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, 2017

2020

☐

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 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 30, 2016,31, 2019, was approximately $1,763,329,797$3,031,733,938 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 14, 2017,20, 2020, was 63,279,520.

103,668,355.



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 20172020 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 1995.1995 (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, spending, margins, costs 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.correct, at least on the timetable of our expectations. Actual results could materially differ from such statements.materially. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA for our forward-looking statements.

The following risk factors, 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 20182021 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 the expected returns.

return.

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

Our competitive position may require significant investments in strategic acquisitions, with associated integration risks, which may not be successful.

Our future success depends on continued international sales.

Foreign currency risk may negatively•Widespread health crises, including the global novel coronavirus (COVID-19) pandemic, could materially and adversely affect our revenues, costbusiness, financial condition and results of sales and operating margins and could result in foreign exchange losses.

operations.

Our inability to access financial markets from time to time to raise capital, finance 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 fail to accurately estimate our customers’ demands.

We may encounter substantial competition.

There are limitations on the protection of our intellectual property.

A significant portion of our business depends on cyclical industries.

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

•Global economic downturns, including any downturn related to COVID-19, may adversely affect our business, operating results and financial condition.

We are subject to governmental import and export regulations.

Our global operations are complex to manage.

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

We depend on highly complex manufacturing processes that require products from limited sources of supply.


•

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

We use and generate 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 detected until deployed, which could increase our costs, and reduce our revenues.

revenues, cause us to lose key customers, and may expose us to litigation related to our products.
•Foreign currency risk may negatively affect our revenues, cost of sales and operating margins, and could result in foreign exchange losses.

Significant defense spending cuts and/•Our competitive position may still require significant investments.

•We may be unable to successfully implement our acquisitions strategy or reductionsintegrate acquired companies and personnel with existing operations.
•Although II-VI continues to expect that its acquisition of Finisar will result in defense programscost savings, synergies, and other benefits, the combined company may not realize those benefits, or be able to retain those benefits even if realized.
•Our future success depends on continued international sales, and our global operations are complex and present multiple challenges to manage.
•We are subject to complex and rapidly changing import and export regulations which could adverselylimit our sales and decrease our profitability.
•Changes in trade policies, such as increased import duties, could increase the cost of goods imported into the United States or China. The inclusion of companies, such as Huawei, on the U.S. Entity List, could decrease our access to customers and markets and materially impact our business.

revenues in the aggregate.
•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
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needs could negatively impact our ability to finance our operations, meet certain obligations or implement our growth strategy.

Change•We may not be able to settle conversions of our convertible senior notes in tax rates, tax liabilitiescash or tax accounting rulesrepurchase the notes in accordance with their terms.

•Our credit agreement restricts our operations, particularly our ability to respond to changes or to take certain actions regarding our business.
•We may fail to accurately estimate the size and growth of our markets and our customers’ demands.
•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.
•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 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 affect futurehave 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.

•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 our business, financial condition, or results of operations and prevent us from fulfilling its debt-related 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 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.

personnel and requires continued good relations with our employees.

•We contract with a number of large end-user service providers and product companies that have agreementsconsiderable 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.

•We may be adversely affected by climate change regulations.
•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.
•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 for obsolete or excess inventories or noncancelable 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 government entities that are subject to significant compliance requirements and changes in government spending.

applicable regulations could be impaired.

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

Some anti-takeover provisions contained•Provisions in our articlesAmended and Restated Articles of incorporationIncorporation (the “Articles of Incorporation”) and by-laws, as well as provisions ofAmended and Restated By-Laws (the “By-Laws”) and the Pennsylvania law, could impairBusiness Corporation Law (the “BCL”) may delay or prevent our acquisition by a takeover attempt,third party, which could also reduce the market price of our commoncapital 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.

value and by the intended anti-dilution actions of our share-buyback program.
•Our ability to declare and pay dividends on our capital stock may be limited, including by the terms of our existing Credit Agreement.
•The Mandatory Convertible Preferred Stock may adversely affect the market price of our common stock.
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•Our common stock is subordinate to our existing and future indebtedness; the Mandatory Convertible Preferred Stock, when issued; and any other preferred stock we may issue in the future. Our Mandatory Convertible Preferred Stock ranks junior to all of our and our subsidiaries’ consolidated liabilities.
•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.
•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.
•Regulatory actions may 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.
•We depend on our subsidiaries for cash to fund our operations and expenses, including future dividend payments with respect to the Mandatory Convertible Preferred Stock.
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 prospectus.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.arise and be present without market participants 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, may impact our business. It is also not possible for management to mitigate all such risks, and therefore any 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.

Investors should also be aware that while

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.



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 executive officesheadquarters are located at 375 Saxonburg Boulevard, Saxonburg, Pennsylvania 16056. Our telephone number is 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 Elements (Zn and Se)elements from which II-VI originally designed and produced infrared optics for high-power CO2 lasers used in materials processing. The majority of our revenues are attributable to the sale of engineered materials and optoelectronic components, devices, and devicessubsystems for industrial laser applications,the optical communications, products, compound semiconductor substrate-based productsindustrial materials processing, aerospace and defense, and consumer products.electronics markets. Reference to “fiscal” or “fiscal year” means our fiscal year ended June 30 for the year referenced.


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


Acquisition of Finisar Corporation
On September 24, 2019 (the “Closing Date”), the Company completed its acquisition of Finisar Corporation ("Finisar"), a global technology leader for subsystems and components for fiber-optic communications. Additional information regarding the Company’s acquisition of Finisar is set forth below and in Note 3. Acquisitions to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Due to timing of the acquisition, the results of Finisar for the three months ended September 30, 2019, have not been allocated to an Operating Segment, and are presented in Unallocated and Other within Note 14. Segment and Geographic Reporting to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Beginning on October 1, 2019, the results of Finisar have been allocated to the Photonic Solutions and Compound Semiconductors Segments.
General Description of Business

We develop, manufacture, and market engineered materials, optoelectronic components, and devices for precision use in optical communications, industrial materials processing, optical communications, military,aerospace and defense, consumer electronics, semiconductor capital equipment, life sciencesciences, and automotive applications.applications and markets. We use advanced engineered materialmaterials growth technologies coupled withand proprietary high-precision fabrication, micro-assembly,microassembly, optical thin-film coating, and electronic integration to enablemanufacture complex optoelectronic devices and modules. Our products are deployed in applications that we believe reduce costs and improve performance and reliability 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 communication products; (iv) aerospace and defense applications including intelligence, surveillance, and reconnaissance; (v) semiconductor processing and tooling;tools; and (vi) thermoelectric cooling and power generationpower-generation solutions.

6

Through RD&E investments and its strategic acquisitions, II-VI has expanded its portfolio of materials grown and fabricated in-house.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 enhancedifferentiate our products’ durability to high energyagainst high-energy lasers and harshextreme 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- to large-scale precision optical assemblies, including those in combination with thermal management components, integrated electronics, and/or software.

Since 2013,

II-VI also has offeredoffers 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 several types of 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 datacentersdatacenters; optical communications network monitoring; materials processing; and 3D sensingfast and accurate measurements in biomedical instruments and consumer 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 our growth in the short term while keeping the long term in mind. With a 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

Financial data regarding our revenues, results of operations, industry segments, and international sales for the three years ended June 30, 20172020, are set forth in the Consolidated Statements of Earnings (Loss) and in Note 1114. Segment and Geographic Reporting to the Company’sour Consolidated Financial Statements 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.


Effective July 1, 2019, the Company realigned its organizational structure into two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Photonic Solutions and (ii) Compound Semiconductors. Refer to Note 14. Segment and Geographic Reporting for further information on reporting segments.

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, 2017,2020, our bookings were approximately $1.1$2.7 billion, compared towith bookings of approximately $875 million$1.4 billion for the fiscal year ended June 30, 2016.

2019.

We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2017,2020, our backlog was approximately $400$957 million, compared towith approximately $290$500 million as of June 30, 2016.

2019.

Global Operations

II-VI is headquartered in Saxonburg, PA,Pennsylvania, 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, GermanySingapore, Sweden, Switzerland, the United Kingdom, and Switzerland.Vietnam. We also utilize a contract manufacturer in Thailand.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, and Taiwan. Approximately 69% of our revenues for the fiscal year ended June 30, 2017 were generated from sales to customers outside of the United States.

Kingdom.

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Employees

The table below summarizes the number of our employees as of June 30, 2017.2020, in the main functions. We have a long-standing practice of encouraging active employee participation in areas of operations and quality management. We believe our relations with our employees are good. We reward substantially all of our employees with incentivesome form of variable compensation based on achievement of performance goals. There are approximately 136161 employees located in the United States and the Philippines who are covered under collective bargaining agreements. The Company’s five-year collective bargaining agreement in the United States is up for renewal in January 2021, and the Company's two-year collective bargaining agreement in the Philippines expiresis up for renewal in June 2019. The collective bargaining agreement covering certain U.S. based employees expires in January 2021. There are 849450 employees of PhotopII-VI in China who work under contract manufacturing arrangements for customersa customer of the Company.

Company, Corning Incorporated.

 

Number of employees

Percent of total

Direct production

8,216

79%

Research, development & engineering

1,117

11%

Sales, marketing, administration, finance and supporting services

1,016

10%

Total:

10,349

100%


Number of
employees		Percent of
total
Direct production15,10166%
Research, development, engineering, sales and marketing4,05816%
General administration3,81018%
Total:22,969100%

Manufacturing Processes

Our success in developing and manufacturing many of our products depends on our ability to manufacture and refine technically-challengingto tailor the optical and physical properties of technically 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, and 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-organic chemical vapor deposition and molecular beam epitaxy reactors, automated Computer Numeric Controlcomputer numeric control optical fabrication, high throughputhigh-throughput thin-film coaters, micro-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.

Sources of Supply

The major

Among the raw materials we use includeare zinc, selenium, ZnSe, ZnS,zinc selenide, zinc sulfide, hydrogen selenide, hydrogen sulfide, arsine, phosphine, hydrogen, silane, tellurium, yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, GaAs,graphite, gallium arsenide, gallium nitride, indium phosphide, copper, gold, nickel, germanium, molybdenum, quartz, optical glass, silicon carbide, and carbon in its diamond form.
We utilize numerous optical, electrical, and other materials.

mechanical parts in our processes that we often also commonly refer to as raw materials, including integrated circuits, mechanical housings, and optical components from third-party suppliers.

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 be 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. As 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 raw materials to our specifications on a timely basis could have a materially adverse effect on our results of our operations.

8

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, and (iii) II-VI Performance Products.Compound Semiconductors. These segments, and the business units within the segments, are reflected in the organizationCompany's current organizational chart below:

II-VI Laser

iivi-20200630_g1.jpg

The Photonic Solutions designs, manufactures and markets optical and electro-opticalSegment leverages II-VI’s compound semiconductor technology platforms to deliver components and subsystems that are differentiated based on deep knowledge of end-user applications for our key end markets.

The Compound Semiconductors Segment is a market leader in differentiated materials sold underand devices such as those based on GaAs, InP, GaN, and SiC by independently driving investments that advance its technology roadmaps. We may from time to time reorganize parts of a given segment or corporate center to drive the II-VI Infrared brand name and used primarily in high-power CO2 lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold underfocus of certain priorities as identified by the II-VI HIGHYAG and II-VI Laser Enterprise brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers 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 and integrated circuits in high volume sold under the II-VI EpiWorks 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 networks and other diverse consumer and commercial applications.  In addition, 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 engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, military and medical markets.

CEO.




During the fiscal year ended June 30, 2017, the Company completed the following acquisitions:

Date:

Acquired:

Amount:

October 12, 2016

DirectPhotonics Industries GmbH (“DPI”)

$0.6 million

June 19, 2017

Integrated Photonics, Inc. (“IPI”)

$41.7 million


DPI  joined the II-VI Laser Solutions segment and IPI joined the II-VI Photonics segment.  See Note 2 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding the Company’s acquisitions, which information is incorporated herein by reference.







9

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.


Segment:

Group/Division:

Our Products:

II-VI Laser Solutions

Segment

II-VI Infrared

Business Unit

•      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

Our Products

Photonic Solutions

II-VI HIGHYAG

ROADM

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

II-VI Laser Enterprise

•      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 navigation, optical interconnects and 3D sensing

II-VI OptoElectronic Devices

•      VCSELs for 3D sensing in consumer electronics and automotive

•      RF wafers for optical/telecommunications

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

Coherent Optics

•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
Transceivers
•Pluggable transceivers for Ethernet and fiber channel applications in cloud and enterprise datacenter applications
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

10

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

Segment

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

Business Unit		Our Products

II-VI Marlow

Compound Semiconductors

Engineered Materials & Laser Optics

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

•Specialty refining, recycling, and materials recovery services for high-purity rare metals such as selenium and tellurium, as well as related chemical products such as 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

II-VI Advanced Materials

Laser Devices & Systems

•High-power semiconductor lasers and laser bars enabling fiber and direct-diode lasers for materials processing, medical, defense, consumer, and printing applications
•Laser heads and modules; Q-switched laser modules; high-power, uncooled pump laser modules; laser solutions for super-hard 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
Aerospace & Defense
•Precision optical assemblies, objectives, infrared optics, thin-film coatings, and optical materials
•Optical solutions for critical and complex design, engineering, and production challenges in defense and aerospace
Wide Bandgap Semiconductors
•SiC and advanced semiconductor materials for high frequencyhigh-frequency and high powerhigh-power electronic device applications in defense, telecommunications, automotive, and industrial markets

II-VI Performance Metals

Optoelectronic & RF Devices

•      Specialty refining, recyclingVCSELs for sensing, including 3D sensing in consumer electronics and materials recovery servicesautomotive applications
•GaAs-based RF electronic devices
•Integrated circuits for high purity rare metals such as Seleniumtransceivers for optical communications
•III-V epitaxial wafers to enable higher-performance photonic and Tellurium, as well as related chemical products such as Tellurium Dioxide,RF components for optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy, agricultureconsumer, communications, network, and industrial applications.

mobile applications
InP Devices
•Semiconductor lasers and detectors for optical interconnects and sensing applications




11


Our Markets

Our market-focused businesses are currently organized by technologytechnologies and products. Our businesses are composed ofaddress the following primary markets: Materials Processing, Communications (“Comms”), Militaryoptical and Semiconductor Equipment (“Semi Cap”). Other markets (“Other”) include: Life Sciences, Consumer Electronicswireless communications, industrial materials processing, aerospace and Automotive. The table below summarizes our revenue by reported segmentsdefense, consumer electronics, semiconductor capital equipment, life sciences, and the distribution of that revenue by endautomotive. As we grow, we may add new primary markets.

