

)

 

 

(13,860

)

 

 

(15

)

Taxes on non U.S. earnings(26,557)(7)(915)1 (5,857)(5)

Valuation allowance

 

 

(6,008

)

 

 

(5

)

 

 

(806

)

 

 

(1

)

 

 

8,464

 

 

 

9

 

Valuation allowance(3,720)(1)(9,365)15 (6,703)(5)

Research and manufacturing incentive deductions and credits

 

 

(7,024

)

 

 

(6

)

 

 

(5,681

)

 

 

(5

)

 

 

(4,374

)

 

 

(5

)

Research and manufacturing incentive deductions and credits(22,968)(6)(15,836)25 (11,756)(9)

Stock compensation

 

 

(4,103

)

 

 

(3

)

 

 

1,770

 

 

 

2

 

 

 

702

 

 

 

1

 

Stock compensation(2,500)(1)4,334 (7)(1,914)(1)

Repatriation tax

 

 

36,777

 

 

 

30

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Repatriation tax— — — — 14,108 11 

Impact of U.S. tax rate change on deferred balances

 

 

(4,209

)

 

 

(3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

GILTI and FDIIGILTI and FDII27,369 8 36,067 (56)6,437 5 

Other

 

 

(893

)

 

 

(1

)

 

 

203

 

 

 

-

 

 

 

1,189

 

 

 

1

 

Other8,124 2 1,047 (2)1,142 1 

 

$

34,192

 

 

 

28

 

 

$

23,514

 

 

 

20

 

 

$

24,469

 

 

 

27

 

 $55,038 16 $3,101 (5)$21,296 17 



U.S. Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). was signed into law. The Tax Act significantly revisesincludes changes to the U.S. statutory federal tax rate and puts into effect the migration from a worldwide system of taxation to a territorial system, among other things. The Tax Act includes certain changes such as introducing a new category of income, referred to as global intangible low tax income (“GILTI”), related to earnings taxed at a low rate of foreign entities without a significant fixed asset base, and imposes additional limitations on the deductibility of interest and officer compensation. The Company made a final accounting policy election to treat taxes due from future ongoinginclusions in U.S. corporatetaxable income tax by,related to GILTI as a current period expense when incurred.
93


The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes.  As a result of the Act, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As the Company has a June 30 fiscal year end, the lower corporate incomedetermined it will repatriate earnings for all non-U.S. subsidiaries with cash in excess of working capital needs.  Such distributions could potentially be subject to U.S. state tax rate was phased in resulting in a U.S. statutory federal rate of approximately 28% for the Company’s fiscal year ending June 30, 2018,certain states and 21% for subsequent fiscal years.  As part of the transitionforeign withholding taxes.  Foreign currency gains/losses related to the new territorialtranslation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax system, the Tax Act imposes a one-time repatriation tax on total post-1986 earnings and profits (“E&P”) of foreign subsidiaries that were previously deferred from U.S. income taxes.

At June 30, 2018, the Company has not finalized its accounting for the tax effects of the Tax Act; however, as described below, management has made a reasonable estimate of the effects on existing deferred tax balances and has recorded an estimated amount for its one-time repatriation tax, resulting in an increase in income tax expense.when distributed.  The Company has yet to complete its calculation ofestimated the total post-1986 foreign E&P and therefore may change.

The impact of the repatriationassociated withholding tax is expected to be offset by available net operating loss and credit carryforwards which currently have a valuation allowance.  Thus the tax expense reported is reduced by the release of the valuation allowance on U.S. deferred tax assets.  The reduction of the U.S. corporate tax rate caused the Company to adjust the U.S. deferred tax assets and liabilities to the lower U.S. statutory federal rate of 21%. However, the Company will continue to analyze certain aspects of the Tax Act which could affect the measurement of these balances or give rise to new deferred tax amounts. In addition, the Company has recorded withholding taxes on planned repatriation due to the change to a territorial tax system.  The transitional impacts described above resulted in a cumulative provisional net charge to income tax expense of $8.0 million for the year ended June 30, 2018.  

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the estimates recorded during the year ended June 30, 2018, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The Securities and Exchange Commission has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company currently anticipates finalizing and recording any resulting adjustments by the end of the quarter ending December 31, 2018.

$22 million.


During the fiscal years ended June 30, 2018, 2017,2021, 2020, and 2016,2019, net cash paid by the Company for income taxes was $21.3$60 million, $23.6$40 million, and $18.5$26 million, respectively.

Our foreign subsidiaries in the Philippinesvarious tax jurisdictions operate under various tax holiday arrangements.  The benefits of such arrangements phase out through the fiscal year ended June 30, 2019.  The impact of the tax holidays on our effective rate is a reduction in the rate of 0.17%3.22%, 0.31%(8.91)% and 0.37%0.25% for the fiscal years ended June 30, 2018, 20172021, 2020 and 2016,2019, respectively, and the impact of the tax holidays on diluted earnings per share is immaterial.

$0.10, $0.07, and $0.00 for the fiscal years ended June 30, 2021, 2020, and 2019, respectively. The holiday related to II-VI Malaysia Advanced Manufacturing Center Sdn. Bhd will end during the fiscal year ended June 30, 2026, the holiday related to certain II-VI Laser Enterprise Philippines, Inc.'s business lines will end during the fiscal year ended June 30, 2022, and the holiday related to II-VI Vietnam Co., Ltd will end during the fiscal year ended June 30, 2024.

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2018:

2021:

Type

 

Amount

 

 

Expiration Date

($000)

 

 

 

 

 

 

Tax credit carryforwards:

 

 

 

 

 

 

Federal research and development credits

 

$

13,913

 

 

June 2019-June 2038

Foreign tax credits

 

 

251

 

 

June 2024-June 2028

State tax credits

 

 

5,594

 

 

June 2019-June 2038

Operating loss carryforwards:

 

 

 

 

 

 

Loss carryforwards - federal

 

$

68,661

 

 

June 2020-June 2038

Loss carryforwards - state

 

 

47,756

 

 

June 2019-June 2038

Loss carryforwards - foreign

 

 

16,347

 

 

June 2019-June 2028

TypeAmountExpiration Date
($000)
Tax credit carryforwards:
Federal research and development credits$79,211 June 2022-June 2041
Foreign tax credits20,493 June 2022-June 2031
State tax credits15,434 June 2022-June 2036
State tax credits (indefinite)39,125 Indefinite
Operating loss carryforwards:
Loss carryforwards - federal$47,755 June 2022-June 2036
Loss carryforwards - state136,454 June 2022-June 2041
Loss carryforwards - state (indefinite)13,076 Indefinite
Loss carryforwards - foreign17,375 June 2021-June 2040
Loss carryforwards - foreign (indefinite)48,884 Indefinite


The Company has recorded a valuation allowance against the majority of the foreign and state loss and credit carryforwards. The Company’s U.S. federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulting from the Company’s acquisitions are subject to various annual limitations under Section 382 of the U.S. Internal Revenue Code.


Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2018, 20172021, 2020 and 20162019 were as follows:

 

 

2018

 

 

2017

 

 

2016

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

7,577

 

 

$

5,559

 

 

$

4,022

 

Increases in current year tax positions

 

 

2,536

 

 

 

895

 

 

 

2,146

 

Increases in prior year tax positions

 

 

224

 

 

 

2,605

 

 

190

 

Decreases in prior year tax positions

 

 

(9

)

 

 

-

 

 

 

(67

)

Settlements

 

 

-

 

 

 

(1,143

)

 

 

-

 

Expiration of statute of limitations

 

 

(436

)

 

 

(339

)

 

 

(732

)

Ending balance

 

$

9,892

 

 

$

7,577

 

 

$

5,559

 


202120202019
($000)
Beginning balance$42,803 $11,520 $9,892 
Increases in current year tax positions3,940 1,506 191 
Increases in prior year tax positions— — 376 
Acquired business5,341 31,791 6,036 
Settlements(7,514)— — 
Expiration of statute of limitations(6,545)(2,014)(4,975)
Ending balance$38,025 $42,803 $11,520 

94

The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal year 2018years 2021, 2020 and 2017,2019, there was $0.3 million, $0.6 million and $0.5$(0.1) million of interest and penalties within income tax expense, respectively. During the fiscal year 2016, there was no interest or penalties within income tax expense. The Company had $0.6$3 million, $4 million and $0.3$1 million of interest and penalties accrued at June 30, 20182021, 2020 and 2017,2019, 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. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate, was approximately $1.6$26 million, $24 million and $1.3$6 million at June 30, 20182021, 2020 and 2017,2019, respectively. The Company expects a decrease of $3.4$2 million of unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.

Fiscal years 20152018 to 20182021 remain open to examination by the Internal Revenue Service, fiscal years 20132016 to 20182021 remain open to examination by certain state jurisdictions, and fiscal years 20082010 to 20182021 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination in New York for the U.S. Federal income tax returnyears ended June 30, 2018 though June 30, 2019 and under examination for certain subsidiary companies in India for the year ended June 30,March 31, 2016; certain subsidiary companies in the Philippines for the year ended June 30, 2017;2019; and Germany for the years ended June 30, 2012 through June 2015.30, 2018. The Company believes its income tax reserves for these tax matters are adequate.



Note 11. Equity and Redeemable Preferred Stock

Mandatory Convertible Preferred Stock

On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 2,000,000 shares of 6.00% Series A Mandatory Convertible Preferred, no par value per share (“Mandatory Convertible Preferred Stock”), resulting in gross proceeds to II-VI from the offering of $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by the Company (the “Preferred Stock Offering”). In addition, the underwriters had a 30-day option to purchase up to an additional 300,000 shares of Series A Mandatory Convertible Preferred Stock at the applicable public offering price, less underwriting discounts and commissions and solely to cover over-allotments with respect to the preferred stock offering. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Preferred Stock Offering, including the issuance and sale of 2 million shares of Mandatory Convertible Preferred Stock.

Upon conversion on the mandatory conversion date, July 1, 2023, as determined in accordance with the terms of the Mandatory Convertible Preferred Stock, each outstanding share of the Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a number of shares of II-VI Common Stock equal to not more than 4.6512 shares of II-VI Common Stock and not less than 3.8760 shares of II-VI Common Stock (the “Minimum Conversion Rate”), depending on the applicable market value of the II-VI Common Stock, determined in accordance with the terms of the Mandatory Convertible Preferred Stock and subject to certain anti-dilution adjustments.

Other than in the event of one of certain fundamental changes, a holder of Mandatory Convertible Preferred Stock may, at any time prior to July 1, 2023, elect to convert such holder’s shares of Mandatory Convertible Preferred Stock, in whole or in part (but in no event less than one share of Mandatory Convertible Preferred Stock), at the Minimum Conversion Rate per share of Mandatory Convertible Preferred Stock, subject to certain anti-dilution adjustments.

If 1 of certain fundamental changes occurs on or prior to July 1, 2023, holders of the Mandatory Convertible Preferred Stock will have the right to convert their shares of Mandatory Convertible Preferred Stock, in whole or in part (but in no event less than one share of the Mandatory Convertible Preferred Stock), into shares of II-VI Common Stock at the conversion rate determined in accordance with the terms of the Mandatory Convertible Preferred Stock during the period beginning on, and including, the effective date of such change and ending on, and including, the date that is 20 calendar days after the effective date of such fundamental change (or, if later, the date that is 20 calendar days after holders receive notice of such fundamental change, but in no event later than July 1, 2023). Holders who convert their shares of the Mandatory Convertible Preferred Stock during that period will also receive a dividend make-whole amount and, to the extent there is any, the accumulated dividend amount, in each case as calculated in accordance with the terms of the Mandatory Convertible Preferred Stock.

Upon issuance of the Mandatory Convertible Preferred Stock, the Company used a Monte Carlo simulation model to estimate the future market value of the II-VI Common Stock on the mandatory conversion date, based on the following inputs:

95


Note 9.

Earnings Per Share

Expected Volatility50% - 55%
Cost of Equity14% - 17%
Dividend Yieldnone



Expected volatility is based on the historical volatility of II-VI Common Stock, taking into consideration the mean-reverting tendency of volatility and the expected term of the Mandatory Convertible Preferred Stock, as well as traded option contracts for II-VI Common Stock. The cost of equity was calculated over a 3-year term, assuming a risk-free interest rate of 0.2% derived from the average U.S. Treasury Note rate during the period. The dividend yield of zero is based on the fact that the Company has never paid cash dividends on II-VI Common Stock and has no current intention to pay cash dividends on II-VI Common Stock in the future.