Reported Segments

FY17

Revenue ($M)

Materials Processing

Comms

Military

Semi Cap

Other

II-VI

Laser Solutions

339

69%

13%

4%

5%

9%

II-VI Photonics

 

419

9%

84%

- %

3%

4%

II-VI Performance Products

214

9%

16%

42%

18%

15%

Total

 

972

30%

44%

11%

7%

8%

Communications Market:


II-VI’s optical communications and wireless products and technologies enable the digital transformation in the next generation of 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 downloads and streaming, live TV, social networking, on-line gaming, file sharing, enterprise IP/internet traffic, cloud computing, and datacenter virtualization that must be handled by both wireline and wireless networks. 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, 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 these 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,networks; 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 cable along the wayfiber-optic cables at intervals spanning typically 80 km 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 an 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.

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 many modern transceiver designs100 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 to meet the growing demand. Gallium nitride on silicon carbide (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.

12

We are a market leader in the development and manufacture 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 for 4G/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 previous 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 platform 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 enables them to operate at high-power levels and still dissipate the excess heat generated.

these next-generation wireless networks.

Materials Processing Market:

Our industrial laser optics and solutions for the materials processing market remain in strong demand. There continues to be a steadywell-positioned, although we were impacted by the global demand to support existing installations and new deployments of CO2 and fiber laser systems, especially for our greater than 1 kilowatt high-power handling optics and beam delivery solutions.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 the 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 cutting plastics, textiles, leather, wood, and other organic materials, for which the CO2 laser’s 10 micron10-micron wavelength is ideally suited. 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 computing devices.  


integrated circuits.

OverFiber lasers that operate at about 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 allmany materials processing segments andapplications, especially for precision machining such as marking and micro drilling. Frommicrodrilling. II-VI supplies a broad set of laser optics and fused-fiber products 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 pieceworkpiece 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. to process specific metals or alloys.

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 the military market is enablinghigh-energy lasers for targeting, night vision, navigation, as well as(HELs); contested space; and intelligence, surveillance, and reconnaissance systems. Multiple fighter jets(ISR). From uniquely grown single crystals and advanced ceramics, to completely engineered gimbal subsystems, II-VI solutions are equippedembedded on nearly every platform in the field as well as those under development. Recently acquired coherent laser beam combining (CBC) and advanced lightweight gimbal technologies, along with our large area sapphire windows that surrounddomestically produced high-power fiber laser pumps and amplifiers, are enabling next-generation HEL systems and space-based laser communications applications. With the addition of nano-machined single-crystal silicon and grating technologies, together with II-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 packaged behind them.They provide hemispherical coverage for airborne, naval, and ground-based systems.

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Our solutions for the Lunar Reconnaissance Orbiter (LRO) provided the first images proving that the footprints on the moon are used on missiles with infrared guidance systems ranging from small, man-portable designsstill 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 man-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 to 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 yttrium-based materialsto 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 thermo-electric 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 or 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 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-wavelightweight 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 DUV lithography equipment that is widely deployed in semiconductor fabs. In the emerging market of EUV lithography systems, CO2 lasers are used to generate extreme ultraviolet radiation.extreme-ultraviolet light. These CO2 lasers and beam delivery systems leverage our broad portfolio of CO2 laser optics, CdTe Modulators, high power handlingmodulators, 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:

Today the majority of our business in


Within the life sciences end market, is inII-VI focuses on light-based analytical tools. Many such analytical toolsinstruments that are found in modern biotech laboratories are based on some form of interaction with light. This applies to biotechnology laboratories. Applications includeflow cytometry, cell sorting, confocal microscopy, 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 reticlesinstruments to manage light delivery to 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 ourfrom samples.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 the DNA to reveal their 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 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 reaching 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 proceduresprocedures.Crystals and our custom designedlaser cavities, along with custom-designed lens assemblies, are integrated and 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.


II-VI solutions are the building blocks of scientific molecular spectroscopy and imaging-based platforms. These tools typically target environmental applications such as water, air, food/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.

14

Consumer Electronics Market:

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

Our VCSELs, unlike many on the market, have already been designed into consumer products such as the computer mousemice and mobile phones as well as for menu navigation in smart phones and in carvehicle steering wheels. Our VCSELs are also widely deployed in datacenters and in the emerging market for HDMI optical cables. This expertise in VCSEL technology is beinghas been leveraged for the upcomingemerging 3D sensing market. Following our acquisition3D sensing was the first application to drive the demand for relatively large two-dimensional VCSEL arrays. A typical design for 3D sensing requires tens of VCSELs per chip in fiscal year 2016order to scale up the optical power required, for example, for face recognition applications. Therefore, 3D sensing applications drove an entirely new manufacturing infrastructure to enable 6-inch wafer processing. Today, II-VI is one of the very few vertically integrated 6-inch VCSEL manufacturers with a 6-inch epitaxyproven 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 invested significantly in fiscal year 2017 to complete our capacity expansion and be ready to ramp our sales significantly in the near future.

augmented reality headsets.

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 substratescomprehensive understanding of crystal growth and materials processing was acquired over decades of sustained R&D and manufacturing, allowing us to continuously evolve our technology and IP portfolio. We offer a full range of substrate diameters, including the world’s first 200 mm substrate.

Our industry-leading semiconductor lasers, optics, and materials are availableat the core of LiDAR systems embedded in large diametersadvanced driver-assistance systems (ADAS) and have what we believeautonomous vehicles. LiDAR sensors enable ADAS to perform functions such as emergency braking and adaptive cruise control. LiDAR sensors are also expected to be best-in-class quality and low defect levels.

Our thermo-electric modules are used to cool the batteries to extend their operating life. They are also more efficient than resistive heaters when usedembedded in heated car seats and extend a battery’s 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 onautonomous vehicles.

II-VI enables LiDAR which employs semiconductor lasers to properly identify and measure the distance to obstacles ahead. Our GaAs-based semiconductor laser platform, which already enablessensors with a broad portfolio of productscomponents and modules, including high-power laser diodes, fiber amplifiers, frequency-modulated continuous wave detection (FMCW) 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 high peak powers for direct illumination and imaging. 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 force 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 has centralized its worldwide sales and its strategic marketing and sales functions across the Company’s business units.functions. Sales offices have been strategically establishedrealigned to best serve and distribute products to our worldwide customer base. There isare significant cooperation, coordination, and synergies among our business units, thatwhich capitalize on the most efficient and appropriate marketing channels to address diverse applications within our markets.

15

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, and 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 qualifying our partsproducts as key components of our customers’ systems. As of June 30, 2017,2020, we employed approximately 246336 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. For further information regarding our exposure to government markets, see the discussion set forth in Item 1A – Risk Factors of this Annual Report on Form 10-K.


Customers

Customers

The mainrepresentative groups of customers by segmentssegment are as follows:


Segment:

Group/Division:

Business Unit:

Our Customers Are:

Representative Customers:

II-VI LaserPhotonic Solutions

II-VI Infrared

ROADM

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.

•      BGI Complete Genomics, Shenzhen Co., Ltd.

•      SPI Lasers Limited

II-VI Opto Electronics

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
•Nokia Solutions and Networks
•Nippon Electric Company Ltd. (NEC Corporation)

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

•      Fujitsu Network Communications

•      Corning Incorporated

•      Coherent, Inc.

•      Acacia Communications, Inc.

•      Han’s Laser Technology Industry Group Co. Ltd.

Advanced OpticsGlobal 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
•Corning Incorporated
•Coherent Inc.
•Han’s Laser Technology Industry Group Co. Ltd.
16

II-VI Performance Products

Compound Semiconductors

II-VI OpticalEngineered Materials & Laser Optics

OEM 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
•TRUMPF GmbH + Co. KG
•Bystronic Laser AG
•Coherent Inc.
Manufacturers and developers of integrated-circuit capital equipment for the semiconductor capital equipment industry
•ASML Holding NV
•Carl Zeiss AG
•Nikon Corporation
•KLA-Tencore Corporation
Primary mineral processors, refiners, and providers of specialized materials used in laser optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy, and industrial products
•Aurubis AG
Laser Devices & Systems

Manufacturers of industrial laser components, optical communications equipment, and consumer technology applications; automotive manufacturers

•Ford Motor Company
•Laserline GmbH
•Wuhan Raycus Fiber Laser Technologies Co. Ltd.
•Hisense Broadband
OEM and subsystem integrators of aiming, machine vision, biomedical instruments, and fiber lasers; laser cutting machines for superhard materials
•BGI Complete Genomics, Shenzhen Co. Ltd.
•TRUMPF GmbH + Co. KG
Aerospace & DefenseManufacturers of equipment and devices for aerospace, defense, and commercial markets.

markets

•Lockheed Martin Corporation

II-VI M Cubed

Manufacturers and developers of integrated circuit capital equipment for the semiconductor industry.

Wide Bandgap Semiconductors

•      ASML Holding NV

•      Carl Zeiss AG

•      Nikon Corporation

•      KLA-Tencor Corporation

Manufacturers and developers of products and components for various defense and industrial markets.

•      Corning Incorporated

II-VI Marlow

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

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

•Sumitomo Electric Device Innovations Inc.

•Showa Denko K. K.

KK

•STMicroelectronics

•IQE PLC

•Infineon Technologies AG

•Dynax Semiconductor Inc.

II-VI Performance Metals

Primary mineral processors, refineriesOptoelectronic & RF Devices

Manufacturers of consumer electronics and providerstransceivers
•Sumitomo Electric Devices
InP DevicesManufacturers of specialized materials that are used in laser optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy and industrial products.

transceivers

•Aurubis AG





17

Competition

We believe we are

II-VI is a global leader in many of ourits product families. We compete partly on the basis of our reputation for offering the highly engineered nature of our products, product and technology roadmaps, IP,intellectual property, ability to scale, quality, on-time delivery, time, technical support, and pricing. 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 mainrepresentative groups of our competitors by segment are as follows:


Segment:

Areas of Competition:

Competitors:

II-VI LaserPhotonic Solutions

Optics, optical components, modules, and subsystems for optical communications

•      Molex LLC
•      Lumentum Operations LLC
Optical and crystal components, thin-film coatings, and subassemblies for lasers and metrology instruments
•      Casix Inc.
•      CASTECH Inc.
•      Hellma GmbH & Co. KG
•      Research Electro-Optics Inc.
•      IDEX Corporation
Compound SemiconductorsInfrared laser optics

•      Sumitomo Electric Industries Ltd.

•      Newport Corporation

      MKS Instruments Inc.
•      Wavelength Opto-Electronic Pte. Ltd.
•      Sigma Koki Co. Ltd.

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

•      Optoskand AB

•      Precitece      Precitec GmbH

& Co. KG
•      Mitsubishi Cable Industries Ltd.

Bio-medical

Biomedical instruments for flow cytometry, DNA sequencing, fluoresceand fluorescence microscopy

•      Lumentum Operations LLC

•      Coherent Inc.

•      BWT Beijing Ltd

      Pavilion Integration Corporation
•      Shimadzu Corporation

Semiconductor laser diodes for the industrial and consumer markets

•      Lumentum Operations LLC

•      Finisar Corporation

•      Broadcom Ltd.

•      Koninklijke Philips N.V

      ams AG

•      Jenoptik AG

•      Osram      OSRAM Licht AG

•      Sony Corporation
•      Hamamatsu Photonics KK

II-VI Photonics

Optics and optical components for networking

•      O-Net Communications Group Ltd.

•      OPLINK Communication, LLC

•      Axsun

•      Casix, Inc. (Fabrinet)

Optical modules and subsystems for amplification, monitoring and wavelength  management

•      Lumentum Operations LLC

•      Finisar Corporation

•      Accelink

•      O-Net Communications Group, Ltd.

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

•      Casix, Inc. (Fabrinet)

•      Castech

•      REO

•      Laser Components

II-VI Performance Products

Infrared optics for militaryaerospace and defense applications

•      UTC Aerospace Systems (formerly Goodrich Corporation)

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

Thermoelectric components, sub-assembliessubassemblies, and systems

•      Komatsu Ltd.

•      Laird plc

PLC

•      Ferrotec Corporation

Metal Matrix Composites

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

•      Berliner Glas

KGaA

•      Herbert Kubatz GmbH & Co.
•      CoorsTek Inc.

•      Japan Fine Ceramics Co. Ltd.

Single crystal

Single-crystal SiC substrates

•      Cree Inc.

•      Dow Corning Corporation

•      Nippon Steel & Sumitomo Metal

      SICC Co. Ltd.

•      SiCrystal AG

      TankeBlue Semiconductor Co. Ltd.
•      ROHM Co. Ltd.

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

•      Vital

Materials Co. Ltd.

•      5NPlus

      5N Plus Inc.
•      RETORTE GmbH Selenium Chemicals & Metals

18

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, penetrate 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 from 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 serving the applications mentioned above.

We have grown the number and size of our key accounts substantially. A substantialsignificant 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 in the areas of:

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 performancehigh-performance engineered materials through our dedicated corporate R&D programRD&E programs to increase new product revenue and maximize return on investment.

investment

Balanced Approach to Research and Development

Internally and externally funded R&DRD&E expenditures, targeting an overall investment of between 7 and 10 percent7%–11% of revenues.

revenues depending on the nature of the investment in terms of technology platforms or products

We are committed to accepting the right mix of internally and externally funded research that ties closely to our long-term strategic objectives.

Leverage Vertical Integration

Combine R&DRD&E and manufacturing expertise, operating with a bias to bothtoward components and production machines,machines; reducing cost and lead time to enhance competitiveness, time to market, profitability, and profitability.

quality; and enabling our customers to offer competitive 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, thereby 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, 2017,2020, the Company continued to identify, invest in, and focus our research and development on new products across the Companyand 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-VI Phase Gate Process”.

Our research and development program includes internally and externally funded research and development expenditures targeting an overall annual investment of between 7% and 10% of product revenues. 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. The Company continues to believe that externally funded research and development will decrease in the near term due to governmental budget constraints.

Process.”

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, materials 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, 2017, we employed 1,117 people in RD&E functions, 687 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 this interaction between the development and manufacturing functions enhances the direction of our projects, and design for manufacturing, reducing costs and accelerating technology transfers.





19

During the fiscal year ended June 30, 2017,2020, we focused our research and developmentRD&E investments in the following areas:

Segment:

Area of Development:

Our Research and DevelopmentRD&E Investments:

II-VI Laser

Photonic Solutions

High Power Laser Diodes and High Volume Manufacturing

Photonics design

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 synthetic diamond for EUV applications.

Focusing on broadening our portfolio beyond infrared windows applications.

II-VI Photonics

Photonics Design

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

components for photonics applications

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

lasers

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

Developing indium phosphideInP growth and processing capability.

capability together with associated packaging technology

Optical Amplifiers

amplifiers and subsystems

Investing and broadening the range of semi-customamplifiers and custom amplifiers for Tier 1 customers.

integrated subsystems, including ROADMs

Wavelength selective switchingDeveloping LC and LCOS technologies and associated module designs for WSS; investing in manufacturing equipment and the automation platform
Optical Monitoring

monitoring

Continuing optical channel monitor investment.

monitoring investment

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

plant

Micro-Optics Manufacturing

Micro-optics manufacturing

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

packages

Investing in manufacturing equipment for computerized processes.

processes

II-VI Performance Products

Compound Semiconductors

Silicon Carbide Technology

High-power laser diodes, semiconductor lasers, and devices for optical communications and sensing, 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
Developing high-power and high-speed InP lasers, detectors, and components for applications in optical communications
High-power beam deliveryDeveloping multi-kW beam delivery systems and cables for welding and cutting
CVD diamond technologyDeveloping CVD diamond for EUV applications
Broadening our portfolio beyond infrared window applications
SiC technologyDeveloping advanced SiC substrate growth technologies to support emerging markets in GaN RF and SiC power electronics.

electronics

Focused on continuous improvements

Continuous improvement to maintain world-class, high quality, large diameter substrates.

high-quality, large-diameter substrates and epitaxial wafers

Thermoelectric Materialsmaterials and Devices

devices

Continuing to develop leading bismuth tellurideBi2Te3 materials for thermoelectric cooling/heating.

heating

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

market

Metal Matrix Composites

Metal-matrix composites and Reaction Bonded Ceramics

reaction-bonded ceramics

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

solutions
Fiber laser technologiesDeveloping high-power fiber laser technologies for aerospace, defense, and commercial applications

20

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, andas well as vigorously protect, our intellectual property rights.

We have a total of approximately 2,450 patents globally.

Internally funded research and development expenditures were $96.8$339.1 million, $60.4$139.2 million, and $51.3$116.9 million for the fiscal years ended June 30, 2017, 20162020, 2019, and 2015,2018, respectively. For these same periods, externally funded research and development expenditures were $7.8$16.4 million, $8.7$14.7 million, and $9.5$12.7 million, respectively.

respectively, and were included in cost of goods sold in the Consolidated Statements of Earnings (Loss).



Import and 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 arei.e., items that potentially have both commercial and military applications;

and

•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 have also implemented similar import and export control laws and import control regulations, which may affect our operations or transactions subject to their jurisdiction.regulations. For additional discussionsdiscussion regarding our import and export 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 help 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 in the past and will continue to assert and vigorously protect our intellectual property rights.  We have confidentiality and non-competitionnoncompetition agreements with certain personnel. We require that our U.S. employees sign a confidentiality and noncompetition 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 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 our technology. 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 which 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.

Executive Officers of the Registrant

The executive officers of the Company and their respective ages and positions as of June 30, 20172020, are set forth below. Each executive officer listed has been appointed by the Boardboard of Directorsdirectors to serve until removed or until such person’s successor is appointed and qualified.


Name

Age

Position

Name

AgePosition
Vincent D. Mattera, Jr.

61

64

President and Chief Executive Officer; Director

Walter R. Bashaw II

55President
Mary Jane Raymond

57

59

Chief Financial Officer and Treasurer and Assistant Secretary

Gary A. Kapusta

57

Chief Operating Officer

Giovanni Barbarossa

57

58

Chief TechnologyStrategy Officer and President, II-VI Laser Solutions

Compound Semiconductors

David G. Wagner

54

Vice President, Human Resources

Jo Anne Schwendinger

62

64

General CounselChief Legal Officer and Compliance Officer and Secretary

Christopher Koeppen49Chief Technology Officer



21


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. 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). His 14 year tenure at II-VI underpins
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 valuable historical knowledge about the Company’s operational and strategic issues. We believe that Dr. Mattera’s expertise and experience qualifies him to provide the board with continuityManaging Shareholder and a unique perspective about onDirector of the Company.

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:(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. Ms. Raymond holds a B.A. degree in Public Management from St. Joseph’s University, and an MBA from Stanford University.

Gary A. Kapusta

Giovanni Barbarossa joined II-VI in February 2016 and has served 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 M.B.A from Lehigh University.  

Giovanni Barbarossa joined II-VI inOctober 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.

David G. Wagner has been employed by the Company since 2008 and has been the Vice President, Human Resources since 2011.  Prior to his employment with the Company, Mr. Wagner was employed with Owens Corning (NYSE:OC) from 1985 through 2008, serving in various human resource management positions, ultimately becoming the Vice President, Human Resources, for Owen Corning’s global sales force. Mr. Wagner graduated with a B.S. degree in Human Resources Management from Juniata College in 1985.   

Jo Anne Schwendinger joined II-VI in March 2017has served as the Company’s Chief Legal and servesCompliance Officer and Secretary since November 2017. Ms. Schwendinger also served as the Company’s General Counsel and Secretary.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 CounselCounsel–Asia-Pacific and Sub-Saharan Africa and Assistant General Counsel. Ms. Schwendinger holds a Bachelor’sbachelor’s degree from the Université d'Avignon et des Pays de Vaucluse, a Master’smaster’s degree from the Université de Strasbourg, Maitrise and a Juris DoctorJ.D. degree from the University of Pittsburgh Law School.

22


Christopher Koeppen joined the Company 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 Director of Corporate Strategic Technology Planning in 2015. He then served as Vice President of 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 its acquisition by Aegis Lightwave. He has more than two decades of progressively increasing general and technology management experience in high-tech companies, including at Meriton Networks, Mahi Networks, Photuris, and Lucent Technologies. Dr. Koeppen holds a Ph.D. in Physics from the University of Pennsylvania, where he was an AT&T Bell Laboratories Scholar, and B.S. degrees in 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 ten-percent10% 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 Business Conduct and Ethics, governance guidelines, and the charters for variousour board committees. All such documents are located on the Investors page of our website and are available free of charge.

23

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 more 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 previously announced an investment programcontinue to make investments in programs with the goal of gaining a greater share of end markets using semiconductor lasers especiallyand 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 market,end markets, as well as our ability to gain market share in such market,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, completelypartially or at all,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 research, development, and developmentengineering 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.

Widespread health crises, including the global novel coronavirus (COVID-19) pandemic, could materially and adversely affect our business, financial condition, and results of operations.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the United States and world. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including the impact to our suppliers, customers, and employees as well as the impact to the countries and markets in which we operate. At the onset of the COVID-19 outbreak, we began focusing intensely on mitigating the adverse impacts of COVID-19 on our foreign and domestic operations, starting by protecting our employees, suppliers, and customers.
Significant reductions in demand for one or more of our products or a curtailment to one or more of our product lines may be caused by, among other things, the temporary inability of our customers to purchase and utilize our products in next-stage manufacturing due to shutdown orders or financial hardship.
Workforce constraints triggered by shutdown orders and stay-at-home polices may present challenges in meeting our obligations to our customers and achieving cost and operational targets. For example, approximately 45% of our global facilities are subject to a government order, including approximately 10% that are currently closed, most of which are administrative facilities where employees are working remotely. We expect facilities to continue to be subject to similar government orders for the foreseeable future.
We may face disruptions from our third-party manufacturing and raw materials supply arrangements caused by constraints over their workforce capacity or their own financial or operational difficulties. There is also heightened risk and uncertainty regarding the loss or disruption of other essential third-party service providers, including transportation services, contract manufacturing, marketing, and distribution services.
24

Governmental and regulatory responses to the pandemic may include 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.
Such efforts to ensure the safety of our workforce, customers, and suppliers may result in increased operating expenses and potentially jeopardize the efficiency of operations. Such impacts may further increase the difficulty of planning for operations and may adversely impact our results.
We have made efforts to identify, manage, and mitigate the economic disruption impacts of the COVID-19 pandemic to the Company; however, there are factors beyond our knowledge or control, including the duration and severity of this outbreak or any such similar outbreak, as well as further governmental and regulatory actions.
Global economic downturns, including any downturn related to COVID-19, 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 of 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, aerospace and defense, optical communications, telecommunications, semiconductor, consumer, and medical and life science markets in which we participate. All aspects of our Company’s forecast 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, or Chinese economies, 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.
Adverse changes could also occur as a result of economic upswings, such as increased wages and scarce labor pools, and increased interest rates.
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.
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 related to our products.
Some systems that use our products are inherently complex in design and require ongoing maintenance. Our Competitive Position May Require Significant Investmentscustomers may discover defects in Strategic Acquisitions, With Associated Integration Risks, Which May Not Be Successful

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.
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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. Our net sales outside the United States represented a majority of our total sales in each 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 from 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. 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 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 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.

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 September 2019. We may continue to expand and diversify our operations with additional acquisitions. 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 are successful in making 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.







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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 price of our common stock or our 6.00% Series A Mandatory Convertible Preferred Stock (“Mandatory Convertible Preferred Stock”) 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 II-VI continues to expect that its acquisition of Finisar will result in cost savings, synergies, and other benefits, the combined company may not realize those benefits, or be able to retain those benefits even if realized.
The success of II-VI’s acquisition of Finisar will continue to depend in large part on the success of the management of the combined company in integrating the operations, strategies, technologies, and personnel of the two companies. The combined company may fail to realize some or all of the anticipated benefits of the combination if the integration process takes longer than expected or is more costly than expected. The failure of the combined company to meet the challenges involved in successfully integrating the operations of the two companies or to otherwise realize any of the anticipated benefits of the combination, including additional cost savings and synergies, could impair the operations of the combined company. In addition, II-VI continues to believe that the overall integration of Finisar will be a time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt the combined company’s business.
Potential difficulties that the combined company may encounter in the integration process include:
•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 of both companies;
•the creation of uniform standards, controls, procedures, policies, and information systems;
•the reduction of the costs associated with each company’s operations;
•the integration of corporate cultures and maintenance of employee morale;
•the retention of key employees; and
•potential unknown liabilities associated with the merger.
The anticipated cost savings, synergies, and other benefits of the acquisition of Finisar assume a successful integration of the companies 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 Dependsfuture success depends on Continued International Sales

Salescontinued international sales, and our global operations are complex and present multiple challenges to customers in countries other than the United States accounted for approximately 69%, 63% and 63% of revenues during the years ended June 30, 2017, 2016 and 2015, respectively. manage.

We anticipate that international sales will continue to account for a significant portion of our revenues for the foreseeable future. If we do notThe failure to maintain our current volume of international sales we could suffermaterially affect our business, results of operations, financial condition, and/or cash flows.
We manufacture products in the 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 management’s ability to respond in an effective and timely manner. Any inability to respond in an effective and timely manner
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to issues in our global operations could have a material adverse effect on our business, results of operations, and/or financial condition.

Foreign Currency Risk May Negatively Affect

We are subject to complex and rapidly changing import and export regulations which could limit our Revenues, Costsales and decrease our profitability.
We are subject to the passage of Sales and Operating Marginschanges in the interpretation of regulation by U.S. government entities at the federal, state, and Could Resultlocal 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 Foreign Exchange Losses

We conductcivil 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 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 incur costsprofits may be materially and adversely affected. Further changes in the local currencytrade policy of most countries in which we operate. Our net sales outside the United States represented a majorityor of other countries with 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 total salescustomers, other parties doing business with us, or the general public. Any such reputational harm could result in eachthe 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, or 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 last three fiscal years. We incur currency transaction risk whenever oneproduct, 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, or ITAR, administered by the Department of State’s Directorate of Defense Trade Controls, require a license. Certain of our operating subsidiaries enters into either a purchaseproducts 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 a sales transaction using a different currencyhaving one or more of our customers be restricted 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 alsoreceiving exports from us, could significantly reduce our revenue and materially adversely affect our results of operations when the value of salesbusiness, financial condition, 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, givenCompliance with regulations of the volatilityUnited States and other governments also subjects us to additional fees and costs. The absence of exchange rates, wecomparable restrictions on competitors in other countries may not be ableadversely affect our competitive position.
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Any inability to effectively manageaccess financial markets from time to time to raise required capital, finance our currency risks, and any volatility in currency exchange rates may increase the price ofworking capital requirements or our products in local currencyacquisition strategies, or otherwise support our liquidity needs could negatively impact our ability to finance our foreign customersoperations, meet certain obligations, or increase the manufacturing cost ofimplement 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 Capital, Finance 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.

growth strategy.

We occasionally borrow under our existing credit facilitiesfacility or to issue our equity 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 facilitiesfacility or 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 downturnsconditions 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 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 with any such 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 Failmay not be able to Accurately Estimatesettle 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 and Finisar’s 0.50% Convertible Senior Notes due 2036, which we refer to collectively as our 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 such notes) at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest. In addition, upon conversion of such 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 such 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 notes, or pay cash with respect to notes being converted.
In addition, our ability to repurchase or to pay cash upon conversion of our notes may be limited by law, regulatory authority, or agreements governing our future indebtedness. Our Customers’ Demands

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 applicable 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 any such notes.

Our credit agreement restricts our operations, particularly our ability to respond to changes or to take certain actions regarding our business.
The documents governing 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”) contain 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 the 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.
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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 agreements 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 non-cancelablenoncancellable 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 declinedeclines 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 Substantial Competition

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 compete could have a material adverse effect on our business, results of operations, or financial condition.

There Are Limitationsare limitations on the Protectionprotection of Our Intellectual Property

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 uswe take will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance that third-partiesthird 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-partythird 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 eventsevent 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 IP developed during a project that is assigned to the other party without us retaining rights to that IP or is jointly owned with the other party.
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A Significant Portionsignificant portion of Our Businessour business is Dependentdependent on Cyclical Industries

cyclical industries.

Our business is significantly dependent on the demand for products produced by end-users of industrial lasers, and optical communication products.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 Breach IncidentsProtection Regulation (“GDPR”), which became effective in May 2018. While we have taken measures to assess the requirements of, and Breakdownto comply with, the GDPR, as well as new and existing data-related laws and regulations of Informationother jurisdictions, these measures may be challenged, including by authorities that regulate data-related compliance. We could incur significant expense in facilitating and Communication Technologies Could Disruptresponding 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 Operationsbusiness.
Data breach incidents and Impact Our Financial Results

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, orand unauthorized disclosure of confidential information. Although we have not experienced an incident, ifIf we are unable to prevent or contain such security or privacy breaches, our operations wouldcould 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 economypenalties.

We have an inherent degree of uncertainty. As a result, it is difficultentered into supply agreements that commit us to estimate the level of growth or contraction for 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 industrial, military, optical communications, telecommunications, semiconductor, and medical and life science markets in which we participate. All aspects of our company forecast dependsupply products 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 ongoing stagnation in the European economy, slowdown in the Chinese economy, reductions or limited growth in consumer spending or consumer credit, 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 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 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.

specified terms.

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 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 regulations could result in civil and criminal, monetary and non-monetary penalties, disruptions to our business, limitations on our ability to import and export products and services and damage to our reputation.

Our Global Operations are Complex to Manage

We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, and Switzerland, and through contract manufacturers in Thailand and China.  We also maintain direct sales offices in Hong Kong, Japan, Germany, Switzerland, the United Kingdom, Belgium, China, Singapore, 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, results of operations or financial condition.

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

We have supply agreements with some customers whichthat require us to supply products and to allocate sufficient capacity to make these products. We have also agreed to pricing schedules and methodologies whichthat 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 Dependdepend on Highly Complex Manufacturing Processes That Require Productshighly complex manufacturing processes that require feeder materials, components, and products from Limited Sourceslimited sources of Supply

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 thea specification for a product that our suppliers cannot meet.