The Company declared $27 million of preferred stock dividends during fiscal year 2021 associated with the Mandatory Convertible Preferred Stock. Dividends from the quarter ended June 30, 2021 were $7 million and were presented as other accrued liabilities on the Consolidated Balance Sheet.

The following table sets forth the computation of earningspresents dividends per share and dividends recognized for the periods indicated. Basic net incomeyear ended June 30, 2021:
Year Ended June 30, 2021
Dividends per share11.80 
Series A Mandatory Convertible Preferred Stock dividends ($000)27,140 

Redeemable Convertible Preferred Stock
The Company issued 75,000 shares of II-VI Series B-1 Convertible Preferred Stock in the year ended June 30, 2021. Refer to Note 3. Pending Coherent Acquisition for additional information.

In connection with the execution of the Investment Agreement, on March 30, 2021, the Company filed a Statement with Respect to Shares (the “Statement”) with the Pennsylvania Department of State Corporation Bureau to establish the designation, rights and preferences of the II-VI Series B-1 Convertible Preferred Stock. The Statement became effective on March 30, 2021.

The shares of II-VI Series B-1 Convertible Preferred Stock accrue dividends at 5.00% per annum, subject to increase if II-VI defaults on payment obligations with respect to the New II-VI Convertible Preferred Stock, not to exceed 14% per annum. Until the fourth anniversary of March 31, 2021 (the “Initial Issue Date”), dividends are payable solely in-kind. After the fourth anniversary of the Initial Issue Date, dividends are payable on the applicable series, at the Company’s option, in cash, in-kind, or as a combination of both.

The shares of II-VI Series B-1 Convertible Preferred Stock are convertible into shares of II-VI Common Stock as follows:

•at any time after their issuance, at the election of the holder, each share of II-VI Series B-1 Convertible Preferred Stock may be converted into shares of II-VI Common Stock at a conversion price of $85.00 per share (“Conversion Price”), except that the shares of II-VI Series B-1 Convertible Preferred Stock will be so convertible only after the earliest to occur of (i) the issuance of shares of II-VI Series B-2 Convertible Preferred Stock upon the Closing, (ii) the termination of the Merger Agreement or (iii) the delivery by II-VI to the Investor of an offer to repurchase the II-VI Series B-1 Convertible Preferred Stock upon the occurrence of a Fundamental Change (as defined in the Statement); and

•at any time following the third anniversary of Initial Issue Date, at the election of II-VI, each share of II-VI Series B-1 Convertible Preferred Stock may be converted into shares of II-VI Common Stock at the then-applicable Conversion Price if the volume-weighted average price of II-VI Common Stock exceeds 150% of the then- applicable Conversion Price for 20 trading days out of any 30 consecutive trading days.
The II-VI Series B-1 Convertible Preferred Stock have voting rights, voting as one class with the II-VI Common Stock, on an as-converted basis, subject to limited exceptions.

96

On or at any time after the tenth anniversary of the Initial Issue Date:

•each holder has the right to require the Company to redeem all of their II-VI Series B-1 Convertible Preferred Stock, for cash, at a redemption price per share equal to the sum of the Stated Value for such shares (as defined in the Statement) plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value (such price the “Redemption Price,” and such right the “Put Right”), and

•the Company has the right to redeem, in whole or in part, on a pro rata basis from all holders based on the aggregate number of shares of II-VI Series B-1 Convertible Preferred Stock outstanding, for cash, at the Redemption Price.

In connection with any Fundamental Change, and subject to the procedures set forth in the Statement, the Company must, or will cause the survivor of a Fundamental Change (such survivor of a Fundamental Change, the “Acquirer”) to, make an offer to repurchase, at the option and election of the holder thereof, each share of II-VI Series B-1 Convertible Preferred Stock then-outstanding (the “Fundamental Change Repurchase Offer”) at a purchase price per share in cash equal to (i) the Stated Value for such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value as of the date of repurchase plus (ii) if prior to the fifth anniversary of the Initial Issue Date, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through the fifth anniversary of the Initial Issue Date.

The II-VI Series B-1 Convertible Preferred Stock is redeemable for cash outside of the control of the Company upon the exercise of the Put Rights, and upon a Fundamental Change, and is therefore classified as mezzanine equity.

The Company recognized $10 million of preferred stock dividends during the fiscal year ended 2021, which were presented as a reduction to retained earnings on the Consolidated Balance Sheet as of June 30, 2021. The Company incurred $27 million of transaction costs associated with the II-VI Series B-1 Convertible Preferred Stock, of which, $23 million were capitalized, and $4 million were expensed in the Selling, General, and Administrative expenses in the Consolidated Statements of Earnings (Loss) for the fiscal year ended June 30, 2021.

The following table presents dividends per share and dividends recognized for the year ended June 30, 2021:
Year Ended June 30, 2021
Dividends per share$134.55 
Dividends ($000)9,583 
Deemed dividends ($000)508 

The obligation to issue the shares of II-VI Series B-2 Convertible Preferred Stock is an embedded feature within the II-VI Series B-1 Convertible Preferred Stock that does not require bifurcation for separate accounting.

Common Stock Offering

On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 9,302,235 shares of II-VI Common Stock at a public offering price of $43.00 per share, resulting in gross proceeds to II-VI from the offering of approximately $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “Common Stock Offering”). In addition, the underwriters had a 30-day option to purchase up to an additional 1,395,335 shares of II-VI Common Stock at the applicable public offering price, less underwriting discounts and commissions. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Common Stock Offering, including the issuance and sale of approximately 11 million shares II-VI Common Stock.

Note 12.        Earnings Per Share
Basic earnings (loss) per common share is computed usingby dividing net earnings (loss) available to common shareholders by the weighted averageweighted-average number of shares of common stock outstanding during the period. Diluted net income
The diluted earnings (loss) per common share has beenis computed usingby dividing the weighted averagediluted earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period plus dilutive potential shares of common stock and potentially dilutive shares of common stock outstanding during the period. The dilutive effect of equity awards is calculated based on the average stock price for each fiscal period, using the treasury method. For the fiscal years ended 2021, 2020 and 2019, diluted shares outstanding include the
97

dilutive effect of the potential shares of the Company's common stock issuable from (1) stock options, performance and restricted shares. For fiscal year ended 2021, the diluted shares (underoutstanding also include the treasury stock method) and (2)dilutive effect of the potential shares of the Company's Common Stock issuable upon conversion of outstanding convertible debt (under

The following is a reconciliation of the If-Converted method) outstanding duringnumerators and denominators of the period. The Company’s convertible debt calculated under the If-Converted method was antidilutivebasis and diluted earnings (loss) per share computations for the fiscal year 2018 and was excluded from the calculation of earnings per share.

periods presented ($000):

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

($000 except per share)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

88,002

 

 

$

95,274

 

 

$

65,486

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

62,499

 

 

 

62,576

 

 

 

61,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.41

 

 

$

1.52

 

 

$

1.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

88,002

 

 

$

95,274

 

 

$

65,486

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

62,499

 

 

 

62,576

 

 

 

61,366

 

Dilutive effect of common stock equivalents

 

 

2,634

 

 

 

1,931

 

 

 

1,543

 

Diluted weighted average common shares

 

 

65,133

 

 

 

64,507

 

 

 

62,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.35

 

 

$

1.48

 

 

$

1.04

 



Year Ended June 30,202120202019
($000 except per share)
Numerator
Net earnings (loss)$297,552 $(67,029)$107,517 
Deduct Series A preferred stock dividends(27,140)— — 
Deduct Series B redeemable preferred stock dividends(9,583)— — 
Deduct Series B redeemable preferred stock deemed dividends(508)— — 
Basic earnings (loss) available to common shareholders$260,321 $(67,029)$107,517 
Effect of dilutive securities:
Add back interest on II-VI Notes Due 2022$12,264 $— $— 
Diluted earnings (loss) available to common shareholders$272,585 $(67,029)$107,517 
Denominator
Weighted average shares104,151 84,828 63,584 
Effect of dilutive securities
Stock options, performance and restricted shares3,552 — 2,220 
II-VI Notes due 20227,331 — — 
Diluted weighted average common shares115,034 84,828 65,804 
Basic earnings (loss) per common share$2.50 $(0.79)$1.69 
Diluted earnings (loss) per common share$2.37 $(0.79)$1.63 

The following table presents potential shares of common stock excluded from the calculation of diluted net incomeearnings (loss) per share, as their effect would have been antidilutive ($000)(in thousands of shares):

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Stock options and restricted shares

 

 

135

 

 

 

140

 

 

 

153

 

0.25% Convertible Senior Notes due 2022

 

 

7,331

 

 

 

-

 

 

 

-

 

Total anti-dilutive shares

 

 

7,466

 

 

 

140

 

 

 

153

 


Note 10.

Operating Leases

Year Ended June 30,202120202019
Series A Mandatory Convertible Preferred Stock8,915 — — 
Series B Redeemable Preferred Stock2,230 — — 
II-VI Notes due 2022— 7,331 7,331 
Stock options, performance and restricted shares118 2,345 115 
0.50% Finisar Convertible Notes— 289 — 
Total anti-dilutive shares11,263 9,965 7,446 


Note 13.        Leases
We determine if an arrangement is a lease at inception 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 leases are recorded in property, plant and equipment, net, and finance lease liabilities within other current and other non-current liabilities on our Consolidated Balance Sheet. Finance lease assets are amortized in operating expenses on a
98

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 Consolidated Balance Sheet. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.
The Company leases certain property under operating leases that expire at various dates. Future rental commitments applicableCompany’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 operatingCompany. For the purpose of lease liability measurement, we consider 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. We account for non-lease components, such as common area maintenance, as a component of the lease, and include it in the initial measurement of our lease 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 we 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 short-term leases, at June 30, 2018 are as follows:

Year Ending June 30,

 

 

 

 

($000)

 

 

 

 

2019

 

$

20,100

 

2020

 

 

19,100

 

2021

 

 

14,500

 

2022

 

 

11,700

 

2023

 

 

9,800

 

Thereafter

 

 

52,700

 

Rent expense was approximately $17.0 million, $14.7 million,lease term, and $14.2 million for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.

discount rates ($000):

Note 11.

Share-Based Compensation Plans

Year Ended
June 30, 2021		Year Ended
June 30, 2020
Finance Lease Cost
Amortization of right-of-use assets$1,667$1,667
Interest on lease liabilities1,2681,328
Total finance lease cost2,9352,995
Operating lease cost37,36132,466
Sublease income1,471368
Total lease cost$38,825$35,093
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases1,268 1,328 
Operating cash flows from operating leases35,641 30,816 
Financing cash flows from finance leases1,152 1,026 
Assets Obtained in Exchange for Lease Liabilities
Right-of-use assets obtained in acquisitions13,391 29,247 
Right-of-use assets obtained in exchange for new operating lease liabilities52,839 29,458 
Total assets obtained in exchange for new operating lease liabilities66,230 58,705 
Weighted-Average Remaining Lease Term (in Years)
Finance leases10.511.5
Operating leases7.07.2
Weighted-Average Discount Rate
Finance leases5.6 %5.6 %
Operating leases6.1 %7.3 %

The following table presents future minimum lease payments, which include short-term leases ($000):
99

Future YearsOperating LeasesFinance LeasesTotal
Year 1$34,076 $2,486 $36,562 
Year 231,121 2,554 33,675 
Year 327,276 2,624 29,900 
Year 423,332 2,697 26,029 
Year 518,632 2,771 21,403 
Thereafter58,590 16,648 75,238 
Total minimum lease payments$193,027 $29,780 $222,807 
Less: amounts representing interest42,128 7,484 49,612 
Present value of total lease liabilities$150,899 $22,296 $173,195 

Note 14.        Share-Based Compensation
The Company’s Board of Directors adoptedamended the II-VI Incorporated Amended and Restated 20122018 Omnibus Incentive Plan, (the “Plan”) which was approved by the shareholders at the Annual Meeting in November 2014 as amended.2018. The Amended Omnibus Plan (the “Plan”) was approved at the annual meeting in November 2020. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to employees, officers and directors of the Company. The maximum number of shares of the Company’s common stock authorized for issuance under the Plan is limited to 4,900,0009,550,000 shares of common stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability of the grantee.
As of June 30, 2018,2021, there were approximately 955,0008 million shares available to be issued under the Plan, including forfeited shares from predecessor plans.

The Company records share-based compensation expense for these awards, which requires the recognition of the grant-date fair value of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-based stock appreciation rights, cash-based restricted share unit awardsunits and cash-based performance share unit awardsunits as liability awards, in accordance with applicable accounting standards.

U.S. GAAP.

Share-based compensation expense for the fiscal years ended June 30, 2018, 20172021, 2020 and 20162019 is as follows ($000):

$000:

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Stock Options and Cash-Based Stock Appreciation Rights

 

$

6,605

 

 

$

5,611

 

 

$

4,309

 

Restricted Share Awards and Cash-Based Restricted Share Unit Awards

 

 

7,850

 

 

 

6,799

 

 

 

4,401

 

Performance Share Awards and Cash-Based Performance Share  Unit Awards

 

 

5,221

 

 

 

3,626

 

 

 

2,196

 

 

 

$

19,676

 

 

$

16,036

 

 

$

10,906

 

Year Ended June 30,202120202019
Stock Options and Cash-Based Stock
   Appreciation Rights		$10,626 $11,893 $6,801 
Restricted Share Awards, Restricted Share
   Units, and Cash-Based Restricted Share Units		47,060 49,957 9,242 
Performance Share Units and Cash
   Based Performance Share Units		16,640 11,977 8,920 
$74,326 $73,827 $24,963 

The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and administrative expense in the Consolidated Statements of Earnings, based on the employee classification of the grantee. Share-based compensation expense associated with liability awards was $4.4 million, $4.3 million, and $1.2 million, in the fiscal years ended June 30, 2018, 2017 and 2016, respectively.



Stock Options and Cash-Based Stock Appreciation Rights:

The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense.options and cash-based stock appreciation rights. During the fiscal year ended June 30, 2021, no stock options were issued. During fiscal years ended June 30, 2018, 20172020 and 2016,2019, the weighted-average fair value of options granted under the stock option planPlan was $14.23, $8.88$14.79 and $7.35,$20.66, respectively, per option using the following assumptions:

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Year Ended June 30,20202019

Risk-free interest rate

 

 

2.00

%

 

 

1.43

%

 

 

1.68

%

Risk-free interest rate1.50 %2.80 %

Expected volatility

 

 

37

%

 

 

37

%

 

 

38

%

Expected volatility39 %37 %

Expected life of options

 

6.43 years

 

 

6.28 years

 

 

6.43 years

 

Expected life of options6.91 years6.96 years

Dividend yield

 

None

 

 

None

 

 

None

 

Dividend yieldNoneNone


100

The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted average rate for all options granted during the fiscal year. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no current intention to pay cash dividends in the future. The estimated annualized forfeitures are based on the Company’s historical experience of option pre-vesting cancellations and are estimated at a rate of 17.6%. The Company will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future periods if the actual forfeitures are higher than estimated.

Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 20182021 was as follows:

 

 

Stock Options

 

 

Cash-Based Stock Appreciation Rights

 

 

 

Number of

 

 

Weighted Average

 

 

Number of

 

 

Weighted Average

 

 

 

Shares

 

 

Exercise Price

 

 

Rights

 

 

Exercise Price

 

Outstanding - July 1, 2017

 

 

4,080,915

 

 

$

18.15

 

 

 

214,467

 

 

$

19.17

 

Granted

 

 

474,270

 

 

$

35.54

 

 

 

47,800

 

 

$

35.46

 

Exercised

 

 

(573,004

)

 

$

18.27

 

 

 

(30,467

)

 

$

18.44

 

Forfeited and Expired

 

 

(53,473

)

 

$

27.67

 

 

 

(26,352

)

 

$

23.14

 

Outstanding - June 30, 2018

 

 

3,928,708

 

 

$

20.07

 

 

 

205,448

 

 

$

22.56

 

Exercisable - June 30, 2018

 

 

2,288,266

 

 

$

17.24

 

 

 

59,766

 

 

$

18.47

 

Stock OptionsCash-Based Stock Appreciation Rights
Number of
Shares		Weighted Average
Exercise Price		Number of
Rights		Weighted Average
Exercise Price
Outstanding - July 1, 20203,721,801 $26.99 230,374 $32.13 
Exercised(1,047,216)$21.04 (76,880)$28.75 
Forfeited and Expired(31,951)$33.86 (8,160)$34.14 
Outstanding - June 30, 20212,642,634 $29.26 145,334 $33.80 
Exercisable - June 30, 20211,805,735 $25.31 63,209 $27.36 


As of June 30, 2018, 20172021, 2020 and 2016,2019, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $96.1$88 million, $69.3$80 million and $10.1$56 million, respectively. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30, 2018, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2018.2021. This amount varies based on the fair market value of the Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years ended June 30, 2018, 2017,2021, 2020, and 20162019 was $14.7$49 million, $12.3$20 million, and $4.5$15 million, respectively. As of June 30, 2018,2021, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $13.9$9 million. This cost is expected to be recognized over a weighted-average period of approximately threetwo years.

Outstanding and exercisable stock options at June 30, 20182021 were as follows:

 

 

Stock Options and Cash-Based Stock

 

 

Stock Options and Cash-Based Stock

 

 

 

Appreciation Rights Outstanding

 

 

Appreciation Rights Exercisable

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

Number of

 

 

Average Remaining

 

 

Average

 

 

Number of

 

 

Average Remaining

 

 

Average

 

Range of

 

Shares or

 

 

Contractual Term

 

 

Exercise

 

 

Shares or

 

 

Contractual Term

 

 

Exercise

 

Exercise Prices

 

Rights

 

 

(Years)

 

 

Price

 

 

Rights

 

 

(Years)

 

 

Price

 

$10.04 - $15.38

 

 

902,022

 

 

 

4.21

 

 

$

13.25

 

 

 

667,878

 

 

 

3.54

 

 

$

12.99

 

$15.47 - $23.50

 

 

2,647,015

 

 

 

5.58

 

 

$

19.29

 

 

 

1,657,129

 

 

 

4.40

 

 

$

18.80

 

$25.91 - $39.65

 

 

569,559

 

 

 

9.00

 

 

$

34.79

 

 

 

23,025

 

 

 

7.14

 

 

$

31.23

 

$41.50 - $45.24

 

 

15,560

 

 

 

9.55

 

 

$

42.87

 

 

 

-

 

 

 

-

 

 

$

-

 

 

 

 

4,134,156

 

 

 

5.77

 

 

$

20.20

 

 

 

2,348,032

 

 

$

4.18

 

 

$

17.27

 


Stock Options and Cash-Based Stock
Appreciation Rights Outstanding		Stock Options and Cash-Based Stock
Appreciation Rights Exercisable
Number ofWeighted
Average Remaining		Weighted
Average		Number ofWeighted
Average Remaining		Weighted
Average
Range ofShares orContractual TermExerciseShares orContractual TermExercise
Exercise PricesRights(Years)PriceRights(Years)Price
$13.34 - $18.07574,264 3.55$16.18 574,264 3.55$16.18 
$18.07 - $24.35685,719 4.01$20.83 674,952 3.94$20.70 
$24.35 - $35.39542,224 6.79$33.21 291,734 6.18$34.20 
$35.39 - $36.90573,384 8.21$36.47 126,567 8.16$36.43 
$36.90 - $49.90412,377 7.08$47.85 201,427 6.96$47.60 
2,787,968 5.78$29.49 1,868,944 4.78$25.38 

Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Unit Awards:

Units:

Restricted share awards, restricted share units, and cash-based restricted share unit awardsunits compensation expense was calculated based on the number of shares or units expected to be earned by the grantee multiplied by the stock price at the date of grant (for restricted share awards)awards and restricted share units) or the stock price at the period end date (for cash-based restricted share unit awards)units), and is being recognized over the vesting period. Generally, the restricted share awards, restricted share units, and cash-based restricted share units have a three-year tranche vesting provision.
Restricted share award, restricted share unit, awards have a three year tranche vesting provision and an estimated forfeiture rate of 10.2%.

Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2018,2021, was as follows:

 

 

Restricted Share Awards

 

 

Cash-Based Restricted Share Units

 

 

 

Number of

 

 

Weighted Average

 

 

Number of

 

 

Weighted Average

 

 

 

Shares

 

 

Grant Date Fair Value

 

 

Units

 

 

Grant Date Fair Value

 

Nonvested - June 30, 2017

 

 

811,833

 

 

$

19.45

 

 

 

140,927

 

 

$

19.12

 

Granted

 

 

166,348

 

 

$

35.58

 

 

 

46,012

 

 

$

35.43

 

Vested

 

 

(370,571

)

 

$

18.15

 

 

 

(55,189

)

 

$

17.45

 

Forfeited

 

 

(12,091

)

 

$

28.71

 

 

 

(14,424

)

 

$

24.97

 

Nonvested - June 30, 2018

 

 

595,519

 

 

$

24.58

 

 

 

117,326

 

 

$

25.57

 

101


Restricted Share AwardsRestricted Share UnitsCash-Based Restricted Share Units
Number of
Shares		Weighted Average
Grant Date 
Fair Value		Number of
Units		Weighted Average
Grant Date Fair Value		Number of
Units		Weighted Average
Grant Date Fair Value
Nonvested - June 30, 202050,527 $35.92 2,242,412 $39.46 82,003 $38.31 
Granted— $— 1,277,460 $45.74 5,194 $44.30 
Vested(49,525)$35.47 (996,955)$37.91 (38,943)$38.57 
Forfeited(1,002)$18.42 (196,745)$38.36 (2,381)$38.91 
Nonvested - June 30, 2021— $— 2,326,172 $43.67 45,873 $38.75 

As of June 30, 2018,2021, total unrecognized compensation cost related to non-vested, restricted share unit and cash-based restricted share unit awardsunits was $9.7$68 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The restricted share award and restricted share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based restricted share unit compensation expense was calculated based on the number of sharesunits expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. The total fair value of the restricted share awards, restricted share units, and cash-based restricted share unit awardsunits granted during the years ended June 30, 2018, 20172021, 2020 and 2016,2019, was $7.5$59 million, $7.8$11 million and $6.3$10 million, respectively. The total fair value of restricted sharesshare awards, restricted share units and cash-based restricted share unit awardsunits vested was $17.0$69 million, $6.2$75 million and $5.5$20 million during fiscal years 2018, 20172021, 2020 and 2016,2019, respectively.

Performance Share AwardsUnits and Cash-Based Performance Share Unit Awards:

Units:

The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees performance share awardsunits and cash-based performance share unit awardsunits under the Plan. As of June 30, 2018,2021, the Company had outstanding grants covering performance periods ranging from 12 to 36 months. These awardsgrants are intended to provide continuing emphasis on specified financial performance goals that the Company considers important contributors to the creation of long-term shareholder value. These awardsgrants are payable only if the Company achieves specified levels of financial performance during the performance periods.

The performance share compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. Performance share and cash-based performance share unit award activity relating to the Plan during the year ended June 30, 2018, was as follows:

 

 

Performance Share Awards

 

 

Cash-Based Performance Share Units

 

 

 

Number of

 

 

Weighted Average

 

 

Number of

 

 

Weighted Average

 

 

 

Shares

 

 

Grant Date Fair Value

 

 

Units

 

 

Grant Date Fair Value

 

Nonvested - June 30, 2017

 

 

377,710

 

 

$

19.52

 

 

 

17,152

 

 

$

19.37

 

Granted

 

 

99,168

 

 

$

35.25

 

 

 

9,120

 

 

$

35.25

 

Vested

 

 

(70,210

)

 

$

14.84

 

 

 

(2,221

)

 

$

15.42

 

Forfeited

 

 

(24,398

)

 

$

17.84

 

 

 

(6,772

)

 

$

25.88

 

Nonvested - June 30, 2018

 

 

382,270

 

 

$

24.57

 

 

 

17,279

 

 

$

25.71

 

As of June 30, 2018, total unrecognized compensation cost related to non-vested performance share and cash-based performance share unit awards was $4.7 million. This cost is expected to be recognized over a weighted-average period of approximately one year. The total fair value of the performance share and cash-based performance share unit awards granted during the fiscal years ended June 30, 2018, 2017 and 2016 was $3.8 million, $5.3 million and $2.4 million, respectively. The total fair value of performance shares vested during the fiscal years ended June 30, 2018, 2017 and 2016 was $3.6 million, $5.9 million and $1.5 million, respectively.  