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We also make products for which the Company is one of the world’s largest suppliers. We use high-quality, optical gradeoptical-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 qualityhigh-quality ZnSe. Lack of adequate availability of high qualityhigh-quality ZnSe could have a material adverse effect upon our business. There can be no assurance that we will not experience manufacturing yield inefficiencies whichthat 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 hydrogen selenide.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 purityhigh-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 Tellurideyttrium 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 Global Operations Are Subject to Complex Legalbusinesses purchase, produce, and Regulatory Requirements

We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, and Switzerland, and through contract manufacturers in Thailand and China.  We also maintain direct sales offices in Hong Kong, Japan, Germany, Switzerland, the United Kingdom, Belgium, China, Singapore, 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, taxessell high-purity selenium and other raw materials based upon quoted 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 canprices from minor metal exchanges. The negative impact from increases in commodity prices might not 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 regulationsrecovered through our product sales, which could have a material adverse effect on our business, results of operations ornet earnings and financial condition.

We Useuse and Generate Hazardous Substancesgenerate potentially hazardous substances that Are Subjectare subject to Stringent Environmental Regulations

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 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. We regularly conduct employee physical examinations and workplace monitoring regarding such 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.

nonexistent.

We have in place an emergency response planplans with respect to our generation and use of the hazardous substance Hydrogen Selenide.substances hydrogen selenide, hydrogen sulfide, arsine, and phosphine. Special attention has been given to all procedures pertaining to thisthese gaseous materialmaterials to minimize the chanceschance of its accidental release into the atmosphere.

With respect to the manufacturing, use, storage, and disposal of the low-level radioactive material Thorium Fluoride,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, processes, or processes,products, there can be no assurance that problems will not develop in the future whichthat could have a material adverse effect on our business, results of operations, or financial condition.



We May Be Adversely Affectedhave 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, 2020, we had approximately $2.3 billion of outstanding debt (including our outstanding debt securities and borrowings under our Credit Agreement). 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;
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•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; seeking additional debt or equity; or reducing or delaying capital expenditures, strategic acquisitions, investments, and 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 Climate Change Regulations

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.

The enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017 significantly affected U.S. tax law by changing how the 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.
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 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 from 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.
Natural disasters or other global or regional catastrophic events could disrupt our operations, give rise to substantial environmental hazards, and adversely affect our results.
We may be exposed to business interruptions due to 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 depends on our ability to attract, retain, and develop key personnel and 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,
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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 orraw 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, a changechanges 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, fromor changes in costs of goods sold.

Some Systems That Use

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 Products Are Complex in Design and May Contain Defects that Are Not Detected Until Deployed Which Could Increase Our Costs and Reduce Our Revenues

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 lossbusiness.

A small number 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 consistently accounted for a material adverse effect on our business, results of operations or financial condition.

Significant Defense Spending Cuts and/or Reductions in Defense Programs Could Adversely Impact Our Business

Specific to the military business within our II-VI Laser Solutions and II-VI Performance Products segments, sales to customers in the defense industry totaled approximately 11%significant portion of our revenues, although none individually represent greater than 10% of total revenues. Our success 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 fiscal year ended June 30, 2017. These customers generally contract with a governmental entity, typically a U.S. governmental agency. Future reductions in defense spending could result from the current or future economic or political environment.  For example, the ongoing sequestration of the defense budget could result in reductions in demand for defense-related products that we produce. Further, changes to existing defense procurement laws and regulations could adversely affect our results of operations.  Most governmental programs are subject to funding approval and can be modified or terminated with no warning upon the determination of a legislative or administrative body. The loss of or failure to obtain certain contracts or the loss of a major government customer could have a material adverse effect on our business, results of operations or financial condition.

Changes in Tax Rates, Tax Liabilities or Tax Accounting Rules Could 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. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities.foreseeable future. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to 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 than 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 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 throughable to offset any decline in revenues from our product sales which could have a material adverse effect onexisting major customers with revenues from new customers, and our net earnings and financial condition.


Natural Disasters or Other Global or Regional Catastrophic Events Could Disrupt Our Operations and Adversely Affect Our Results

Wequarterly results may be exposed to business interruptions due to catastrophe, natural disaster, pandemic, terrorismvolatile because we are dependent on large orders from these customers that may be reduced, delayed, or actscancelled. The markets in which we have historically sold our optical subsystems and components products are dominated by a relatively small number of war that are beyondsystems manufacturers, thereby limiting the number of our control. Disruptionspotential customers.

Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically important 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 Depends on Our Ability to Retain Key Personnel

business. 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 assurancecannot ensure that we will be able to retain our major customers, attract additional customers, or attractthat 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 personnel necessary forpast experienced delays and reductions in orders from some of our success.major customers. In addition, our customers have in the past sought price concessions from us, and we expect that they will continue to do so in the future. Expense reduction measures that we 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 the servicesone or more of our key personnelmajor 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 significantly harm our business.

The manufacturing of our products may be adversely affected if we are unable to manufacture certain products in our 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 material adverse effect onlong 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 business,financial condition and results of operationsoperations. In addition, for a variety of reasons, including changes in circumstances at our contract manufacturers or financial condition.

We Have Agreements with Government Entities That Are Subjectour own business strategies, we may voluntarily, or be required to, Significant Compliance Requirements and transfer the manufacturing of certain products to other manufacturing sites.

Changes in Government Spending

Our agreements relatingmanufacturing 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

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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 salereporting requirements of productsthe Securities Exchange Act of 1934, as amended (“the Exchange Act”), the Sarbanes-Oxley Act of 2002, as amended ("the Sarbanes-Oxley Act”), and Nasdaq listing requirements. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to government entities maymaintain 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 maintain effective controls, or any difficulties encountered in their implementation or improvement, could delay the reporting of our financial results or cause us to be subject to termination, reductioninvestigations, enforcement actions by regulatory agencies, stockholder lawsuits, or modificationother adverse actions requiring us to incur defense costs or pay 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 stock. 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.
Risks Relating to Our Capital Stock
Our stock price has been volatile in the event of changes in government requirements, reductions in federal spendingpast and other factors. We are also subject to investigation and audit for compliance with the requirements of government contracts, including procurement integrity, export control, employment practices, the accuracy of records and the recording of costs.  Failure to comply with these requirements might result in suspension of these contracts and suspension or debarment from government contracting or subcontracting.

Our Stock Price Has Been Highly Volatilemay be volatile in the Past and May Be Extremely Volatile in the Future

future.

The market price for our common stock on The NASDAQthe Nasdaq Global Select Market Composite varied between a high of $41.10$51.90 and a low of $17.76$19.00 in the fiscal year ended June 30, 2017. We expect that this volatility will continue. Factors that could cause fluctuation in our stock2020. The market price include, among other things, general economic and market conditions, actual or anticipated variations in operating results, changes in financial estimates 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 ventures or other strategic initiatives, capital commitments, additions or departures of key personnel and sales of our common stock could fluctuate significantly for many reasons, including the following:
•future announcements concerning us or equity-linked securities.

Manyour competitors;

•the overall performance of equity markets;
•the trading volume of our common stock;
•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 the COVID-19 pandemic 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;
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•the issuance of common stock or other securities (including, without limitation, the shares of common stock issued upon conversion of any shares of Mandatory Convertible Preferred Stock and the shares issued upon conversion of outstanding convertible notes);
•incurrence of indebtedness;
•quarterly variations in operating results;
•our ability to accurately forecast future performance;
•business acquisitions or divestitures;
•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 and are experiencing exceptional volatility as a result of the effects of the COVID-19 pandemic. Moreover, these factors are beyond our control. However, these factors could causefluctuations 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.
In addition, we expect that the market price regardlessof the Mandatory Convertible Preferred Stock will be influenced by yield and interest rates in the capital markets, the time remaining to the Mandatory Conversion Date, 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 market prices of our operating results.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. This volatility maytrading activity could, in turn, affect the market price atof the Mandatory Convertible Preferred Stock.
Provisions in our Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) and Amended and Restated By-Laws (the “By-Laws”) 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 shareholders can sell our commoncapital stock.

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

Our articles of incorporation and by-lawsBy-Laws 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.

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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 nonconsenting 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.


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 commoncapital 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 a fundamental change 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. These features of the Mandatory Convertible 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 Intendwe do not currently intend to Pay Dividends, Holders of Our Common Stock Will Benefitpay dividends, 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 actions of our share-buyback program.

We have never declared ornor paid any dividends on our common stock and do not expect to pay cash dividends 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 commoncapital 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.
The Mandatory Convertible Preferred Stock 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. For example, the market price of our common stock could become more volatile and could depress possible sales of our common stock to
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shareholders who view the Mandatory Convertible Preferred Stock as a 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, when issued; and any other preferred stock we may issue in the future. Our Mandatory Convertible Preferred Stock ranks 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.
Our common stock ranks junior to our Mandatory Convertible 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 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 then outstanding a liquidation preference equal to $200.00 per share plus accumulated and unpaid dividends.
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 only after all of our consolidated liabilities have been paid. In addition, the Mandatory Convertible Preferred Stock ranks 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 then outstanding.
As of June 30, 2020, our total consolidated indebtedness was approximately $2.3 billion, of which an aggregate of approximately $1.9 billion was secured indebtedness of ours, to which the Mandatory Convertible Preferred Stock would have been subordinated. In addition, we have the ability to, and may, incur additional indebtedness in the future.
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.
38

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.
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 the Mandatory Convertible 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 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.

39

Item 1B.

Item 1B. UNRESOLVED STAFF COMMENTS

None.


None.

Item 2.

Item 2.  PROPERTIES

Information regarding our principal U.S. properties at June 30, 20172020, is set forth below:

Location

LocationPrimary Use(s)

Primary Business Segment(s)

Approximate Square
Footage

Ownership

Saxonburg, PA

Sherman, TX

Manufacturing Corporate Headquarters

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

II-VI Laser Solutions and II-VI Performance Products

Compound Semiconductors

252,000

281,000

Owned
and

Leased

Warren, NJ

Saxonburg, PA

Manufacturing and
Research and Development

II-VI Laser Solutions

Compound Semiconductors

151,000

235,000

Owned and Leased

Newark, DE

Warren, NJ

Manufacturing and
Research and Development

II-VI Performance Products

Compound Semiconductors

90,000

159,000

Leased

Temecula, CA

Newark, DE

Manufacturing and
Research and Development

II-VI Performance Products

Compound Semiconductors

87,000

135,000

Leased

Dallas, TX

Sunnyvale, CA

Manufacturing, and
Research and Development,

and Corporate Administrative Offices

II-VI Performance Products

Photonic Solutions

67,000

112,000

Owned
and

Leased

Monroe, CT

Murrieta, CA

Manufacturing and
Research and Development

II-VI Performance Products

Compound Semiconductors

48,000

108,000

Leased

Easton, PA

Fremont, CA

Manufacturing and
Research and Development

II-VI Laser Solutions

Compound Semiconductors

48,000

107,000

Leased

Santa Rosa, CA

Manufacturing and
Research and Development

II-VI Photonics

39,000

Leased

Pine Brook, NJ

Manufacturing and
Research and Development

II-VI Performance Products

36,000

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

Champaign, IL

Manufacturing and
Research and Development

II-VI Laser Solutions

27,000

Leased

Hillsborough, NJ

Manufacturing and
Research and Development

II-VI Photonics

23,000

Leased

Woburn, MA

Manufacturing and
Research and Development

II-VI Photonics

20,000

Leased

Starkville, MS

Manufacturing

II-VI Performance Products

19,000

Leased

Newtown, CT

Manufacturing and
Research and Development

II-VI Performance Products

13,000

Leased

Tyngsboro, MA

Research and Development

II-VI Laser Solutions

10,000

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, 20172020, 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

3,232,363Owned and II-VI Performance Products

1,227,000

Leased

Philippines

Malaysia

Manufacturing

II-VI LaserPhotonic Solutions and II-VI Performance Products

314,000

640,000

Leased

Owned

Vietnam

United Kingdom

Manufacturing,

Research and Development

II-VI PhotonicsCompound Semiconductors and II-VI Performance Products

Photonic Solutions

207,000

319,000

Owned and Leased

Switzerland

Philippines

Manufacturing

Compound Semiconductors318,000Leased
VietnamManufacturingCompound Semiconductors and Photonic Solutions189,000Owned and Leased
SwitzerlandManufacturing, Research and Development, and Distribution

II-VI Laser Solutions

Compound Semiconductors

134,000

118,000

Leased

Germany

Manufacturing and Distribution

II-VI Laser Solutions, II-VI Photonics and II-VI Performance Products

80,000

Owned and Leased

Singapore

Manufacturing

II-VI Laser Solutions

35,000

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 operation.

operations.

Item 4.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.


40


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 Stockcommon stock is traded on the NASDAQNasdaq 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 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

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

Low

 

Fiscal 2016

 

 

 

 

 

 

 

 

First Quarter

 

$

19.30

 

 

$

15.04

 

Second Quarter

 

$

19.46

 

 

$

15.69

 

Third Quarter

 

$

22.18

 

 

$

16.09

 

Fourth Quarter

 

$

23.39

 

 

$

17.91

 

On August 14, 2017, the last reported sale price for the Company’s Common Stock was $36.60 per share. As of such date,August 20, 2020, there were approximately 771839 holders of record of our Common Stock.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 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 6.00% 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.

ISSUER PURCHASES OF EQUITY SECURITIES

In August 2014,2017, 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 $50.0$50 million of its Common Stock.common stock with a portion of the net proceeds received from the offering and sale of 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 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 available for general corporate purposes. During each of the fiscal yearyears ended June 30, 2017,2020 and June 30, 2019, the Company did not repurchasepurchased 50,000 shares of its Common Stockcommon stock for $1.6 million under this program. As of June 30, 2020, the Company has cumulatively purchased 1,416,587 shares of its common stock pursuant to the repurchase program. Since inception of the repurchase program, the Company has repurchased 1,316,587 shares of its Common StockProgram for approximately $19.0 million in the aggregate.

$22.3 million. The following table provides information with respect to purchasesdollar value of the Company’s equity securities during the quarter endedshares as of June 30, 2017.

 

 

 

 

 

 

 

 

 

 

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 Plans or

 

 

Under the Plan or

 

Period

 

Shares Purchased

 

 

Per Share

 

 

Programs (a)

 

 

Program

 

April 1, 2017 to April 30, 2017

 

 

2,698

 

(1)

$

32.50

 

 

 

-

 

 

$

30,906,904

 

May 1, 2017 to May 31, 2017

3,873

 

(2)

$

33.25

 

 

 

-

 

 

$

30,906,904

 

June 1, 2017 to June 30, 2017

 

 

15,069

 

(3)

$

34.05

 

 

 

-

 

 

$

30,906,904

 

(1)

Includes 2,698 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 3,873 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 15,069 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 2017 Proxy Statement2020 that may yet be purchased under the heading “Equity Compensation Plan Information”Program is hereby also incorporated by reference into this Item 5.

approximately $27.7 million.

