For our relative Total Shareholder Return (“TSR”) performance-based awards,units, which are based on market performance of our stock as compared to the Russel 2000S&P Composite 1500 – Electronic Equipment, Instruments & Components Index, the compensation cost is recognized over the performance period on a straight-line basis, net of forfeitures, because the awardsgrants vest only at the end of the measurement period and the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate the fair value of the TSR performance-based awardsunits using the Monte-Carlo simulation model.

The performance share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation expense was calculated based on the number of units expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. Performance share unit and cash-based performance share unit activity relating to the Plan during the year ended June 30, 2021, was as follows:
102

 Performance Share UnitsCash-Based Performance Share Units
Number of
Units		Weighted Average
Grant Date Fair Value		Number of
Units		Weighted Average
Grant Date Fair Value
Nonvested - June 30, 2020409,246 $40.96 35,188 $38.54 
Granted209,639 $52.04 — $— 
Vested(187,410)$30.03 (14,928)$35.25 
Forfeited(5,344)$37.66 — $— 
Performance Adjustments92,178 $17.52 7,464 $35.25 
Nonvested - June 30, 2021518,309 $45.28 27,724 $39.43 
As of June 30, 2021, total unrecognized compensation cost related to non-vested performance share units and cash-based performance share units was $12 million. This cost is expected to be recognized over a weighted-average period of approximately 1.65 years. The total fair value of the performance share units and cash-based performance share units granted during the fiscal years ended June 30, 2021, 2020 and 2019 was $14 million, $15 million and $10 million, respectively. The total fair value of performance share units and cash-based performance share units vested during the fiscal years ended June 30, 2021, 2020 and 2019 was $9 million, $6 million and $11 million, respectively. The performance adjustments relate to grants that exceeded the performance targets when vested during FY21, including the final number of shares issued, which were 200% of the target units based on actual results during the three-year performance period.

Note 12.

Note 15.        Segment and Geographic Reporting

The Company reports its business segments using the “management approach” model for segment reporting. This means that the Company determines its reportable business segments based on the way the chief operating decision maker organizes business segments within the Company for making operating decisions and assessing performance.

The Company reports its financial results in the following three segments: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products,2 segments, and the Company’s chief operating decision maker receives and reviews financial information based on these segments.  The Company evaluates business segment performance based upon segment operating income, which is defined as earnings before income taxes, interest and other income or expense.

The II-VI Laser SolutionsCompound Semiconductors segment is locatedhas locations in the United States, Singapore, China, Germany, Switzerland, Japan, Belgium, the United Kingdom, Italy, South Korea, the Philippines, Vietnam, Sweden, and Taiwan. II-VI Laser SolutionsThis segment address all of II-VI's 7 end markets, namely: communications, industrial, aerospace & defense, consumer electronics, semiconductor capital equipment, life sciences and automotive. This segment designs, manufactures and markets the following products: (i) optical and electro-optical components and materials sold under the II-VI Infrared brand name and used primarily in high-power CO2 lasers, fiber-delivered beam delivery systems and processing toolsfiber-lasers and direct diode lasers for industrialmaterials processing applications; (ii) infrared optical components and high-precision optical assemblies for aerospace and defense, medical and commercial laser imaging applications; (iii) semiconductor lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names. II-VI Laser Solutions also manufacturesdetectors for optical interconnects and sensing applications; (iv) engineered materials for thermoelectric, ceramics and silicon carbide for a wide range of applications; and (v) compound semiconductor epitaxial wafers for applications in optical components,and wireless devices, and high-speed communication systems and manufactures 6-inch GaAs wafers allowing for the production of high performance lasers and integrated circuits in high volume sold under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brand names.  

communication.

The II-VI PhotonicsPhotonic Solutions segment is locatedhas locations in the United States, China, Vietnam, Germany, Japan, the United Kingdom, Italy, Malaysia, Australia, and Hong Kong. II-VI PhotonicsThis segment manufactures (i) transceivers for data centers and telecom optical networks; (ii) pump lasers, optical amplifiers, wavelength selective switches and advanced components for telecom networks; (iii) crystal materials, optics, microchip lasers and optoelectronic modules for usea wide range of applications, including in optical communication networkscommunications, life sciences, and other diverse consumer and commercial applications.  electronics markets.
In addition, the segment manufactures pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers, for both terrestrial and submarine applications within the optical communications market.

The II-VI Performance Products segment is located in the United States, Vietnam, Japan, China, Germany and the Philippines. II-VI Performance Products is further divided into production and administrative units that are directed by managers. II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical and commercial laser imaging applications.  In addition, the segment designs, manufactures and markets unique engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, military and medical markets.

On August 7, 2017,September 2019, the Company completed its acquisition of II-VI Compound Semiconductor Ltd. See Note 2. Acquisitions.Finisar. The operating results of this acquisition have been reflected in the selected financial information of the Company’s II-VI LaserPhotonic Solutions segment.

On June 19, 2017,segment and Compound Semiconductors Segment beginning on October 1, 2019, with the Company completed its acquisition of IPI. See Note 2. Acquisitions. The operating results of this acquisition have beenfrom September 24, 2019 to September 30, 2019 reflected in the selected financial information of the Company’s II-VI Photonics segment.

Unallocated and Other.

The accounting policies are consistent across both of the segments aresegments. To the same as those ofextent possible, the Company. The Company’s corporate expenses are allocated to the segments. The Company evaluates segment performance based upon reported segment operating income, which is defined as earnings from continuing operations before income taxes, interest and other income or expense. Inter-segmentUnallocated and Other include eliminating inter-segment sales and transfers have been eliminated.

as well as transaction costs related to the pending Coherent

103


acquisition in the fiscal year ended June 30, 2021. In the fiscal year ended June 30, 2020, it included transaction costs related to the Finisar acquisition.
The following tables summarize selected financial information of the Company’s operations by segment:

 

II-VI

 

 

 

 

 

 

II-VI

 

 

 

 

 

 

 

 

 

 

Laser

 

 

II-VI

 

 

Performance

 

 

 

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Eliminations

 

 

Total

 

Photonic SolutionsCompound SemiconductorsUnallocated
& Other		Total

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($000)

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20212021

Revenues

 

$

427,968

 

 

$

464,457

 

 

$

266,369

 

 

$

-

 

 

$

1,158,794

 

Revenues$2,038,284 $1,067,607 $— $3,105,891 

Inter-segment revenues

 

 

34,661

 

 

 

14,542

 

 

 

5,609

 

 

 

(54,812

)

 

 

-

 

Inter-segment revenues35,358 244,407 (279,765)— 

Operating income

 

 

36,797

 

 

 

67,732

 

 

 

30,758

 

 

 

-

 

 

 

135,287

 

Operating income (loss)Operating income (loss)207,652 221,239 (26,772)402,119 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(18,352

)

Interest expense— — — (59,899)

Other income, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,259

 

Other income, net— — — 10,370 

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(34,192

)

Income taxes— — — (55,038)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

88,002

 

Net earnings— — — 297,552 

Depreciation and amortization

 

 

38,552

 

 

 

24,984

 

 

 

17,234

 

 

 

-

 

 

 

80,770

 

Depreciation and amortization161,208 108,861 — 270,069 

Expenditures for property, plant & equipment

 

 

82,478

 

 

 

39,162

 

 

 

39,683

 

 

 

-

 

 

 

161,323

 

Expenditures for property, plant & equipment87,304 59,033 — 146,337 

Segment assets

 

 

760,988

 

 

 

595,909

 

 

 

404,764

 

 

 

-

 

 

 

1,761,661

 

Segment assets4,231,289 2,281,361 — 6,512,650 

Equity investments

 

 

-

 

 

 

-

 

 

 

69,215

 

 

 

-

 

 

 

69,215

 

Goodwill

 

 

103,390

 

 

 

114,398

 

 

 

52,890

 

 

 

-

 

 

 

270,678

 

Goodwill1,053,028 243,699 — 1,296,727 

 

 

II-VI

 

 

 

 

 

 

II-VI

 

 

 

 

 

 

 

 

 

 

 

Laser

 

 

II-VI

 

 

Performance

 

 

 

 

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Eliminations

 

 

Total

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

339,341

 

 

$

418,515

 

 

$

214,190

 

 

$

-

 

 

$

972,046

 

Inter-segment revenues

 

 

33,792

 

 

 

14,236

 

 

 

10,189

 

 

 

(58,217

)

 

 

-

 

Operating income

 

 

30,931

 

 

 

62,975

 

 

 

21,635

 

 

 

-

 

 

 

115,540

 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,809

)

Other income, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,056

 

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(23,514

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

95,274

 

Depreciation and amortization

 

 

24,958

 

 

 

21,442

 

 

 

17,237

 

 

 

-

 

 

 

63,637

 

Expenditures for property, plant & equipment

 

 

82,760

 

 

 

27,397

 

 

 

32,788

 

 

 

-

 

 

 

142,945

 

Segment assets

 

 

589,239

 

 

 

578,315

 

 

 

309,743

 

 

 

-

 

 

 

1,477,297

 

Equity investment

 

 

-

 

 

 

-

 

 

 

11,727

 

 

 

-

 

 

 

11,727

 

Goodwill

 

 

84,180

 

 

 

113,272

 

 

 

52,890

 

 

 

-

 

 

 

250,342

 


 

II-VI

 

 

 

 

 

 

II-VI

 

 

 

 

 

 

 

 

 

 

Laser

 

 

II-VI

 

 

Performance

 

 

 

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Eliminations

 

 

Total

 

Photonic SolutionsCompound SemiconductorsUnallocated
& Other		Total

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($000)

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20202020

Revenues

 

$

303,002

 

 

$

325,879

 

 

$

198,335

 

 

$

-

 

 

$

827,216

 

Revenues$1,536,790 $821,230 $22,051 $2,380,071 

Inter-segment revenues

 

 

24,290

 

 

 

12,081

 

 

 

7,274

 

 

 

(43,645

)

 

 

-

 

Inter-segment revenues31,515 164,884 (196,399)— 

Operating income

 

 

36,184

 

 

 

37,849

 

 

 

17,780

 

 

 

-

 

 

 

91,813

 

Operating income (loss)Operating income (loss)49,930 62,279 (72,730)39,479 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,081

)

Interest expense— — — (89,409)

Other income, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,223

 

Other income, net— — — (13,998)

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(24,469

)

Income taxes— — — (3,101)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

65,486

 

Net lossNet loss— — — (67,029)

Depreciation and amortization

 

 

17,222

 

 

 

19,855

 

 

 

19,586

 

 

 

-

 

 

 

56,663

 

Depreciation and amortization112,203 104,936 3,743 220,882 

Expenditures for property, plant & equipment

 

 

25,620

 

 

 

21,096

 

 

 

11,454

 

 

 

-

 

 

 

58,170

 

Expenditures for property, plant & equipment45,795 88,318 2,764 136,877 
Segment assetsSegment assets3,502,467 1,732,247 — 5,234,714 
GoodwillGoodwill1,052,494 186,515 — 1,239,009 



104

Photonic SolutionsCompound SemiconductorsUnallocated
& Other		Total
($000)
2019
Revenues$638,889 $723,607 $— $1,362,496 
Inter-segment revenues12,568 94,405 (106,973)— 
Operating income81,898 82,414 (15,643)148,668 
Interest expense— — — (22,417)
Other income, net— — — 2,562 
Income taxes— — — (21,296)
Net earnings— — — 107,517 
Depreciation and amortization26,273 66,092 — 92,365 
Expenditures for property, plant & equipment44,851 83,899 — 128,750 
Segment Assets681,610 1,272,163 — $1,953,773 
Goodwill134,057 185,721 — $319,778 

Geographic information for revenues from the legal country of origin, (shipped from), and long-lived assets from theby country, of origin, which include property, plant and equipment, net of related depreciation, and certain other long-term assets, were as follows:

 

Revenues

 

Revenues

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Year Ended June 30,202120202019

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

United States

 

$

373,735

 

 

$

294,200

 

 

$

266,347

 

United States$2,017,152 $1,432,195 $405,404 

Non-United States

 

 

 

 

 

 

 

 

 

 

 

 