41

PERFORMANCE GRAPH

The following graph compares cumulative total shareholder return on the Company’s Common Stockcommon 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, 2012,2015, through June 30, 2017.2020. The Company’s current fiscal year peer group includes Cabot Microelectronics Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., Silicon Laboratories Inc., Lumentum Holdings Inc., Finisar Corp, Coherent, Inc. and Corning Inc. The Company’s priorIncorporated.
In our Annual Report on Form 10-K for our fiscal year ended June 30, 2019, our fiscal year peer group reflected below consisted of Cabot Microelectronics Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., and Silicon Laboratories. The priorincluded Finisar. Finisar has been excluded from the current fiscal year peer group does not include Rofin-Sinar Technologies, Inc., which previously had been includedas a result of our acquisition of Finisar in the Company’s peer group, as this company was acquired during fiscal year 2017 and ceased to be publicly traded.



September 2019.
iivi-20200630_g2.jpg

42

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. All periods presented have been adjusted to present this product line on a discontinued operations basis. 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,

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

($000 except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues from continuing operations

 

$

 

972,046

 

 

$

 

827,216

 

 

$

 

741,961

 

 

$

 

683,261

 

 

$

 

551,075

 

Earnings from continuing operations

 

 

 

95,274

 

 

 

 

65,486

 

 

 

 

65,975

 

 

 

 

38,316

 

 

 

 

58,720

 

Earnings (loss) from discontinued operations

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

133

 

 

 

 

(6,789

)

Net earnings attributable to redeemable noncontrolling interest

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

1,118

 

Net earnings attributable to II-VI Incorporated

 

 

 

95,274

 

 

 

 

65,486

 

 

 

 

65,975

 

 

 

 

38,449

 

 

 

 

50,813

 

Basic earnings (loss) per shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

1.52

 

 

 

 

1.07

 

 

 

 

1.08

 

 

 

 

0.62

 

 

 

 

0.92

 

Discontinued operation

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(0.11

)

Consolidated

 

 

 

1.52

 

 

 

 

1.07

 

 

 

 

1.08

 

 

 

 

0.62

 

 

 

 

0.81

 

Diluted earnings (loss) per shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

1.48

 

 

 

 

1.04

 

 

 

 

1.05

 

 

 

 

0.60

 

 

 

 

0.90

 

Discontinued operation

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(0.11

)

Consolidated

 

 

 

1.48

 

 

 

 

1.04

 

 

 

 

1.05

 

 

 

 

0.60

 

 

 

 

0.80

 

Diluted weighted average shares outstanding

 

 

 

64,507

 

 

 

 

62,909

 

 

 

 

62,586

 

 

 

 

63,686

 

 

 

 

63,884

 


Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Year Ended June 30,20202019201820172016
($000 except per share data)($000 except per share data)
Statement of EarningsStatement of Earnings
Net revenuesNet revenues$2,380,071 $1,362,496 $1,158,794 $972,046 $827,216 
Net earnings (loss)Net earnings (loss)(67,029)107,517 88,002 95,274 65,486 
Basic earnings (loss) per shareBasic earnings (loss) per share(0.79)1.69 1.41 1.52 1.07 
Diluted earnings (loss) per shareDiluted earnings (loss) per share(0.79)1.63 1.35 1.48 1.04 
Diluted weighted average shares outstandingDiluted weighted average shares outstanding84,828 65,804 65,133 64,507 62,909 
June 30,June 30,20202019201820172016

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

Working capital

 

$

 

517,344

 

 

$

 

411,721

 

 

$

 

373,812

 

 

$

 

370,666

 

 

$

 

366,710

 

Working capital$1,116,076 $542,348 $525,370 $517,344 $411,721 

Total assets

 

 

 

1,477,297

 

 

 

 

1,211,981

 

 

 

 

1,057,273

 

 

 

 

1,070,753

 

 

 

 

863,317

 

Total assets5,234,714 1,953,773 1,761,661 1,477,297 1,211,981 

Long-term debt

 

 

 

322,022

 

 

 

 

215,307

 

 

 

 

155,066

 

 

 

 

220,787

 

 

 

 

113,551

 

Long-term debt2,186,092 443,163 419,013 322,022 215,307 

Total debt

 

 

 

342,022

 

 

 

 

235,307

 

 

 

 

175,066

 

 

 

 

240,787

 

 

 

 

113,551

 

Total debt2,255,342 466,997 439,013 342,022 235,307 

Retained earnings

 

 

 

748,062

 

 

 

 

652,788

 

 

 

 

587,302

 

 

 

 

521,327

 

 

 

 

482,878

 

Retained earnings876,552 943,581 836,064 748,062 652,788 

Shareholders' equity

 

 

 

900,563

 

 

 

 

782,338

 

 

 

 

729,081

 

 

 

 

675,043

 

 

 

 

636,108

 

Shareholders' equity2,076,803 1,133,209 1,024,311 900,563 782,338 


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.

43

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 opto-electronic components, is a vertically integrated manufacturing company that develops innovative products for industrial materials processing, communications, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive 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.

In September 2019, the Company completed its acquisition Finisar Corporation (“Finisar”), See Note 3. Acquisitions, to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K. The operating results of this acquisition have been reflected in the selected financial information of the Company’s Photonic Solutions segment and thermoelectric integrators.

Compound Semiconductors Segment beginning on October 1, 2019, with the results from September 24, 2019 to September 30, 2019 reflected in Unallocated and Other.

Finisar is a global technology leader in optical communications, providing components and subsystems to networking equipment manufacturers, data center operators, telecom service providers, consumer electronics and automotive companies. Finisar, headquartered in Sunnyvale, California, designs products that meet the increasing demands for network bandwidth, data storage and 3D sensing subsystems. As part of the Finisar acquisition, the Company entered into a new Amended and Restated Credit Agreement, dated as of September 24 2019. This agreement secured $2.425 billion in aggregate principle amount of senior secured credit facilities. See Note 9. Debt, to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
On June 30, 2020, the Company announced its intention to offer, in concurrent underwritten public offerings, newly issued shares of its common stock and newly issued shares of its Series A Mandatory Convertible Preferred Stock, "Mandatory Convertible Preferred Stock"). In addition, the underwriters were granted a 30-day option to purchase additional shares of its common stock at the applicable public offering price, less underwriting discounts and commissions, and 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. See Note 21. Subsequent Event, to our Consolidated Financial Statements contained in Item 8 of 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.
44

Critical Accounting Policies and Estimates


The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“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, allowance for doubtful accounts, warranty reserves, inventory valuation, business combinations, valuation of long-lived assets including acquired intangibles and goodwill, accrual of bonus and profit sharing estimates, accrual of income tax liability estimates 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 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 have a material impact on the financial statements.

Revenue Recognition

Revenues for product shipments are realizable when we have persuasive evidence of a sales arrangement, 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 comprise 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 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 less than 1% of the Company’s consolidated revenues.

Allowance for Doubtful Accounts

The Company establishes an allowance for doubtful accounts based on historical experience and believes the collection of revenues, net of this reserve, is reasonably assured. The allowance for doubtful accounts is an estimate for potential non-collection of accounts receivable based on historical experience. The Company did not experience a non-collection of accounts receivable materially affecting its financial condition or results of operations as of and for each of the fiscal years ended June 30, 2017, 2016 and 2015. If the financial condition of the Company’s customers were to deteriorate, causing an impairment of their ability to make payments, additional provisions for bad debts could be required in future periods. The Company’s allowance for doubtful accounts reserve estimates have historically been proven to be materially correct based upon actual charges incurred.

Warranty Reserve

The Company records a warranty reserve as a charge against earnings based on a historical percentage of revenues utilizing actual returns over a period that approximates historical warranty experience. If actual returns in the future are not consistent with the historical data used to calculate these estimates, additional warranty reserves could be required. The Company’s warranty reserve estimates have historically been proven to be materially correct based upon actual charges incurred.

Consolidated Financial Statements.


Inventory Reserves

The Company generally records an inventory reserve as a charge against earnings for all products on hand for more than 12 to 24 months, depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative customers. An additional reserve 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 reserves may be required. The Company’s inventory reserve estimates have historically been proven to be materially correct based upon actual write-offs incurred.

Business Acquisitions

Combinations


The Company accounts for business acquisitions by establishingunder the acquisition-date fair value asacquisition method of accounting whereby the measurement for alltotal purchase price is allocated to tangible and intangible assets acquired and liabilities assumed. Certain provisionsassumed based on the respective fair values. In determining the fair value of U.S. GAAP prescribe,intangible assets acquired, the Company must make assumptions about the future performance of the acquired business, including among other things, the determinationforecasted revenue growth attributable to the asset group and projected operating expenses inclusive of acquisition-dateexpected synergies, including future cost savings, and other benefits expected to be achieved by combining the Company and Finisar. The Company’s intangible assets are comprised of customer relationships, trade names and developed technology. The estimated fair value of consideration paidthe customer relationships, trade names and developed technology are determined using the multi-period excess earnings method and relief from royalty methods. Both methods require forward looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future economic and market conditions. The estimated fair value of the developed technology is also dependent on the selection of the royalty rate used in a business combination (including contingent consideration)the valuation method. Different assumptions for certain intangible assets may result in materially different values for these assets, which would impact the Company’s financial position and the exclusionfuture results of transaction and acquisition-related restructuring costs from acquisition accounting.

operations.


Goodwill and Indefinite-Lived Intangibles


The Company tests goodwill and indefinite-lived intangible assets on an annual basis for impairment orannually, 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 uponon 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. Theconditions and their projections. For fiscal year 2020, 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. As of June 30, 2017,2020, no reporting units are at risk for impairment as the fair value of the reporting units substantially exceed the carrying value.

The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process 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 two-step process. Otherwise, the Company will forego the two-step process and does not need to perform any further testing.

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 suffer frombe 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 maymight 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, 2017.

Bonus and Profit Sharing

The Company records certain bonus and profit sharing estimates as a charge against earnings. These estimates are adjusted to actual based on final results of operations achieved during the fiscal year. Certain partial bonus amounts are paid quarterly based on interim company performance, and the remainder is paid after the fiscal year end. Other bonuses are paid annually.

45

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-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. The Company adopted an accounting policy 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. 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 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,measures taken in response to the COVID-19 pandemic have adversely affected, and could in the future materially adversely impact, our business, results of operations, financial condition and stock price.

In particular, the COVID-19 pandemic is having a significant impact on global markets due to resulting supply chain and production disruptions, workforce and travel restrictions, quarantines and shelter-in-place orders, reduced spending and other similar measures implemented by many companies and other factors. Following the initial outbreak of COVID-19, we experienced temporary disruptions to our operations in China. While these operations have returned to active service, approximately 45% of our global facilities are subject to a government order, including approximately 10% that are currently closed, most of which generally equalsare administrative facilities where employees are working remotely. Certain of our customers and suppliers currently are impacted by similar operational restrictions.

Our focus has been on the vesting period. The Company utilizesprotection of the Black-Scholes valuation model for estimating the fair valuehealth and safety of share-based equity expense using assumptionsour 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.

46

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.

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 20172020 Compared to Fiscal Year 2016

2019

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 bookings and select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 20172020 and June 30, 20162019 ($ in millions except per share information):

 

 

Year Ended

 

 

Year Ended

 

 

 

June 30, 2017

 

 

June 30, 2016

 

Bookings

 

$

1,072.2

 

 

 

 

 

 

$

875.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% 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

 

 

 

89.9

 

 

 

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 share

 

$

1.48

 

 

 

 

 

 

$

1.04

 

 

 

 

 



Year Ended June 30, 2020Year Ended June 30, 2019
% of
Revenues		% of
Revenues
Total revenues$2,380.1 100.0 %$1,362.4 100.0 %
Cost of goods sold1,560.5 65.6 %841.1 61.7 %
Gross margin819.6 34.4 521.3 38.3 
Operating expenses:    
Internal research and development339.1 14.2 139.2 10.2 
Selling, general and administrative441.0 18.5 233.5 17.1 
Interest and other, net103.4 4.3 19.8 1.5 
Earnings (Loss) before income tax(63.9)(2.7)128.8 9.5 
Income taxes3.1 0.1 21.3 1.6 
Net earnings (loss)$(67.0)(2.8)%$107.5 7.9 %
Diluted earnings (loss) per share$(0.79)$1.63 

Executive Summary

Net earnings


Consolidated
Revenues. Revenues for the year ended June 30, 2020 increased 75% to $2,380.1 million, compared to $1,362.4 million for the prior fiscal year. The increase in revenues is primarily attributed to the acquisition of Finisar, which contributed $938.4 million of revenues for the fiscal year 2017 were $95.3ended June 30, 2020. In addition to the acquisition of Finisar, the increase in revenues within Photonic Solutions was driven by increased demand from customers in the optical communication market, ROADM and other optical communication products addressing the growing deployment of 5G optical networks. Compound Semiconductors recorded a 13% revenue increase during the current fiscal year, 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 $819.6 million, ($1.48 per-share diluted)or34.4%, of total revenues, compared to $65.5$521.3 million, ($1.04 per-share diluted) or38.3%of total revenues,for the same period last fiscal year. The increase in net earnings for the fiscal year ended June 30, 2017Gross margin as a percentage of revenues decreased 380 basis points compared to the prior fiscal year despite the 75% increase in revenues during this same period last yearperiod. Gross margin was primarilynegatively impacted by additional cost of goods sold of $87.7 million related to the fair value adjustment of the acquired Finisar inventory, and as the result of increased revenues, favorable product mix atrelating to Finisar's Transceiver product line which has a lower gross margin profile than the II-VI Photonics segmentCompany's historical margins.
47

Internal research and improved operational performance from all three segments. In particular, the Company has seen continued increased demand from the optical communications customer base as a result of continuation of the China broadband initiative, datacenter and U.S. metro upgrade cycles (including cable television). The Company’s II-VI Laser Solutions segment realized increased demand for its carbon dioxide (“CO2”), one-micron laser and diamond optics product lines. Net earnings were also favorably impacted by the earnout and technology transfer income received as part of the sale of the RF business of ANADIGICS last fiscal year recorded in Other expense (income), net. The Company recorded $7.0 million or $0.09 per share diluted of other income related to these transactions. In addition, the Company benefitted from lower income tax expenses as a result of reversing certain U.S. valuation allowances in conjunction with the acquisition of IPI. Partially offsetting the increase in net earnings were increaseddevelopment. Company-funded internal research and development expenses incurred in the II-VI Laser Solutions segment for the Company’s investment in the high-volume VCSELs platform.