Non-United States
Hong KongHong Kong356,356 299,359 319,601 

China

 

 

253,672

 

 

 

208,595

 

 

 

172,292

 

China343,483 292,139 290,287 

Hong Kong

 

 

186,978

 

 

 

190,702

 

 

 

140,821

 

JapanJapan132,015 146,325 109,670 

Germany

 

 

132,161

 

 

 

88,304

 

 

 

72,070

 

Germany153,548 124,934 155,000 

Japan

 

 

89,153

 

 

 

76,212

 

 

 

57,287

 

VietnamVietnam38,799 22,152 22,322 

Switzerland

 

 

49,557

 

 

 

50,497

 

 

 

54,760

 

Switzerland24,462 35,895 32,770 

Vietnam

 

 

26,898

 

 

 

22,497

 

 

 

24,267

 

Italy

 

 

11,458

 

 

 

10,791

 

 

 

10,160

 

Korea

 

 

9,757

 

 

 

6,584

 

 

 

3,887

 

Korea12,406 8,537 11,674 
TaiwanTaiwan11,385 3,743 2,005 
SingaporeSingapore5,103 5,791 6,868 
PhilippinesPhilippines4,974 4,479 4,179 

United Kingdom

 

 

9,359

 

 

 

8,473

 

 

 

8,154

 

United Kingdom4,560 4,226 2,712 

Singapore

 

 

5,941

 

 

 

3,913

 

 

 

3,039

 

Belgium

 

 

4,511

 

 

 

7,503

 

 

 

6,026

 

Philippines

 

 

3,909

 

 

 

3,057

 

 

 

8,106

 

Taiwan

 

 

1,705

 

 

 

718

 

 

 

-

 

OtherOther1,648 296 4 

Total Non-United States

 

 

785,059

 

 

 

677,846

 

 

 

560,869

 

Total Non-United States$1,088,739 $947,876 $957,092 

 

$

1,158,794

 

 

$

972,046

 

 

$

827,216

 

$3,105,891 $2,380,071 $1,362,496 

 

 

Long-Lived Assets

 

June 30,

 

2018

 

 

2017

 

 

2016

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

309,062

 

 

$

240,029

 

 

$

137,521

 

Non-United States

 

 

 

 

 

 

 

 

 

 

 

 

China

 

 

81,175

 

 

 

62,024

 

 

 

51,824

 

United Kingdom

 

 

65,357

 

 

 

396

 

 

 

203

 

Switzerland

 

 

37,155

 

 

 

36,795

 

 

 

38,202

 

Germany

 

 

14,876

 

 

 

15,323

 

 

 

15,162

 

Vietnam

 

 

10,042

 

 

 

8,272

 

 

 

8,895

 

Philippines

 

 

6,628

 

 

 

6,115

 

 

 

4,399

 

Hong Kong

 

 

2,818

 

 

 

1,914

 

 

 

1,765

 

Other

 

 

598

 

 

 

704

 

 

 

943

 

Total Non-United States

 

 

218,649

 

 

 

131,543

 

 

 

121,393

 

 

 

$

527,711

 

 

$

371,572

 

 

$

258,914

 


105

Long-Lived Assets
June 30,20212020
($000)
United States$737,151 $754,815 
Non-United States
China402,987 369,544 
United Kingdom60,090 55,028 
Malaysia53,187 46,162 
Switzerland37,121 37,129 
Sweden27,374 24,270 
Germany16,703 18,631 
Australia13,627 12,321 
Vietnam10,246 11,140 
Philippines7,890 7,607 
Taiwan6,532 — 
Korea4,595 3,438 
Hong Kong2,104 2,870 
Other1,916 1,965 
Total Non-United States$644,372 $590,105 
$1,381,523 $1,344,920 

Note 13.

Note 16.        Fair Value of Financial Instruments

The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:

•Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.

•Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.

•Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurements.

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.


At June 30, 2018, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts.

In February 2016, the Company entered into an interest rate swap with a contingent earnout arrangement which provides upnotional amount of $1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a maximum of $6.0 million of additional cash earnout opportunities based upon EpiWorks achieving certain agreed-upon financial and operational targets for capacity, wafer output and gross margin, which if earned would be payable for the achievement of each specific annual target over the next three years.fixed interest rate. The Company paidreceives payments based on the first year earnoutone-month LIBOR and makes payments based on a fixed rate of 1.52%. The Company receives payments with a floor of 0.00%. The interest rate swap agreement has an effective date of November 24, 2019, with an expiration date of September 24, 2024. The initial notional amount of $2.0the interest rate swap is scheduled to decrease to $825 million duringin June 2022 and will remain at that amount through the year ended June 30, 2017.

In June 2017, the Company entered into a contingent earnout arrangement which provides up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving certain agreed-upon financial and transitional objectives relating to finance, information technology and human resources, which if earned, would be payable for the achievement of each specific annual target over the next year.

In November 2017, the Company acquired a 93.8% equity investment in a privately held company.expiration date. The Company hasdesignated this instrument as a cash flow hedge and deemed the right to purchase allhedge relationship effective at inception of the outstanding interest of each of the minority equity holders and the minority equity holders have the right to cause the Company to purchase all of their outstanding interests at any time on or after the third anniversary of the investment, or earlier upon certain events.contract. The Company performed a Monte Carlo simulation to estimate the fair value of the net put option at the investment date and recorded a liabilityinterest rate swap of $2.2$29 million in “Other Liabilities”is recognized in the Consolidated Balance Sheet within other accrued liabilities (current) and other liabilities (non-current). Changes in fair value are recorded within accumulated other comprehensive income (loss) on the Consolidated Balance Sheet and reclassified into the Consolidated Statements of Earnings (Loss) as interest expense in the period in which the underlying transaction affects earnings. Cash flows from hedging activities are reported in the Consolidated Statements of Cash Flows in the acquisition date in accordance with ASC 815-10, Derivatives and Hedging.same classification as the hedged item, generally as a component of cash flows from operations. The fair value of the net put optioninterest rate swap is adjusteddetermined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs,

106

including interest rate curves. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The interest rate swap is classified as necessary on a quarterly basis with any changes inLevel 2 item within the fair value recorded through earnings. The change in fair value of the net purchase option from the investment date to June 30, 2018 was not material.

The fair values of these contingent earnout arrangements and the net put option were measured using valuations based on other unobservable inputs that are significant to the fair value measurement (Level 3).

hierarchy.

The Company estimated the fair value of the 0.25% convertible notesII-VI Notes and Finisar Notes based on quoted market prices as of the last trading day prior to June 30, 2018;2021; however, the convertible notesII-VI Notes and Finisar Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the convertible notesII-VI Notes and Finisar Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the convertible notesII-VI Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 7.9. Debt for details on the Company’s debt facilities.
The fair value and carrying value of the convertible notesII-VI Notes and Finisar Notes were as follows at June 30, 20182021 ($000):

 

Fair Value

 

 

Carrying Value

 

Convertible notes

$

388,125

 

 

$

288,591

 

The following tables provide a summary by level of the fair value of financial instruments that are measured on a recurring basis as of June 30, 2018 and 2017 ($000):

 

 

Fair Value Measurements at June 30, 2018 Using:

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

for Identical

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

 

June 30, 2018

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

121

 

 

$

-

 

 

$

121

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent earnout arrangements

 

$

5,405

 

 

$

-

 

 

$

-

 

 

$

5,405

 

Net put option

 

$

2,024

 

 

$

-

 

 

$

-

 

 

$

2,024

 


Fair ValueCarrying Value
II-VI Notes$549,580 $328,032 
Finisar Notes$14,889 $14,888 

 

 

Fair Value Measurements at June 30, 2017 Using:

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

for Identical

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

 

June 30, 2017

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

191

 

 

$

-

 

 

$

191

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent earnout arrangements

 

$

5,795

 

 

$

-

 

 

$

-

 

 

$

5,795

 


The Company’s policy is to report transfers into and out of Levels 1 and 2 of the fair value hierarchy at fair values as of the beginning of the period in which the transfers occur. There were no transfers in and out of Levels 1 and 2 of the fair value hierarchy during fiscal years 2018 and 2017.

The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s level 3 contingent earnout arrangements related to the acquisitions of II-VI EpiWorks and IPI and the net put option relating to the purchase of the equity investment in November 2017. ($000):

 

Significant

 

 

Unobservable Inputs

 

 

(Level 3)

 

Balance at July 1, 2017

$

5,795

 

 

 

 

 

Activity:

 

 

 

Purchase price adjustment - IPI

 

(35

)

Net put option

 

2,233

 

Changes in fair value recorded in other expense (income), net

 

(564

)

 

 

 

 

Balance at June 30, 2018

$

7,429

 

The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings includes both variableincluding its lease obligations, excluding the 0.25% Convertible Notes and fixed interest rates, non-interest bearing debt and a capital lease obligation andthe 0.50% Finisar convertible notes, are considered Level 2 among the fair value hierarchy and accordingly their carryingprincipal amounts approximate fair value.

Note 14.

Derivative Instruments

By entering into the Investment Agreement as described in Note 3 on March 25, 2021, the Company entered into a commitment to issue shares of II-VI Series B-1 Convertible Preferred Stock on the Initial Closing Date for a fixed price (such commitment the "Forward Sale Commitment"). The Forward Sale Commitment comprises a financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics: (i) embodies an obligation to repurchase the Company's equity shares and (ii) requires or may require the Company to settle the obligation by transferring assets. Under ASC 480, Distinguishing Liabilities from Equity, it is required to be initially measured and subsequently remeasured, at fair value as an asset or liability with changes in fair value recognized in earnings. An option pricing model was utilized to calculate the fair value of the Forward Sale Commitment. The Company recognized $11 million of realized gains within Other Expense (Income), Net in the Consolidated Statements of Earnings (Loss) for the year ended June 30, 2021, related to the Forward Sale Commitment due to changes in its fair value from March 25, 2021 to its settlement on March 31, 2021.

The Company, from time to time, purchases foreign currency forward exchange contracts, primarily in Japanese Yen, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales, for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk.

The Company has recorded the fair value of these contracts in the Company’s financial statements. These contracts had a total notional amount of $12.0 million and $12.7 million at June 30, 2018 and 2017, respectively. As of June 30, 2018, these forward contracts had expiration dates ranging from July 2018 through October 2018, with Japanese Yen denominations individually between 250 million and 500 million Yen. The Company does not account for these contracts as hedges as defined by U.S. GAAP and records the change in the fair value of these contracts in Other expense (income), net in the Consolidated Statements of Earnings as they occur. The fair value measurement takes into consideration foreign currency rates and the current creditworthiness of the counterparties to these contracts, as applicable, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments and thus represents a Level 2 measurement. These contracts are recorded in prepaid and other current assets in the Company’s Consolidated Balance Sheets as of June 30, 2018. The change in the fair value of these contracts for the fiscal year ended June 30, 2018, 2017 and 2016 was insignificant.


Note 15.

Note 17.        Employee Benefit Plans

Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at the discretion of the Company’s board of directors and were $5.0$2 million, $4.3$6 million, and $3.4$5 million for the years ended June 30, 2021, 2020 and 2019, respectively.
On August 18, 2018, 2017 and 2016, respectively.

Thethe Company has an employee stock purchase plan availableadopted the 2018 Employee Stock Purchase Plan (“2018 Plan”) for full time U.S. employees who have completed six monthstwo years of continuous employment with the Company.Company, and the 2018 Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders in November 2018. The employee may purchase the Company’s common stock at 5% belowfor the prevailinglesser of 90% of the fair market price.value of the shares (i) on the first trading day of the offering period, or (ii) on the purchase date. Offering periods will run from August through January and from February through July each year. The amountnumber of shares which may be bought by an employee during each fiscal year is limited to 10%15% of the employee’s base pay. This plan, as amended,The 2018 Plan limits the number of shares of common stock available for purchase to 1,600,0002,000,000 shares. There were 462,798 and 477,949As of June 30, 2021, there have been 361,834 shares purchased on behalf of common stock available for purchasethe employees under the plan at June 30, 2018 and 2017, respectively.

Plan.