Consolidated

Bookings. Bookings are defined as customer orders received that are expected to be converted to revenues over the next 12 months. For long-term customer orders, the Company does not include in bookings the portion of the customer order that is beyond 12 months, due to the inherent uncertainty of such an order that far out in the future.  Bookings for the year ended June 30, 2017 increased 22% to $1.1 billion, compared to $875.3 million for the same period last fiscal year. The Company’s II-VI Photonics segment realized increased bookings of $81.3 million, or 22%, over the same period last fiscal year due to increased orders from the ongoing Chinese broadband initiative, U.S. Metro, datacenter communications, and the continued investment in undersea fiber optic networks. The Company’s II-VI Laser Solutions segment realized increased bookings of $60.8 million, or 20%, over the same period last fiscal year. The increase was driven by higher demand for high and low power laser optics, fiber laser and direct diode laser components and optics and components supporting semiconductor photolithography. Additionally, the Company’s II-VI Performance Products segment realized increased bookings of $54.8 million, or 28% driven by increased demand for silicon carbide (“SiC”IR&D”) substrates supporting radio frequency (“RF”) development and also power device products in automotive and industrial markets.

Revenues. Revenues for the year ended June 30, 2017 increased 18% to $972.0 million, compared to $827.2 million for the prior fiscal year.  The Company has seen continued increased demand from the optical communications customer base as a result of 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, one-micron laser and diamond optic products.

Gross margin. Gross margin for the year ended June 30, 2017 was $388.3 million, or 39.9%, of total revenues, compared to $312.8 million, or 37.8%, of total revenues for the same period last fiscal year.  The improvement in gross margin was primarily driven by incremental margins realized on the Company’s higher revenue levels which increased approximately $145.0 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 fiscal year ended June 30, 20172020 were $96.8$339.1 million, or 10.0%14.2% of revenues, compared to $60.4$139.2 million, or 7.3%10.2%. of revenues, last fiscal year. The increase in internal research and development expense for fiscal year 2017IR&D expenses is the result of the Company’s continued investments in the development of the technology requiredprimarily due to produce new optoelectronic devices in large volume for future applications as well as new product introductions across the Company’s segments. The Company anticipates the internal research and development expenses as a percentage of revenues to approximate the current run rate as the Company continuescontinuing to invest in new products and processes across all its growth strategies across its segments.

businesses including investments in 5G technology, 3D Sensing, indium phosphide, LIDAR and other emerging market trends. 

Selling, general and administrative.Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 20172020 were $176.0$441.0 million, or 18.1%18.5% of revenues, compared to $160.6$233.5 million, or 19.4%17.1% of revenues, last fiscal year. The increase in SG&A in absolute dollars iswas primarily the result of a higher revenue base requiring more leveltransaction 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 recent 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$103.4 million compared to expense of $1.9$19.8 million last fiscal year.  Included in interestInterest and other, net wereprimarily includes $89.4 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$14.4 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 prior year’s expense of $1.9 million included $3.1$2.8 million of interestequity earnings from unconsolidated investments. Interest expense onincreased due to the Company’s


higher levels of outstanding borrowings offset by $1.2debt incurred in conjunction with the acquisition of Finisar. In addition, the Company expensed $4.0 million of interest income on the Company’s excess cash reserves. The increase in interest expense indebt extinguishment costs during the current fiscal year is the result of higher levels of outstanding borrowings during the current fiscal year.

and recorded a $5.0 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 (4.9)% benefit, compared to an effective tax rate of 27.3%16.6% last fiscal year. The variation between the Company’s effective tax rate and the U.S. statutory rate 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-datecurrent fiscal year’s effective tax rate was primarily drivennegatively impacted by the reversal ofU.S. enacted tax legislation related to global intangible low tax income (“GILTI”) partially offset by research and development incentives in certain valuation allowances triggered by the acquisition of IPI which generated deferred tax liabilities which offset the previously reserved deferred tax asset.

jurisdictions.

Segment Reporting

Bookings, revenues

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 other expense (income) –, net, as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See “Note 11.Note 14. 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.

Effective July 1, 2019, the Company realigned its composition of its operating segments. The Company combined II-VI Laser Solutions and II-VI Performance Products, and renamed the combined segment Compound Semiconductors.  All applicable segment information has been restated to reflect this change. Additionally, the Company changed the name of II-VI Photonics to Photonic Solutions.
Photonic Solutions ($ in millions)

 

 

 

 

 

 

 

 

 

%

 

 

Year Ended

 

 

Increase

 

Year Ended
June 30,		%
Increase/(Decrease)

 

June 30,

 

 

(Decrease)

 

20202019

 

2017

 

 

2016

 

 

 

 

 

Bookings

 

$

366.8

 

 

$

306.0

 

 

 

20

%

Revenues

 

$

339.3

 

 

$

303.0

 

 

 

12

%

Revenues$1,536.8 $638.9 141 %

Operating income

 

$

30.9

 

 

$

36.2

 

 

 

(15

%)

Operating income$49.9 $81.9 (39)%


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, and II-VI EpiWorks. The Company acquired II-VI EpiWorks on February 1, 2016 and II-VI OptoElectronic Devices Division, on March 15, 2016.

Bookingsabove operating results for the fiscal year ended June 30, 20172020 include the Company’s acquisition of Finisar in September 2019.

Revenues for II-VI Laserthe year ended June 30, 2020 for Photonic Solutions increased 20%141% to $366.8$1,536.8 million, compared to $306.0$638.9 million for last fiscal year. Included in the current year’s revenues were $903.5 million of revenues from the Finisar acquisition.  Exclusive of the acquisition, the increase in revenues was attributed to increased demand of our 5G optical networks driven by the China broadband initiative.
Operating income for the year ended June 30, 2020 for Photonic Solutions decreased 39% to $49.9 million, compared to an operating income of $81.9 million last fiscal year. Bookings included $27.2 million for fiscal year 2017The decrease in operating income was primarily due to acquisition related expenses related to amortization expense on acquired intangible assets and $14.3 million for fiscal year 2016, respectively, attributed to the acquisitionsexpensing of II-VI EpiWorks and II-VI OED. Exclusive of acquisitions,acquired inventory fair value step-up partially offset by incremental margin realized on increased revenues during the increaseyear.
48

Compound Semiconductors ($ in bookingsmillions)

Year Ended
June 30,		%
Increase/(Decrease)
20202019
Revenues$821.2 $723.6 13 %
Operating income$62.3 $82.4 (24 %)

The above operating results for the current fiscal year was driven by higher demand for CO2 and fiber laser and direct diode laser components and photolithography related products, including diamond product optics.

ended June 30, 2020 include the Company’s acquisition of Finisar in September 2019.


Revenues for the fiscal year ended June 30, 20172020 for II-VI Laser SolutionsCompound Semiconductors increased 12%13% to $339.3$821.2 million, compared to revenues of $303.0$723.6 million last fiscal year. Revenues included $24.0 million for fiscal 2017 and $13.9 million for fiscal year 2016, respectively, attributed to the recent acquisitions. Exclusive of acquisitions, theThe increase in revenues forduring the current fiscal year ended June 30, 2017 was primarily driven by increased VCSEL product shipments addressing the result of higher demand for high3D sensing commercial market, and low power laser optics, one-micron laser applicationsincreased revenues to customers in the aerospace and semiconductor photolithography tools and precision optics in laser applications up to 1 kilowatt for marking and engraving.

defense market.

Operating income for the fiscal year ended June 30, 20172020 for II-VI Laser SolutionsCompound Semiconductors decreased 15%24% to $30.9$62.3 million, compared to $36.2operating income of $82.4 million last fiscal year. OperatingThe decrease in operating income was impacted by the segment’s ongoing internal research and development investments for its new optoelectronic laser platform. During the current year, this expense increased approximately $30.2 million over the prior year.

II-VI Photonics ($ in millions)

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

 

 

 

Bookings

 

$

453.5

 

 

$

372.2

 

 

 

22

%

Revenues

 

$

418.5

 

 

$

325.9

 

 

 

28

%

Operating income

 

$

63.0

 

 

$

37.8

 

 

 

67

%


The Company’s II-VI Photonics segment includes the combined operations of II-VI Photop and II-VI Optical Communications.

Bookings for the year ended June 30, 2017 for II-VI Photonics increased 22% to $453.5 million, compared to $372.2 million for the prior fiscal year.  The increase in bookings during the current fiscal year was primarily driven by the resultacquisition of increased orders fromFinisar, which includes unabsorbed operating costs incurred at the ongoing Chinese broadband initiative, U.S. Metro, datacenter communications, andsegment's Sherman, Texas water fabrication facility, during the continued investment in undersea fiber optic networks. The broadband China initiative continued to increase demand for the segment’s transport and amplification component products, particularly 980nm pumps, optical channel monitors and integrated passive components used in optical communications.qualification phase. In addition, the segment saw increased demand for its infrared opticsincurred acquisition related expenses associated with expensing of the fair value inventory write-up and industrial filters.

Revenues for the year ended June 30, 2017 for II-VI Photonics increased 28% to $418.5 million, compared to $325.9 million for last fiscal year. The Company continued to realize increased revenues from the broadband China initiative as China continues to expand 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% to $63.0 million, compared to an operating income of $37.8 million last fiscal year. The increase in operating income was primarily due 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)

other related acquisition expenses.

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2017

 

 

2016

 

 

 

 

 

Bookings

 

$

251.9

 

 

$

197.1

 

 

 

28

%

Revenues

 

$

214.2

 

 

$

198.3

 

 

 

8

%

Operating income

 

$

21.6

 

 

$

17.8

 

 

 

21

%

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.

Bookings for the year ended June 30, 2017 for II-VI Performance Products increased 28% to $251.9 million, compared to $197.1 million for last fiscal year. The increase in bookings for the year ended June 30, 2017 were driven by increasing demand for SiC substrates for RF and power applications supporting growth in the 4G base station market, and supporting development of power device products in automotive and industrial markets as well as increased demand for EUV lithography wafer handling components for the segment’s reaction bonded SiC material.

Revenues for the year ended June 30, 2017 for II-VI Performance Products increased 8% to $214.2 million, compared to $198.3 million for last fiscal year. The increase in revenues for the year ended June 30, 2017 was driven by continued growth in the 4G base station market which is expanding geographically. Revenue growth was also driven by increasing demand for 150mm power device products as the market enters the manufacturing phase in the transition from 100mm to 150mm SiC substrates. In addition, the segment’s semiconductor product offerings experienced increased demands as EUV lithography begins to ramp as part 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 last fiscal year. Incremental margins on higher segment revenues led by SiC substrate revenues contributed to the increased operating income.


Fiscal Year 20162019 Compared to Fiscal Year 2015

2018

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 bookings and select items from our Consolidated Statements of Earnings for the years ended June 30, 20162019 and 2015.2018 ($ in millions except per share information):

 

 

Year Ended

 

 

Year Ended

 

 

 

June 30, 2016

 

 

June 30, 2015

 

Bookings

 

$

875.3

 

 

 

 

 

 

$

761.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

 

 

% of

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Revenues

 

Total revenues

 

$

827.2

 

 

 

100.0

%

 

$

742.0

 

 

 

100.0

%

Cost of goods sold

 

 

514.4

 

 

 

62.2

 

 

 

470.4

 

 

 

63.4

 

Gross margin

 

 

312.8

 

 

 

37.8

 

 

 

271.5

 

 

 

36.6

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internal research and development

 

 

60.4

 

 

 

7.3

 

 

 

51.3

 

 

 

6.9

 

Selling, general and administrative

 

 

160.6

 

 

 

19.4

 

 

 

143.5

 

 

 

19.3

 

Interest and other, net

 

 

1.9

 

 

 

0.2

 

 

 

(2.3

)

 

 

(0.3

)

Earnings before income tax

 

 

89.9

 

 

 

10.9

 

 

 

79.1

 

 

 

10.7

 

Income taxes

 

 

24.5

 

 

 

3.0

 

 

 

13.1

 

 

 

1.8

 

Net earnings

 

$

65.5

 

 

 

7.9

%

 

$

66.0

 

 

 

8.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per shares

 

$

1.04

 

 

 

 

 

 

$

1.05

 

 

 

 

 


Year Ended
June 30, 2019		Year Ended
June 30, 2018
% of
Revenues		% of
Revenues
Total revenues$1,362.4 100.0 %$1,158.8 100.0 %
Cost of goods sold841.1 61.7 696.6 60.1 
Gross margin521.3 38.3 462.2 39.9 
Operating expenses:    
Internal research and development139.2 10.2 116.9 10.1 
Selling, general and administrative233.5 17.1 208.6 18.0 
Interest and other, net19.8 1.5 14.6 1.3 
Earnings before income tax128.8 9.5 122.2 10.5 
Income taxes21.3 1.6 34.2 3.0 
Net earnings$107.5 7.9 %$88.0 7.5 %
Diluted earnings per share$1.63 $1.35 

49

Consolidated

Bookings. Bookings for the year ended June 30, 2016 increased 15% to $875.3 million, compared to $761.7 million for the 2015 fiscal year. All of the Company’s operating segments experienced stronger booking volumes in fiscal year ended June 30, 2016 compared to fiscal year ended June 30, 2015. The increased bookings were primarily lead by II-VI Photonics which realized increased bookings of $89.3 million or 32% over fiscal year ended June 30, 2015. This segment experienced strong orders from the China broadband buildout program as well as increased demand for 100G metro deployments in the United States and demand for products that served the datacenter expansion. 

Revenues.

Revenues. Revenues for the year ended June 30, 20162019 increased 11%18% to $827.2$1,362.4 million, compared to $742.0$1,158.8 million for the fiscal year ended June 30, 2015.2018. The increase in revenues during fiscal year 2016 as compared to fiscal year 20152019 was driven by optical and data communication markets whichstrong demand from customers across the majority of the Company’s business units. In particular, Photonic Solutions experienced a cycle31% revenue growth from the prior fiscal year 2018, primarily driven by increased demand from customers in the optical communication market. Specifically, the segment saw increased demand for ROADM and other optical communication products addressing the growing deployment of investment5G optical networks. Compound Semiconductors recorded an 8% revenue increase during the current fiscal year, driven by strengthening demand for SiC substrate products addressing RF electronics and expansion. The Company’s II-VI Photonicshigh-power switching and power conversion systems for automotive and communication end markets. In addition, this segment capitalized on these markets dynamics andalso 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, 2019was $521.3million, or38.3%, of $65.1 total revenues, compared to $462.2million, or39.9%of total revenues,for fiscal year 2016.   

Gross margin.2018. Gross margin as a percentage of revenues for the year ended June 30, 2016 was 37.8%,decreased 160 basis points compared to 36.6% for the prior fiscal year ended June 30, 2015. Improvementdespite the 18% increase in revenues during this same period. The Company’s Photonic Solutions’ gross margin for fiscal year 2016 was primarily drivennegatively impacted by incremental margins realized on the Company’s higher revenue levels as well asa shift in product mix at II-VI Photonics towards highertolower margin products relatingwhileCompound Semiconductors experiencedunder-absorptionof manufacturing costs forits3DSensing product line due to 980 nm pumps continued delays in the programand undersea network deployments. The inclusionunderutilization of the fiscal year 2016 acquisitions did not have a material impact to the year’s gross margin.

capacity.