Switzerland Defined Benefit Plan

In conjunction with the acquisition of II-VI Laser Enterprise in fiscal year 2014, the

The Company assumedmaintains a pension plan covering employees of our Swiss subsidiary (the “Swiss Plan”). Employer and employee contributions are made to the Swiss Plan based on various percentages of salary and wages that vary according to
107

employee age and other factors. Employer contributions to the Swiss Plan for years ended June 30, 20182021 and 20172020 were $2.7$4 million and $2.4$3 million, respectively. Expected employer contributionsNet periodic pension cost is not material for any year presented.
The underfunded pension liability was $25 million and $27 million as of June 30, 2021 and 2020, respectively. The pension adjustment amount recognized in fiscal year 2019 are $2.7 million.

The changes in the funded status of the Swiss Plan duringaccumulated other comprehensive income was $2 million decrease and $3 million increase for the fiscal years ended June 30, 20182021 and 2017 were as follows:

Year Ended June 30,

 

2018

 

 

2017

 

Change in projected benefit obligation:

 

 

 

 

 

 

 

 

Projected benefit obligation, beginning of period

 

$

59,518

 

 

$

54,094

 

Service cost

 

 

3,766

 

 

 

3,689

 

Interest cost

 

 

424

 

 

 

163

 

Benefits accumulated, net of benefits paid

 

 

1,474

 

 

 

1,743

 

Plan amendments (Reduction of the conversion rate 6.8% to 6.2%)

 

 

(4,068

)

 

 

-

 

Actuarial (gain) loss on obligation

 

 

1,606

 

 

 

(2,777

)

Participant contributions

 

 

1,415

 

 

 

1,262

 

Currency translation adjustment

 

 

(1,581

)

 

 

1,344

 

Projected benefit obligation, end of period

 

$

62,554

 

 

$

59,518

 

Change in plan assets:

 

 

 

 

 

 

 

 

Plan assets at fair value, beginning of period

 

 

42,990

 

 

 

35,857

 

Actual return on plan assets

 

 

1,566

 

 

 

805

 

Employer contributions

 

 

2,731

 

 

 

2,432

 

Participant contributions

 

 

1,415

 

 

 

1,262

 

Benefits accumulated, net of benefits paid

 

 

1,474

 

 

 

1,743

 

Currency translation adjustment

 

 

(1,142

)

 

 

891

 

Plan assets at fair value, end of period

 

$

49,034

 

 

$

42,990

 

Amounts recognized in consolidated balance sheets:

 

 

 

 

 

 

 

 

Other non-current assets:

 

 

 

 

 

 

 

 

Deferred tax asset

 

$

2,859

 

 

$

3,496

 

Other non-current liabilities:

 

 

 

 

 

 

 

 

Underfunded pension liability

 

$

13,520

 

 

 

16,528

 

Amounts recognized in accumulated other comprehensive

income, net of tax:

 

 

 

 

 

 

 

 

Pension adjustment

 

$

2,846

 

 

$

2,514

 

Accumulated benefit obligation, end of period

 

$

59,800

 

 

$

56,457

 


Net periodic pension cost associated with the Swiss Plan included the following components:

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Service cost

 

$

3,766

 

 

$

3,689

 

 

$

2,680

 

Interest cost

 

 

424

 

 

 

163

 

 

 

434

 

Expected return on plan assets

 

 

849

 

 

 

(742

)

 

 

(1,097

)

Net actuarial loss and prior service credit

 

 

203

 

 

 

594

 

 

 

(234

)

Net periodic pension cost

 

$

5,242

 

 

$

3,704

 

 

$

1,783

 

2020, respectively. The projected and accumulated benefit obligations for the Swiss Plan were calculatedobligation was $90 million as of June 30, 2018 and 2017 using the following assumptions:

June 30,

 

2018

 

 

2017

 

Discount rate

 

 

0.9

%

 

 

0.8

%

Salary increase rate

 

 

2.0

%

 

 

2.0

%

The net periodic pension cost for the Swiss Plan was calculated during the fiscal years ended June 30 2018, 2017, and 2016 using the following assumptions:

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

Discount rate

 

 

0.8

%

 

 

0.3

%

 

 

1.1

%

Salary increase rate

 

 

2.0

%

 

 

2.0

%

 

 

2.0

%

Expected return on plan assets

 

 

2.0

%

 

 

2.0

%

 

 

2.0

%

The discount rate is based on assumed pension benefit maturity and estimates developed using the rate of return and yield curves for high quality Swiss corporate and government bonds. The salary increase rate is based on our best assessment for on-going increases over time. The expected long-term rate of return on plan assets is based on the expected asset allocation, taking into consideration historical long-term rates of return for the relevant asset categories.

As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no investment authority over the assets of the plan, which are held and invested by a Swiss insurance company. The investment strategy of the Swiss Plan is managed by an independent asset manager with the objective of achieving a consistent long-term return which will provide sufficient funding for future pension obligations while limiting risk.  

The Swiss Plan is legally separate from II-VI,2021, compared to $85 million as are the assets of the plan. As of June 30, 2018, the Swiss Plan’s asset allocation was as follows (all of which are categorized as Level 2 in the fair value hierarchy):

2020.

June 30,

 

2018

 

 

2017

 

Fixed income investments

 

 

12.0

%

 

 

10.0

%

Equity investments

 

 

50.0

%

 

 

52.0

%

Real estate

 

 

31.0

%

 

 

26.0

%

Cash

 

 

4.0

%

 

 

9.0

%

Other

 

 

3.0

%

 

 

3.0

%

 

 

 

100.0

%

 

 

100.0

%

Estimated future benefit payments under the Swiss Plan are estimated to be as follows:

Year Ending June 30,

 

 

 

 

Year Ending June 30,

($000)

 

 

 

 

($000)

2019

 

$

5,100

 

2020

 

 

1,800

 

2021

 

 

2,700

 

2022

 

 

2,900

 

2022$5,500 

2023

 

 

3,200

 

20234,700 
202420244,900 
202520256,100 
202620267,500 

Next five years

 

 

22,400

 

Next five years35,800 



Other Employee Benefit Plans

The Company has no program for post-retirement health and welfare benefits.

The II-VI Incorporated Deferred Compensation Plan (the “Compensation Plan”) is designed to allow officers and key employees of the Company to defer receipt of compensation into a trust fund for retirement purposes. Under the Compensation Plan, as it is currently implemented by the Company, eligible participants can elect to defer up to 100% of certain discretionary incentive compensation and certain equity awards into the Compensation Plan. The Compensation Plan is a nonqualified, defined contribution employees’ retirement plan. At the Company’s discretion, the Compensation Plan may be funded by the Company making contributions based on compensation deferrals, matching contributions and discretionary contributions. Compensation deferrals will be based on an election by the participant to defer a percentage of compensation under the Compensation Plan. All assets in the Compensation Plan are subject to claims of the Company’s creditors until such amounts are paid to the Compensation Plan participants. Employees of the Company made contributions to the Compensation Plan in the amounts of approximately $1.1 million, $0.8 million, and $1.2 million for the fiscal years ended June 30, 2018, 2017, and 2016, respectively. There were no employer contributions made to the Compensation Plan for the fiscal year ended June 30, 2016.


Note 16.

Note 18.        Other Accrued Liabilities

The components of other accrued liabilities were as follows:

June 30,

 

2018

 

 

2017

 

June 30,20212020

($000)

 

 

 

 

 

 

 

 

($000)

Deferred revenue

 

$

3,384

 

 

$

2,345

 

Warranty reserve

 

 

4,679

 

 

 

4,546

 

Earnout arrangements

 

 

5,405

 

 

 

3,930

 

Contract liabilitiesContract liabilities$13,926 $17,328 
Warranty reservesWarranty reserves21,868 27,620 

Other accrued liabilities

 

 

29,511

 

 

 

18,235

 

Other accrued liabilities110,115 74,390 

 

$

42,979

 

 

$

29,056

 

$145,909 $119,338 

The following table summarizes the change in the carrying value of the Company’s warranty reserve included in Other Accrued Liabilities as of and for the years ended June 30, 2018 and 2017.

Year Ended June 30,

 

2018

 

 

2017

 

($000)

 

 

 

 

 

 

 

 

Balance-Beginning of Year

 

$

4,546

 

 

$

3,908

 

Settlements during the period

 

 

(3,688

)

 

 

(4,212

)

Additional warranty liability recorded

 

 

3,821

 

 

 

4,850

 

Balance-End of Year

 

$

4,679

 

 

$

4,546

 



Note 17.

Note 19.        Commitments and Contingencies

The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early termination. The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred under these commitments based upon historical experience and current expectations. The Company also has commitmentscontingent obligations relating to earnout arrangements on its prior year acquisitions of $5.4 million and $85.0 million for the planned acquisition of CoAdna. Inc., for fiscal year 2019.$1 million. Total future purchase commitments areheld by II-VI as follows:

Year Ending June 30,

 

 

 

 

($000)

 

 

 

 

2019

 

$

114,307

 

2020

 

 

3,477

 

2021

 

 

567

 

2022

 

 

-

 

2023

 

 

-

 


of June 30, 2021, were $352 million in fiscal 2022, and $35 million thereafter.

Note 18.

Note 20.        Share Repurchase Programs

In August 2017, in conjunction with the Company’s offering and sale of the Notes, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from the offering and sale of the Notes. The shares that were purchased by the Company pursuant to this authorization were retained as treasury stock and are available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for approximately $49.9 million pursuant to this authorization in fiscal 2018.

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase any shares pursuant to this Program during the fiscal years ended June 30, 2018 and 2017. During the fiscal year ended June 30, 2016,2021. During the fiscal
year ended June 30, 2020 the Company purchased 380,53850,000 shares of its common stock for $6.3$2 million
under this program. Throughprogram. As of June 30, 2018,2021, the Company has cumulatively purchased 1,316,5871,416,587 shares of itsII-VI common stock pursuant to the Program for approximately $19.0$22 million.

Note 19.

Accumulated Other Comprehensive Income (Loss)


Note 21.        Accumulated Other Comprehensive Income (Loss)
108

The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2018, 2017,2021, 2020, and 20162019 were as follows ($000):

 

 

Foreign

 

 

 

 

 

 

Total

 

 

 

Currency

 

 

Defined

 

 

Accumulated Other

 

 

 

Translation

 

 

Benefit

 

 

Comprehensive

 

 

 

Adjustment

 

 

Pension Plan

 

 

Income

 

AOCI - June 30, 2015

 

$

9,466

 

 

$

(801

)

 

$

8,665

 

Other comprehensive income (loss) before reclassifications

 

 

(15,651

)

 

 

(6,805

)

 

 

(22,456

)

Amounts reclassified from AOCI

 

 

-

 

 

 

(226

)

 

 

(226

)

Net  current-period other comprehensive income

 

 

(15,651

)

 

 

(7,031

)

 

 

(22,682

)

AOCI - June 30, 2016

 

 

(6,185

)

 

 

(7,832

)

 

 

(14,017

)

Other comprehensive income (loss) before reclassifications

 

 

(2,275

)

 

 

1,920

 

 

 

(355

)

Amounts reclassified from AOCI

 

 

-

 

 

 

594

 

 

 

594

 

Net  current-period other comprehensive income

 

 

(2,275

)

 

 

2,514

 

 

 

239

 

AOCI - June 30, 2017

 

$

(8,460

)

 

$

(5,318

)

 

$

(13,778

)

Other comprehensive income (loss) before reclassifications

 

 

7,152

 

 

 

2,643

 

 

 

9,795

 

Amounts reclassified from AOCI

 

 

-

 

 

 

203

 

 

 

203

 

Net  current-period other comprehensive income

 

 

7,152

 

 

 

2,846

 

 

 

9,998

 

AOCI - June 30, 2018

 

$

(1,308

)

 

$

(2,472

)

 

$

(3,780

)


Note 20.