Internal research and development. development. Company-funded internal research and development expenses for the year ended June 30, 2016 were $60.4 million, or 7.3% of revenues, compared to $51.3 million, or 6.9% of revenues, for the fiscal year ended June 30, 2015. The increase in internal research and development expense is the result of the Company’s continued investments in the development of the technology required to fabricate VCSELs in large volume for future applications as well as new product introductions across the Company’s business units.

Selling, general and administrative. SG&AIR&D expenses for the fiscal year ended June 30, 20162019 were $160.6$139.2 million, or 19.4%10.2% of revenues, compared to $143.5$116.9 million, or 19.3%10.1% of revenues, for fiscal year 2018. The increase in IR&D expenses is primarily due to the Company continuing to invest in new products and processes across all its businesses including investments in 5G technology, 3D Sensing and other engineered material applications.  IR&D expenses as a percentage of revenues were consistent between both fiscal years, and the Company anticipates this percentage to continue to range between 10% and 15% of revenues as the Company continues investing in new product and process development.

Selling, general and administrative. SG&A expenses for the year ended June 30, 2015. The increase in SG&A expense in absolute dollars was primarily due2019 were $233.5 million, or 17.1% of revenues, compared to $208.6 million, or 18.0% of revenues, for fiscal year 2018. During fiscal year 2019, the Company announced its intention to acquire Finisar, and incurred approximately $15.6 million of related transaction expenses. In addition to the fiscal year 2016 acquisitions’ transaction expenses, and severance totaling approximately $11.3 million. The remaining increase in relative dollars wasthe Company incurred higher SG&A expenses to support the higherits growing revenue basebase.  The Company has been successful in fiscal year 2016.   

capitalizing on synergies from its recent acquisitions to improve its operating leverage.

Interest and other, net. Interest and other, net for the year ended June 30, 20162019 was expense of $1.9$19.8 million compared to incomeexpense of $2.3$14.6 million for the prior fiscal year.year 2018. Included in interest and other, net for the year ended June 30, 2016 were earnings on the Company’s equity interest in Guangdong Fuxin Electronic Technology, interest expense on long-term borrowings, earnings from equity investments, interest income on excess cash reserves, and unrealized gains and losses on the Company’s deferred compensation plan, and foreign currency gains and losses. In,The increase in interest and other, net was primarily due to increased interest expense during the current fiscal year ended June 30, 2016 expense of $1.9approximately $4.1 million included $3.1 milliondue to the higher levels of interest expense on the Company’s outstanding

debt.

borrowings, offset by $1.2 million of interest income on the Company’s excess cash reserves. In the fiscal year ended June 30, 2015, income of $2.3 million primarily included a one-time settlement gain of $7.7 million related to certain payment obligations from prior year acquisitions offset by foreign currency losses of $2.2 million and $2.0 million impairment charge on certain tradenames in the II-VI Photonics segment.

Income taxes.The Company’s year-to-date effective income tax rate at June 30, 20162019 was 27.3%16.6%, compared to an effective tax rate of 16.6% in28.0% for fiscal year 2015. The variation between the Company’s2018. Fiscal year 2018’s effective tax rate from continuing operationswas negatively impacted by the U.S. enacted tax legislation and the U.S. statutory rate of 35% was primarily due torecording the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The higher effectiveprovision for the transition tax rate duringunder the fiscal year ended June 30, 2016 is due to an $8.5 million valuation allowance against certain U.S. based deferrednew tax assets.

II-VI Laserlaw.

Photonic Solutions ($ in millions)

 

 

 

 

 

 

 

 

 

 

%

 

 

 

Year Ended

 

 

Increase

 

 

 

June 30,

 

 

(Decrease)

 

 

 

2016

 

 

2015

 

 

 

 

 

Bookings

 

$

306.0

 

 

$

284.8

 

 

 

7

%

Revenues

 

$

303.0

 

 

$

287.9

 

 

 

5

%

Operating income

 

$

36.2

 

 

$

55.0

 

 

 

(34

%)


Bookings

Year Ended
June 30,		%
Increase
20192018
Revenues638.8 486.5 31 %
Operating income81.9 63.2 30 %

The above operating results for the year ended June 30, 2016 for II-VI Laser Solutions increased 7% to $306.0 million, compared to $284.8 million for fiscal year June 30, 2015. Included2019 include the Company’s acquisitions of CoAdna Holdings, Inc. in September 2018 and the bookings amountsproduct line which was $14.3 million of bookings attributed to the fiscal year 2016 acquisitions.  Exclusive of this amount, bookings increased approximately $6.9 million driven by demand for one-micron components for the industrial materials processing market as well higher aftermarket demand for the segment’s CO2 laser optics.  

acquired in November 2018.

50

Revenues for the year ended June 30, 20162019 for II-VI LaserPhotonic Solutions increased 5%31% to $303.0$638.8 million, compared to $287.9$486.5 million for fiscal year ended June 30, 2015.2018. Included in the revenue amount was $13.9fiscal year’s 2019 revenues were $12.4 million of revenue attributedrevenues, excluding sales to customers through our sales offices, from the fiscal year 2016above acquisitions.  Exclusive of these acquisitions, the increase in revenues was primarily attributed to increased demand for optical communication products driven by the China broadband initiative as China continues to build out its broadband networks.  Specifically, the segment saw increased demand for its ROADM and EDFA product lines to address this amount, revenues were consistent with fiscal year 2015.  

and other market demands, including the accelerating demand for 5G technology.

Operating income for the year ended June 30, 20162019 for II-VI LaserPhotonic Solutions decreased 34%increased 30% to $36.2 million, compared to $55.0 million for fiscal year June 30, 2015. The decrease in operating income was primarily due to the inclusion of the operating results of the fiscal year 2016 acquisitions.  Operating income was also negatively impacted by acquisition related transaction and severance expenses of $11.3 million.

II-VI Photonics ($ in millions)

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

 

 

 

Bookings

 

$

372.2

 

 

$

282.9

 

 

 

32

%

Revenues

 

$

325.9

 

 

$

260.8

 

 

 

25

%

Operating income

 

$

37.8

 

 

$

7.2

 

 

 

425

%

Bookings for the year ended June 30, 2016 for II-VI Photonics increased 32% to $372.2 million, compared to $282.9 million for the fiscal year ended June 30, 2015. The increase in bookings was the result of market demand from the China broadband build-out, 100G metro deployments in the United States and undersea 980 nm pumps and high performance optical amplifiers.

Revenues for the year ended June 30, 2016 for II-VI Photonics increased 25% to $325.9 million, compared to $260.8 million for the fiscal year ended June 30, 2015. The increase in revenues was mainly attributable to increased customer demand for optical components and modules for the new deployment of CATV optical networks, the continued strength of the China broadband program by the government to extend the fiber to the home deployment, 4G wireless deployment, and accelerated 5G wireless development.

Operating income for the year ended June 30, 2016 for II-VI Photonics increased 425% to $37.8$81.9 million, compared to an operating income of $7.2$63.2 million for the fiscal year ended June 30, 2015.2018. The increase in operating income was primarily due to incremental marginsmargin realized on the higher revenue levels as well as product mix to higher margin products including 980 nm pumps and optical amplifiers.

increased revenues.

II-VI Performance ProductsCompound Semiconductors ($ in millions)

 

 

Year Ended

 

 

%

 

 

 

June 30,

 

 

Increase

 

 

 

2016

 

 

2015

 

 

 

 

 

Bookings

 

$

197.1

 

 

$

194.0

 

 

 

2

%

Revenues

 

$

198.3

 

 

$

193.3

 

 

 

3

%

Operating income

 

$

17.8

 

 

$

14.6

 

 

 

22

%


Bookings

Year Ended
June 30,		%
Increase
20192018
Revenues$723.6 $672.3 8 %
Operating income$82.4 $73.6 12 %

Revenues for the fiscal year ended June 30, 20162019 for II-VI Performance ProductsCompound Semiconductors increased 2%8% to $197.1$723.6 million, compared to $194.0revenues of $672.3 million for fiscal year June 30, 2015.2018. The moderate increase in bookingsrevenues during fiscal year 2019 was primarily driven by increased demand of silicon carbide substrates used infor SiC products addressing RF applications.  

Revenueselectronics 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 its thermoelectric and aerospace and defense markets.

Operating income for the fiscal year ended June 30, 20162019 for II-VI Performance ProductsCompound Semiconductors increased 3%12% to $198.3$82.4 million, compared to $193.3operating income of $73.6 million for fiscal year June 30, 2015. The increase in revenues was due to increased shipments of military and personal comfort related products. 

Operating income for the year ended June 30, 2016 for II-VI Performance Products increased 22% to $17.8 million, compared to $14.6 million for fiscal year June 30, 2015.2018. The increase in operating income during fiscal year 2019 was a combination of higher revenue levelsprimarily driven by incremental margin realized by increased sales volume, as well as a shift infavorable product mix totoward higher margin products primarily serving the segment’s military markets. 

products.

LIQUIDITY AND CAPITAL RESOURCES

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,

 

2017

 

 

2016

 

 

2015

 

Net cash provided by operating activities

 

$

118.6

 

 

$

123.0

 

 

$

129.4

 

Additions to property, plant & equipment

 

 

(138.5

)

 

 

(58.2

)

 

 

(52.3

)

Net proceeds (payments) on long-term borrowings

 

 

104.0

 

 

 

59.5

 

 

 

(65.5

)

Purchases of businesses, net of cash acquired

 

 

(40.0

)

 

 

(122.2

)

 

 

-

 

Proceeds from exercises of stock options

 

 

15.1

 

 

 

9.7

 

 

 

5.2

 

Payments in satisfaction of employees' minimum tax obligations

 

 

(4.1

)

 

 

(2.0

)

 

 

(1.1

)

Payment on earnout consideration

 

 

(2.0

)

 

 

-

 

 

 

-

 

Purchases of treasury stock

 

 

-

 

 

 

(6.3

)

 

 

(12.7

)

Proceeds from the sale of business

 

 

-

 

 

 

45.0

 

 

 

-

 

Payments on holdback arrangements

 

 

-

 

 

 

-

 

 

 

(2.4

)

Other financing activities

 

 

-

 

 

 

0.6

 

 

 

0.4

 

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

 

 

0.3

 

 

 

(4.3

)

 

 

(2.1

)

Year Ended June 30,202020192018
Net cash provided by operating activities$297.3 $178.5 $161.0 
Proceeds on new long-term borrowings2,121.0 — — 
Proceeds from exercises of stock options13.5 8.7 10.5 
Proceeds from prior credit facility and other borrowings10.0 150.0 445.0 
Purchases of businesses, net of cash acquired(1,036.6)(83.1)(80.5)
Payments of Finisar Notes(560.1)— — 
Payments under prior term loan and credit facility(176.6)(135.0)(292.0)
Payments under new long-term borrowings and credit facility(137.9)— — 
Additions to property, plant & equipment(136.9)(137.1)(153.4)
Debt issuance costs(63.5)(5.6)(10.1)
Payments in satisfaction of employees' minimum tax obligations(28.7)(7.1)(6.6)
Common stock repurchases(1.6)(1.6)(49.9)
Effect of exchange rate changes on cash and cash equivalents and other items(11.7)(9.9)(48.9)

51


Net cash provided by operating activities:

Net cash provided by operating activities was $118.6$297.3 million and $123.0$178.5 million for the fiscal years ended June 30, 20172020 and 2016,2019, respectively. The decreaseincrease in cash flows provided by operating activities during the current fiscal year ended compared to the same period last fiscal year 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 provided by operating activities was $123.0$178.5 million and $129.4$161.0 million for the fiscal years ended June 30, 20162019 and 2015,2018, respectively. The decreaseincrease in cash flows from operating activities in fiscal year 2016 compared to the fiscal year 2015provided by operations was mostly due to a combination of higher net earnings as well as non-cash items such as depreciation, amortization, and share-based compensation expense and improved working capital requirements to accommodate the Company’s increased business activities.  

management of accounts payable.

Net cash (used in)used in investing activities:

Net cash used in investing activities was $177.2$1,179.3 million and $135.2$224.0 million for the fiscal years ended June 30, 20172020 and 2016,2019, respectively. Net cash used in investing activities during the current period primarily included $1,036.6 million for net cash paid for the acquisition of Finisar, and $136.9 million of cash paid for property, plant and equipment to increase capacity to meet the growing demand for the Company’s product portfolio.
Net cash used in investing activities was $224.0 million and $285.0 million for the fiscal years ended June 30, 2019 and 2018, respectively. The increasedecrease in cash used in investing activities was the result of increased levelslower level of capital expenditures of $138.5 millioninvestments in fiscal year 2017 compared to $58.2 million in fiscal year 2016 was primarily driven by additional capital expenditures to increase the Company’s capability to produce new optoelectronic devicesproperty, plant & equipment as it accelerates its new technology investment platform. Additionally, during fiscal year 2017, the Company purchased Integrated Photonics Inc., 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.

Net cash used in investing activities was $135.2 million and $52.2 million for the fiscal years ended June 30, 2016 and 2015, respectively. Net cash used in investing activities during the year ended June 30, 2016 consisted of $122.2 million paid for purchases of businesses, net of cash acquired, capital expenditures of $58.2 million offset by cash received for the sale of the RF business in the amount of $45.0 million. Net cash used in investing activities for fiscal year 2015 consisted entirely of capital expenditures.

continues to strategically allocate resources.

Net cash provided by (used in) financing activities:

Net cash provided by financing activities was $111.6$1,173.6 million for the year ended June 30, 20172020 compared to net cash provided by financing activities of $61.5$4.9 million for the year ended June 30, 2016. During2019. Net cash provided by financing activities during the current fiscal year 2017,included net borrowings on long-term debt of $1,256.4 million primarily to fund the Company borrowed $129.0 million to finance its current year acquisitions and investments in capital expenditures for its new VCSEL investment platform and other growth platforms. The Company alsoacquisition of Finisar, and $13.5 million of cash received $15.1 millionfrom exercises of proceeds from stock option exercises. Offsetting the increase inoptions.  Net 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 $1.4provided by financing activities was offset by $63.5 million of debt issuance costs associated with the Amendedincreased borrowings, $28.7 million of cash payments in satisfaction of employees’ minimum tax obligations from the vesting of equity awards and a $1.6 million payment to repurchase common stock through the Company's share repurchase program.
Net cash provided by financing activities was $4.9 million for the year ended June 30, 2019 compared to net cash provided by financing activities of $97.0 million for the year ended June 30, 2018. During the year ended June 30, 2019, the Company had net borrowings of $15.0 million. The Company realized $8.7 million of proceeds received from the exercise of stock options offset, by $7.1 million of cash payments in satisfaction of employees’ minimum tax obligations on the vesting of the Company’s restricted and performance shares during the current fiscal year.  In addition, the Company incurred approximately $1.6 million of purchases of treasury stock and $5.6 million of debt issuance costs associated with its pending financing of the cash consideration payable in connection with its Finisar acquisition.
Senior Credit Facility (as defined below)Facilities
On September 24, 2019, in connection with the Finisar acquisition, the Company entered into on July 28, 2016.