Capital Lease

Foreign
Currency
Translation
Adjustment		Interest
Rate
Swap		Defined
Benefit
Pension Plan		Total
Accumulated Other
Comprehensive
Income (Loss)
AOCI - June 30, 2018$(1,308)$— $(2,472)$(3,780)
Other comprehensive income (loss) before reclassifications(14,319)— (6,307)(20,626)
Amounts reclassified from AOCI— — 185 185 
Net current-period other comprehensive income(14,319)— (6,122)(20,441)
AOCI - June 30, 2019$(15,627)$— $(8,594)$(24,221)
Other comprehensive income (loss) before reclassifications(15,969)(46,067)(3,528)(65,564)
Amounts reclassified from AOCI— 1,982 420 2,402 
Net current-period other comprehensive income(15,969)(44,085)(3,108)(63,162)
AOCI - June 30, 2020$(31,596)$(44,085)$(11,702)$(87,383)
Other comprehensive income (loss) before reclassifications86,991 (2,687)1,709 86,013 
Amounts reclassified from AOCI— 14,999 638 15,637 
Net current-period other comprehensive income86,991 12,312 2,347 101,650 
AOCI - June 30, 2021$55,395 $(31,773)$(9,355)$14,267 

During fiscal 2017, the Company’s OptoElectronic Devices subsidiary entered into a capital lease related to a building in Warren, New Jersey. The following table shows the future minimum lease payments due under the non-cancelable capital lease ($000):

Fiscal Year Ending June 30,

 

Amount

 

2019

 

$

2,292

 

2020

 

 

2,355

 

2021

 

 

2,419

 

2022

 

 

2,486

 

2023

 

 

2,554

 

Thereafter

 

 

24,740

 

Total minimum lease payments

 

$

36,846

 

Less amount representing interest

 

 

11,906

 

Present value of capitalized payments

 

$

24,940

 




The current and long-term portion of the capital lease obligation was recorded in Other accrued liabilities and Other liabilities, respectively, in the Company’s Consolidated Balance Sheets as of June 30, 2018 and 2017. The present value of the minimum capital lease payments at inception was $25.0 million recorded in Property, Plant & Equipment, net, in the Company’s Consolidated Balance Sheet, with associated depreciation being recorded over the 15 year life of the lease. During the fiscal year ended June 30, 2018, the Company recorded $1.7 million of depreciation expense associated with the capital leased asset.

109

Quarterly Financial Data (unaudited)

Fiscal Year 2018

2021

 

 

September 30,

 

 

December 31,

 

 

March 31,

 

 

June 30,

 

Quarter Ended

 

2017

 

 

2017

 

 

2018

 

 

2018

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

261,503

 

 

$

281,470

 

 

$

294,746

 

 

$

321,075

 

Cost of goods sold

 

 

155,528

 

 

 

172,037

 

 

 

176,361

 

 

 

193,580

 

Internal research and development

 

 

25,574

 

 

 

27,764

 

 

 

30,560

 

 

 

33,346

 

Selling, general and administrative

 

 

50,624

 

 

 

49,122

 

 

 

53,087

 

 

 

55,924

 

Interest expense

 

 

3,645

 

 

 

4,644

 

 

 

5,014

 

 

 

5,049

 

Other expense (income) - net

 

 

(767

)

 

 

(1,965

)

 

 

(1,496

)

 

 

(1,031

)

Earnings before income taxes

 

 

26,899

 

 

 

29,868

 

 

 

31,220

 

 

 

34,207

 

Income taxes

 

 

5,758

 

 

 

20,272

 

 

 

1,122

 

 

 

7,040

 

Net Earnings

 

$

21,141

 

 

$

9,596

 

 

$

30,098

 

 

$

27,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.34

 

 

$

0.15

 

 

$

0.48

 

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.32

 

 

$

0.15

 

 

$

0.45

 

 

$

0.42

 


Quarter EndedJune 30,
2021		March 31,
2021		December 31,
2020		September 30, 2020
($000, except per share)
2021
Net revenues$808,006 $783,232 $786,569 $728,084 
Cost of goods sold500,379 483,676 464,103 441,520 
Internal research and development83,768 83,231 84,858 78,248 
Selling, general and administrative126,666 131,244 118,893 107,186 
Interest expense14,066 13,034 15,585 17,214 
Other expense (income) - net(10,124)(21,432)(3,153)24,339 
Earnings (loss) before income taxes93,251 93,479 106,283 59,577 
Income taxes10,957 12,387 18,383 13,311 
Net Earnings (Loss)$82,294 $81,092 $87,900 $46,266 
Basic earnings (loss) per share$0.62 $0.71 $0.78 $0.39 
Diluted earnings (loss) per share$0.59 $0.66 $0.73 $0.38 

Fiscal Year 2017

2020

 

 

September 30,

 

 

December 31,

 

 

March 31,

 

 

June 30,

 

Quarter Ended

 

2016

 

 

2016

 

 

2017

 

 

2017

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

221,520

 

 

$

231,822

 

 

$

244,987

 

 

$

273,717

 

Cost of goods sold

 

 

133,918

 

 

 

137,559

 

 

 

147,277

 

 

 

164,939

 

Internal research and development

 

 

21,832

 

 

 

23,632

 

 

 

25,380

 

 

 

25,966

 

Selling, general and administrative

 

 

42,079

 

 

 

43,495

 

 

 

43,291

 

 

 

47,137

 

Interest expense

 

 

1,246

 

 

 

1,365

 

 

 

1,936

 

 

 

2,262

 

Other expense (income) - net

 

 

(1,402

)

 

 

(6,045

)

 

 

(2,164

)

 

 

(445

)

Earnings before income taxes

 

 

23,847

 

 

 

31,816

 

 

 

29,267

 

 

 

33,858

 

Income taxes

 

 

7,553

 

 

 

7,913

 

 

 

6,837

 

 

 

1,211

 

Net Earnings

 

$

16,294

 

 

$

23,903

 

 

$

22,430

 

 

$

32,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.26

 

 

$

0.38

 

 

$

0.36

 

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.26

 

 

$

0.37

 

 

$

0.35

 

 

$

0.50

 



Quarter EndedJune 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019
($000, except per share)
2020
Net revenues$746,290 $627,041 $666,331 $340,409 
Cost of goods sold444,153 381,108 517,991 217,269 
Internal research and development100,489 94,764 107,700 36,120 
Selling, general and administrative134,152 82,133 119,218 105,495 
Interest expense25,521 28,530 28,390 6,968 
Other expense (income) - net1,264 7,168 487 5,079 
Earnings before income taxes40,711 33,338 (107,455)(30,522)
Income taxes(10,550)27,417 (9,242)(4,524)
Net Earnings$51,261 $5,921 $(98,213)$(25,998)
Basic earnings per share$0.56 $0.07 $(1.08)$(0.39)
Diluted earnings per share$0.53 $0.06 $(1.08)$(0.39)



110

SCHEDULE II

II-VI INCORPORATED AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JUNE 30, 2018, 2017,2021, 2020, AND 2016

2019

(IN THOUSANDS OF DOLLARS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

Charged

 

 

Charged

 

 

Deduction

 

 

Balance

 

 

 

Beginning

 

 

to

 

 

to Other

 

 

from

 

 

at End

 

 

 

of Year

 

 

Expense

 

 

Accounts

 

 

Reserves

 

 

of Year

 

YEAR ENDED JUNE  30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

1,314

 

 

$

(129

)

 

$

-

 

 

$

(348

)

(2)

$

837

 

Warranty reserves

 

$

4,546

 

 

$

3,821

 

 

$

-

 

 

$

(3,688

)

 

$

4,679

 

Deferred tax asset valuation allowance

 

$

42,562

 

 

$

(4,602

)

 

$

(16,163

)

(5)

$

-

 

 

$

21,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED JUNE  30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

2,016

 

 

$

(134

)

 

$

-

 

 

$

(568

)

(2)

$

1,314

 

Warranty reserves

 

$

3,908

 

 

$

4,850

 

 

$

-

 

 

$

(4,212

)

 

$

4,546

 

Deferred tax asset valuation allowance

 

$

42,641

 

 

$

(79

)

 

$

-

 

 

$

-

 

 

$

42,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED JUNE  30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

1,048

 

 

$

1,123

 

 

$

-

 

 

$

(155

)

(2)

$

2,016

 

Warranty reserves

 

$

3,251

 

 

$

4,648

 

 

$

82

 

(1)

$

(4,073

)

 

$

3,908

 

Deferred tax asset valuation allowance

 

$

2,713

 

 

$

8,464

 

 

$

36,240

 

(3)

$

(4,776

)

(4)

$

42,641

 

(1)

Relates to the warranty reserve acquired from acquisitions.


(2)

Primarily relates to write-offs of accounts receivable.

Balance at
Beginning
of Year		Charged
to
Expense		Charged
to Other
Accounts		Deduction
from
Reserves		Balance
at End
of Year
YEAR ENDED JUNE 30, 2021:
Allowance for doubtful accounts$1,698 $301 $— $(1,075)(3)$924 
Warranty reserves$27,620 $2,134 $— $(7,886)$21,868 
Deferred tax asset valuation allowance$54,559 $(2,545)$1,751 (2)$— $53,765 
YEAR ENDED JUNE 30, 2020:
Allowance for doubtful accounts$1,292 $956 $— $(550)(3)$1,698 
Warranty reserves$4,478 $11,507 $37,453 (1)$(25,818)$27,620 
Deferred tax asset valuation allowance$20,190 $(2,186)$36,555 (1)$— $54,559 
YEAR ENDED JUNE 30, 2019:
Allowance for doubtful accounts$837 $548 $— $(93)(3)$1,292 
Warranty reserves$4,679 $4,185 $— 

$(4,386)$4,478 
Deferred tax asset valuation allowance$21,797 $(1,607)$— 

$— $20,190 

(3)

Valuation allowance recorded through goodwill.


(4)

Reduction in valuation allowance as a result of divesture of portion of business.

(1) Related to amounts assumed from the Finisar Acquisition.

(5)

Primarily relates to the Company’s deferred taxes on the conversion feature of the convertible debt.

(2) Primarily related to currency translation adjustments.

(3) Primarily relates to write-offs of accounts receivable.

111

Item 9.

Item 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


Item 9A.

Item 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer, and the Company’s Chief Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act) as of the end of the period covered by this Annual Report on Form 10-K. The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2018,2021, the Company’s disclosure controls and procedures are effective.


Management’s Report on Internal Control Over Financial Reporting

Refer to Management’s Report on Internal Control Over Financial Reporting included in Item 8.

8 of this Annual Report of Form 10-K.

Report of the Registered Public Accounting Firm

The report of Ernst & Young LLP, an independent registered public accounting firm, with respect to our internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Item 9B.    OTHER INFORMATION

None.

112

PART III


Item 10.

Item 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth above in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” is incorporated herein by reference. The other information required by this item, to the extent applicable, is incorporated herein by reference to the information set forth under the captions “Election of Directors and Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports" in the Company’s definitive proxy statement for the 20182021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A of the Exchange Act (the “Proxy Statement”).

Audit Committee Financial Expert

The information as to the Audit Committee and the Audit Committee Financial Expert is incorporated herein by reference to the information set forth in the Company’s Proxy Statement.

Code of Ethics

The Company has adopted its Code of Business Conduct and Ethics for all of its employees and its Code of Ethics for Senior Financial Officers including the principal executive officer and principal financial officer. The Code of Business Conduct and Ethics and Code of Ethics for Senior Financial Officers can be found on the Company’s Internet web site at www.ii-vi.com under “Investors Information – Corporate Governance Documents.” The Company will promptly disclose on its web site (i) any amendments or waivers with respect to a director’s or executive officer’s compliance with the Code of Business Conducts and Ethics and (ii) any amendments or waivers with respect to any provision of the Code of Ethics for Senior Financial Officers. Any person may also obtain a copy of the Code of Business Conduct and Ethics and/or the Code of Ethics for Senior Financial Officer without charge by submitting their request to the Chief Financial Officer and Treasurer of II-VI Incorporated, 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056, or by calling (724) 352-4455.

We intend to satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics by posting such information on our web site.
The web sitewebsite and information contained on it or incorporated in it are not intended to be incorporated in this Annual Report on Form 10-K or other filings with the SEC.


Item 11.

Item 11.        EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the information set forth under the caption “Director Compensation in Fiscal Year 2018,2021,” “Executive Compensation,” “Compensation Committee Report” and “Compensation and Risk” in the Company’s Proxy Statement.


Item 12.

Item 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the information set forth under the captions “Equity Compensation Plan Information” and “Security Owners of Certain Beneficial Owners and Management” in the Company’s Proxy Statement.


Item 13.

Item 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the information set forth under the caption “Director Independence and Corporate Governance Policies” in the Company’s Proxy Statement.


Item 14.

Item 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the information set forth under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement.

113

PART IV


Item 15.

Item 15.        EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

(1) Financial Statements


(a)(1) Financial Statements
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K.

(2) Schedules

Schedule II – Valuation and Qualifying Accounts for each of the three fiscal years in the period ended June 30, 20182021 is set forth under Item 8 of this Annual Report on Form 10-K.


Financial statements, financial statement schedules and exhibits not listed have been omitted where the required information is included in the Consolidated Financial Statements or notes thereto, or is not applicable or required.

114

Exhibit No.

Description

Location

    3.01

Exhibit No.

Description

Location
2.01Incorporated herein by reference to Exhibit 2.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 9, 2018.
2.02Incorporated herein by reference to Exhibit 2.1 to II-VI's Current Report on Form 8-K (File No. 001-39375) filed on March 25, 2021.
3.01

Incorporated herein by reference to Exhibit 3.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 8, 2011.

3.02

Amended and Restated By-Laws of II-VI Incorporated

, as amended and restated effective February 26, 2021.

Incorporated herein by reference to Exhibit 3.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195)001-39375) filed on August 29, 2014.

March 1, 2021.

   4.01

3.03

Incorporated herein by reference to Exhibit 3.03 to II-VI's Annual Report on Form 10-K (File No. 001-39375) for the fiscal year ended June 30, 2020.
3.04Incorporated herein by reference to Exhibit 3.1 to II-VI's Current Report on Form 8-K (File No. 001-39375) filed on March 31, 2021.
4.01

Incorporated herein by reference to Exhibit 4.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 14, 2017.

4.02

Included in Exhibit 4.01.

  10.01

4.03

Incorporated herein by reference to Exhibit 4.03 of II-VI's Annual Report on Form 10-K (File No, 001-39375) for the fiscal year ended June 30, 2020.
4.04Incorporated herein by reference to Exhibit 4.1 to Finisar Corporation's Current Report on Form 8-K (File No. 000-27999) filed on December 21, 2016.
4.05Incorporated herein by reference to Exhibit 4.2 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2019.
4.06Form of 0.50% Convertible Senior Notes due 2036Included in Exhibit 4.04.
4.07Form of 6.00% Series A Mandatory Convertible Preferred Stock Certificate.Included in Exhibit 3.03.
10.01

Incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2019.

10.02Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on August 2, 2016.

January 30, 2020.

115

  10.02

10.03

Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on August 22, 2017.

  10.03

Credit Agreement, dated as of January 31, 2012, by and among II-VI Japan Incorporated, each of the Guarantors party thereto, PNC Bank, National Association, the other Banks party thereto, and PNC Bank, National Association, in its capacity as agent for the Banks thereunder (500,000,000 Yen Revolving Credit Facility)

Incorporated herein by reference to Exhibit 10.0210.15 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2015.

2018.

10.04

First Amendment to Credit Agreement, dated as of September 18, 2015, by and among II-VI Japan Incorporated, the Guarantors party thereto, the Banks party thereto, and PNC Bank, National Association, as agent.

Incorporated herein by reference to Exhibit 10.01 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2015.

  10.05

Employment Agreement, dated August 1, 2016, by and between II-VI and Vincent D. Mattera, Jr.*

Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on August 2, 2016.

  10.06

Employment Agreement, dated March 6, 2014, by and between II-VI Incorporated and Mary Jane Raymond*

Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2014.

  10.07

Employment Agreement, dated October 3, 2012, by and between II-VI Incorporated and Giovanni Barbarossa*

Incorporated herein by reference to Exhibit 10.07 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the year ended June 30, 2015.

  10.08

Employment Agreement, dated November 10, 2008, by and between II-VI Incorporated and David G. Wagner*

Incorporated herein by reference to Exhibit 10.08 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the year ended June 30, 2015.

  10.09

Employment Agreement, dated February 1, 2016, by and between II-VI Incorporated and Gary A. Kapusta*

Incorporated herein by reference to Exhibit 10.01 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on February 1, 2016.


  10.10

Employment Agreement, dated March 6, 2017, by and between II-VI Incorporated and Jo Anne Schwendinger *

Filed herewith.

  10.11

Consulting Agreement, dated June 30, 2016, between II-VI Incorporated and Carl J. Johnson*

Incorporated herein by reference to Exhibit 10.01 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2017.

  10.12

Form of Employment Agreement* (P)

Incorporated herein by reference to Exhibit 10.16 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.13

Form of Executive Employment Agreement

Filed herewith

  10.14

Form of Exhibit 1 to Employment Agreement

Filed herewith

  10.15

Form of Indemnification Agreement

Filed herewith

  10.16

Form of Representative Agreement between II-VI and its foreign representatives (P)

Incorporated herein by reference to Exhibit 10.15 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.17

II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan (P)

Incorporated herein by reference to Exhibit 10.04 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.18

First Amendment to the II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan

Incorporated herein by reference to Exhibit 10.01 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 1996.

  10.19

II-VI Incorporated Amended and Restated Employees’ Profit-Sharing Plan and Trust Agreement, as amended (P)

Incorporated herein by reference to Exhibit 10.05 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.20

10.05

Incorporated herein by reference to Exhibit 10.14 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1996.

  10.21

10.06

Incorporated herein by reference to Exhibit 10.27 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2009.

  10.22

10.07

Description of Management-By-Objective Plan*(P)

Incorporated herein by reference to Exhibit 10.09 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1993.

  10.23

Incorporated herein by reference to Exhibit 10.17 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2015.


  10.24

10.08

Incorporated herein by reference to Exhibit 10.18 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2015.

  10.25

10.09

Incorporated herein by reference is Exhibit 10.13 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 1996.


  10.26

10.10

Incorporated herein by reference to Exhibit A to II-VI’s Definitive Proxy Statement on Schedule 14A (File No. 000-16195) filed on September 25, 2009.

  10.27

10.11

Incorporated herein by reference to Exhibit 10.27 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011.

  10.28

10.12

Incorporated herein by reference to Exhibit 10.2810.01 to II-VI’s Current Report on Form 10-Q8-K (File No. 000-16195) filed on November 5, 2012.

10.13Incorporated herein by reference is Exhibit 10.30 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the quarterfiscal year ended December 31, 2011.

June 30, 2013.

  10.29

10.14

Form of Performance Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.29 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011.

  10.30

Form of Stock Appreciation Rights Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.30 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2011.

  10.31

Form of Performance Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.31 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2012.

  10.32

Form of Restricted Share Unit Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.32 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended March 31, 2012.

  10.33

Incorporated herein by reference to Exhibit 10.0110.1 to II-VI’s Registration Statement on Form S-8 (File No. 333-199855) filed on November 4, 2014.

  10.34

10.15

Incorporated herein by reference to Exhibit 10.30 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013.


116

  10.35

10.16

Incorporated herein by reference to Exhibit 10.3110.01 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013.

  10.36

Form of Performance Share Award Agreement (Consolidated Revenue) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.32 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013.

  10.37

Form of Stock Appreciation Rights Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.33 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013.

  10.38

Form of Performance Unit Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.34 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013.


  10.39

Form of Restricted Share Unit Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.35 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2013.

  10.40

Form of Performance Share Award Agreement (Total Shareholder Return) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.38 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2014.

  10.41

Form of Performance Unit Award Agreement (Total Shareholder Return) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.39 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2014.

  10.42

Form of Performance Share Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.36 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2015.

  10.43

Form of Performance Unit Award Agreement (Cash Flow From Operations) under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.37 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the fiscal year ended June 30, 2015.

  10.44

II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.1to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the quarter ended December 31, 2015.

  10.45

10.17

Incorporated herein by reference to Exhibit 10.03 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.


  10.46

10.18

Incorporated herein by reference to Exhibit 10.04 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  10.47

Form of Restricted Share Award Agreement (3 year) under the II-VI Incorporated Second Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.05 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  10.48

10.19

Incorporated herein by reference to Exhibit 10.06 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  10.49

Form of Restricted Share Unit Award Agreement under the II-VI Incorporated Second Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.07 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  10.50

10.20

Incorporated herein by reference to Exhibit 10.0810.20 to II-VI's Annual Report on Form 10-K (File No. 001-39375) for the fiscal year ended June 30, 2020.


10.21Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 13, 2018.
10.22
II-VI Incorporated Amended and Restated 2018 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit 99.1 to II-VI’s Registration Statement on Form S-8 (File No. 333-249995) filed on November 10, 2020.
10.23Incorporated herein by reference to Exhibit 10.01 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

December 31, 2018.

  10.51

10.24

Incorporated herein by reference to Exhibit 10.0910.02 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

December 31, 2018.

  10.52

10.25

Incorporated herein by reference to Exhibit 10.1010.03 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

December 31, 2018.

  10.53

10.26

Incorporated herein by reference to Exhibit 10.1110.04 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

December 31, 2018.

  10.54

10.27

Incorporated herein by reference to Exhibit 10.1210.05 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

December 31, 2018.

  21.01

10.28

Incorporated herein by reference to Exhibit 10.28 to II-VI's Annual Report on Form 10-K (File No. 001-39375) for the fiscal year ended June 30, 2020.

117

10.29Incorporated herein by reference to Exhibit 10.1 to II-VI's Current Report on Form 8-K (File No. 000-16195) filed on August 22, 2019.
10.30Incorporated herein by reference to Exhibit 10.2 to II-VI's Current Report on Form 8-K (File No. 000-016195) filed on August 22, 2019.
10.31Incorporated herein by reference to Exhibit 10.1 to II-VI's Current Report on Form 8-K (File No. 001-39375) filed on March 31, 2021.
10.31
Filed herewith.
10.32
Filed herewith.
21.01

Filed herewith.

  23.01

23.01

Filed herewith.

  31.01

31.01

Filed herewith.

  31.02

31.02

Filed herewith.

  32.01

32.01

Furnished herewith.

  32.02

32.02

Furnished herewith.

 101

Interactive Data File

(101.INS)

(101.INS)Inline XBRL Instance Document

Filed herewith.

(101.SCH)

(101.SCH)Inline XBRL Taxonomy Extension Schema Document

Filed herewith.

(101.CAL)

(101.CAL)Inline XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith.

(101.DEF)

(101.DEF)Inline XBRL Taxonomy Definition Linkbase

Filed herewith.

(101.LAB)

(101.LAB)Inline XBRL Taxonomy Extension Label Linkbase Document

Filed herewith.

118

(101.PRE)

(101.PRE)Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

*

Denotes management contract or compensatory plan, contract or arrangement.

104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).Filed herewith.

(P)

Denotes filed via paper copy.


*Denotes management contract or compensatory plan, contract or arrangement.
(P)Denotes filed via paper copy.
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.


Item 16.

Item 16.        FORM 10-K SUMMARY

None.


119

SIGNATURES


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


II-VI INCORPORATED

II-VI INCORPORATED

Date: August 28, 2018

20, 2021

By:

/s/ Vincent D. Mattera Jr.

Vincent D. Mattera Jr.

President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


120

Principal Executive Officer:

Date: August 28, 2018

20, 2021

By:

/s/ Vincent D. Mattera Jr.

Vincent D. Mattera Jr.

President and Chief Executive Officer

and Director

Principal Financial and Accounting Officer:

Date: August 28, 2018

20, 2021

By:

/s/ Mary Jane Raymond

Mary Jane Raymond

Chief Financial Officer and Treasurer

Date: August 28, 2018

20, 2021

By:

/s/ Francis J. Kramer

Francis J. Kramer

Chairman of the Board and Director

Date: August 28, 2018

20, 2021

By:

/s/ Joseph J. Corasanti 

Joseph J. Corasanti

Director

Date: August 28, 2018

20, 2021

By:

/s/ RADM Marc Y. E. Pelaez (retired) 

RADM Marc Y. E. Pelaez (retired)

Director

Date: August 28, 2018

20, 2021

By:

/s/ Howard H. Xia 

Howard H. Xia

Director

Date: August 28, 2018

20, 2021

By:

/s/ William Schromm

William Schromm

Director

Date: August 28, 2018

By:

/s/ Shaker Sadasivam

Shaker Sadasivam

Director

Date: August 28, 2018

20, 2021

By:

/s/ Enrico Digirolamo

Enrico Digirolamo

Director

Date: August 20, 2021By:/s/ Michael L. Dreyer
Michael L. Dreyer
Director
Date: August 20, 2021By:/s/ Patricia Hatter
Patricia Hatter
Director
Date: August 20, 2021By:/s/ David L. Motley
David L. Motley
Director
Date: August 20, 2021By:/s/ Stephen Pagliuca
Stephen Pagliuca
Director

89


121