Company Credit Facilities

On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restateda Credit Agreement (the “Amended"Credit Agreement") 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 provides for senior secured financing of $2.425 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”) 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”).
52

The Credit Agreement also provides for a revolvingletter of credit facilitysub-facility not to exceed $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million.
The Company is obligated to repay the outstanding principal amount of $325 million, as well as a $100 million term loan. The term loan is being repaidthe Term A Facility in consecutive quarterly installments equal to 1.25% of the initial aggregate principal payments onamount of the first business day of each January, April, July and October,Term A Facility, 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 principaloutstanding balance due and payable on the maturity datefifth anniversary of July 2021. Amounts borrowed under the revolving credit facility areClosing Date. Similarly, the Company is obligated to repay the outstanding principal amount of the Term B Facility in quarterly installments equal to 0.25% of the initial aggregate principal amount of the Term B Facility, with the remaining outstanding balance due and payable on the maturity date.seventh anniversary of the Closing Date. The AmendedCompany is obligated to repay the aggregate principal amount of all outstanding revolving loans made under the Revolving Credit Facility is unsecured, but ison the fifth anniversary of the Closing Date.
The Company’s obligations under the Senior Credit Facilities are guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiary of the Company. Company’s existing or future direct and indirect domestic subsidiaries, including Finisar and its 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 will become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25% Convertible Senior Notes 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.
The Company hasvoluntarily may prepay, at any time or from time to time, any amounts outstanding under the optionSenior Credit Facilities in whole or in part without premium or penalty; except for the Term B Facility, pursuant to request an increasewhich in the event of (a) a repayment made before September 24, 2020, (b) the occurrence of a repricing event, or (c) a change to the sizelenders, the Company will be subject to a prepayment premium in an amount equal to one percent of: (i) the principal amount of the revolving credit facilityTerm B Facility that is prepaid under an optional or mandatory prepayment due to a repricing event, (ii) the aggregate outstanding principal amount of the Term B Facility resulting from an amendment to the Credit Agreement, and (iii) the principal amount of the Term B Facility that is mandatorily assigned. The Company may be subject to mandatory prepayment of amounts outstanding under the Senior Credit Facilities under certain circumstances, including in an aggregate additional amount notconnection with certain asset sales or other dispositions of property and debt issuances.
The Company also may be required to exceed $100 million. The Amended Creditprepay amounts under the Term B Facility has a five-year term through July 28, 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 Company’s excess cash flow (as calculated in accordance with the terms of the Credit Agreement) for the Company’s prior fiscal year beginning with its fiscal year ending June 30, 2020 and the Company’s consolidated secured net leverage ratio (as calculated in accordance with the terms of consolidated indebtednessthe Credit Agreement) as of the end of such fiscal year.
Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to consolidated EBITDA. Additionally,an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the Amendedhighest 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 Facility is subject toAgreement. The applicable interest rate would increase under certain covenants, including thosecircumstances relating to minimumevents 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 3.00:1.00. 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 Closing Date, commencing with the first full fiscal quarter after the Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and maximum leverage ratios.including the eighth fiscal quarter after the Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2017,2020, the Company was in compliance with all financial covenants under its Amendedthe Credit Facility. 

In conjunction with the Company’s Amended Credit Facility, theAgreement.

53

The Company incurred approximately $1.4$69.8 million of debt issuance costs whichin connection with the Senior Credit Facilities. The Company evaluated these costs to determine appropriate recognition of expense under Accounting Standards Codification 470, Debt to account for debt modification and extinguishment. As a result of the Company’s assessment, $65.8 million have been capitalized in the Consolidated Balance Sheet.  Debt extinguishment costs of $4.0 million were expensed in other expense (income), net in the Consolidated Statement of Earnings (Loss) during the twelve months ended June 30, 2020.  The Company expensed $2.9 million and $8.8 millionof capitalized debt issuance costs during the three and twelve months ended June 30, 2020, respectively, in interest expense in the Consolidated Statement of Earnings (Loss). The capitalized costs are being amortized to interest expense using the effective interest rate method from the issuance date of September 24, 2019, through the end of each facility. The unamortized debt issuance costs of $56.9 million as of June 30, 2020 are being amortized over five and seven years, for the termTerm A Facility and Revolving Credit Facility, and the Term B Facility, respectively.
On June 30, 2020, the Company announced its intention to offer, in concurrent underwritten public offerings, newly issued shares of its common stock and newly issued shares of its Series A Mandatory Convertible Preferred Stock. On July 7, 2020, the Company used the proceeds from the public offerings to pay off the remaining balance of $715.2 million of the agreement.

The Company’s yen denominated lineTerm B Loan Facility. See Note 21 for further details.

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 credit isthe Company at a 500 million Yen ($4.5 million) facility. The Yen line of credit matures in August 2020. The interest rateredemption price equal to one hundred percent (100%) of the Euro-Rate,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 Wells Fargo Bank, National Association, as 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/or shares of the Company’s common stock, subject to the terms of the Finisar Indenture.
Under the terms of the Finisar Indenture, the consummation and effectiveness of the Merger on the Closing Date constituted a Fundamental Change (as defined in the loan agreement,Finisar Indenture) and a Make-Whole Fundamental Change (as defined in the Finisar Indenture). Accordingly, in accordance with the terms of the Finisar Indenture, each holder of Finisar Notes had the right to (i) convert its Finisar Notes into cash and/or shares of Company Common Stock, at Finisar’s option, or (ii) require that Finisar repurchase such holder’s Finisar Notes for an amount in cash equal to one hundred percent (100%) of the principal amount of such Finisar Notes plus 1.00%accrued and unpaid interest.
Holders of approximately $560.1 million in aggregate principal amount of Finisar Notes exercised the repurchase right. The Company repurchased those Finisar Notes on October 23, 2019 for an aggregate consideration of approximately $561.1 million in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed $561.0 million under a delayed draw on its Term Loan A to 2.25%. At June 30, 2017 and 2016,fund the Company had 300 million yen outstanding underpayment to the lineholders of credit. Additionally,Finisar Notes that exercised the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios.repurchase right. As of June 30, 2017, the Company had $2.72020, approximately $14.9 million outstanding and was in compliance with all covenants under its Yen facility.

aggregate principal amount of Finisar Notes remain outstanding.

Aggregate Availability
The Company had aggregate availability of $73.5 million and $37.7$374.6 million under its lines of creditRevolving Credit Facility as of June 30, 2017 and 2016, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 2017 and 2016, total outstanding letters of credit supported by the credit facilities were $1.3 million and $1.2 million respectively.

2020.

Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 2.2%3.4% and 1.6% for the yearsyear ended June 30, 20172020 and 2016,2019, respectively. The weighted-average of total borrowings for the fiscal years ended June 30, 2017 and 2016 was $272.1 million and $193.7 million, respectively.


54


Share Repurchase Programs
In August 2014,2017, 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 $50.0$50 million of its Common Stock.common stock with a portion of the net proceeds received from the offering and sale of 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 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 has no expiration date and provides(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. Since inceptionDuring each of the repurchase programfiscal years ended June 30, 2020 and June 30, 2019, the Company purchased 50,000 shares of its common stock for $1.6 million under this program. As of June 30, 2020, the Company has repurchased 1,316,587cumulatively purchased 1,416,587 shares of its Common Stockcommon stock pursuant to the Program for approximately $19.0 million in$22.3 million. The dollar value of shares as of June 30, 2020 that may yet be purchased under the aggregate.

Program is approximately $27.7 million.

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

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

271.9

 

 

$

218.4

 

Available borrowing capacity

 

 

73.5

 

 

 

37.7

 

Total debt obligation

 

 

343.5

 

 

 

235.9

 


June 30, 2020June 30, 2019
Cash and cash equivalents$493.0 $204.9 
Available borrowing capacity374.6 211.9 
Total debt obligations2,255.3 467.0 

The Company believes cash flow from operations, existing cash reserves and additional available borrowing capacity from its Amended Credit Facilitycredit facilities and its recent equity raise will be sufficient to fund its needs for working capital, needs, capital expenditures, repayment of scheduled long-term borrowings and lease obligations, investments in internal research and development, share repurchases, and internal and external growth objectives at least through fiscal year 2018. 2021. Refer to Note 21 of the Company’s Consolidated Financial Statements for subsequent event information regarding use of proceeds from the underwritten public offerings in July 2020 and the impact to existing debt obligations.
The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United StatesStates. As of June 30, 2017,2020, the Company held approximately $245$350.8 million of cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the United States, but, under current law, would potentially be subject to United States federal income taxes, less applicable foreign tax credits. The Company has not recorded deferred income taxes related to the majority of its undistributed earnings outside of the United States, as the majority of the earnings of the Company’s foreign subsidiaries are indefinitely reinvested.

States.

55

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 6 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

 

$

343,513

 

 

$

20,000

 

 

$

43,834

 

 

$

279,679

 

 

$

-

 

Interest payments(1)

 

 

47,381

 

 

 

10,058

 

 

 

18,375

 

 

 

12,854

 

 

 

6,094

 

Capital lease obligation

 

 

24,489

 

 

 

1,069

 

 

 

2,349

 

 

 

2,664

 

 

 

18,407

 

Operating lease obligations(2)

 

 

66,600

 

 

 

14,400

 

 

 

22,900

 

 

 

11,400

 

 

 

17,900

 

Purchase obligations(3)(4)

 

 

29,227

 

 

 

25,918

 

 

 

3,309

 

 

 

-

 

 

 

-

 

Other long-term liabilities reflected on the balance sheet under GAAP

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

511,210

 

 

$

71,445

 

 

$

90,767

 

 

$

306,597

 

 

$

42,401

 

(1)

Interest payments represent variable rate interest obligations based on the interest rate in place at June 30, 2017 relating to the Amended Credit Facility 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 (4)
$2,342,951 $69,250 $498,388 $1,096,713 $678,600 
Interest payments (1) (4)
$262,554 $53,549 $101,431 $77,574 $30,000 
Operating lease obligations, including imputed interest$161,288 $31,100 $44,585 $33,287 $52,316 
Finance lease obligations, including imputed interest$32,199 $2,419 $5,040 $5,321 $19,419 
Purchase and sponsorship obligations (2) (3)
$199,660 $196,937 $2,723 $— $— 
Total$2,998,651 $353,255 $652,167 $1,212,895 $780,335 

(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, 2020 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 upon 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.

(3)Includes cash earn out opportunities based on certain acquisitions’ achieving agreed-upon financial, operational and technology targets, and the value of the net purchase option for the Company’s equity investment in a privately held company.

(4)Refer to Note 21. Subsequent Event for additional information regarding use of proceeds from the underwritten public offerings in July 2020.
Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $2.6 million in 2018. 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 1416 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, 2017, which are2020 has been excluded from the table above table, were $7.6 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.

56

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, Euro. and the Euro. The Company also has transactions denominated in Euros, British Pounds Sterling, Chinese Renminbi and Swiss Francs. The Company commenced certain techniques to limit its exposure to the Renminbi and Euro during fiscal year 2017.

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. Foreign currency exchange contracts are used to limit transactional exposure toMalaysian Ringgit. No significant changes in currency rates.

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 denominatedhave occurred 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 $12.7 milliontechniques and $9.2 million at June 30, 2017 and 2016, 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 $6.9 million to an increase of approximately $8.5 million for the year ended June 30, 2017.

Chinese Renminbi

During June 2017, the Company entered into a $50.0 million month-to-month forward contract that matured on June 30, 2017, to limit exposure to the Chinese Renminbi. Upon expiration of this contract, the Company recorded $1.1 million gain in the Consolidated Statement of Earnings.

Euro

During June 2017, the Company entered into a $25.0 million month-to-month forward contract that matured on June 30, 2017, to limit exposure to the Euro. Upon expiration of this contract, the Company recorded an immaterial gain in the Consolidated Statement of Earnings.

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 $1.7 million to an increase of $2.0 million for the year ended June 30, 2017.

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 rate, 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.

used.

Interest Rate Risks

Risk

As of June 30, 2017,2020, the Company’s total borrowings of $343.5 million were from a line of credit borrowing of $252.0 million denominated in U.S. dollars, a term loan denominated in U.S. dollars of $85.0 million, a line of credit borrowing of $2.7 million denominated in Japanese yen and a non-interest bearing note payable assumed ininclude variable rate borrowings, which exposes the acquisition of IPI of $3.8 million. As such, 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. If the Company had not hedged its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have changed net earnings by $1.3resulted in additional interest expense of $15.8 million or $0.02 per-share diluted, for the fiscal year ended June 30, 2017.

Discount Rate Risks

As of June 30, 2017, 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.



2020.

57

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 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 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 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, 2017.2020. 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 Integrated Photonics, Inc.Finisar Corporation, which was acquired on June 19, 2017.in September 2019. The recent acquisition excluded from management’s assessment of internal controls over financial reporting represented approximately $59.8 million $3.1 billion and $45.3 million$2.8 billion of total assets and net assets, respectively, as of June 30, 20172020, and approximately $1.3$938.4 million and $0.1$94.6 million of total revenues and net income,loss, respectively, for the fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2017,2020, 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, 2017.2020. Its report is included herein.



58

Report of Independent Registered Public Accounting Firm

The


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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, 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, 2020, 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 26, 2020 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 Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

59

Valuation of customer relationship and technology intangible assets in the acquisition of Finisar Corporation
Description of the Matter
As discussed in Note 3 to the consolidated financial statements, during the year ended June 30, 2020, the Company completed the acquisition of Finisar Corporation ("Finisar") for a total purchase price of approximately $2,908.5 million. The acquisition was accounted for as a business combination. The consideration paid in the acquisition must be allocated to the acquired assets and liabilities assumed generally based on their fair value with the excess of the purchase price over those fair values allocated to goodwill.

Auditing the Company’s accounting for its acquisition of Finisar was complex due to the significant estimation uncertainty involved in estimating the fair value of certain customer relationship and technology intangible assets. The total fair value ascribed to customer relationship and technology intangible assets amounted to $323.8 million and $334.7 million, respectively. The Company used the multi-period excess earnings method and the relief from royalty method to value the customer relationship and technology intangible assets, respectively. The significant assumptions used to estimate the fair value of customer relationships included the forecasted revenue growth and projected operating expenses inclusive of expected synergies, including future cost savings, and other benefits expected to be achieved by combining the Company and Finisar. The significant assumptions used to estimate the fair value of technology included the forecasted revenue growth and an estimated royalty rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for the acquisition of Finisar. For example, we tested controls that address the risks of material misstatement relating to the valuation of the customer relationship and technology intangible assets, including management’s review of the methods and significant assumptions used to develop such estimates.

To test the estimated fair value of the acquired customer relationship and technology intangible assets, our audit procedures included, among others, assessing the appropriateness of the valuation methodologies used, evaluating the significant assumptions discussed above, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For the forecasted revenue growth and projected operating expenses inclusive of expected synergies, including future cost savings, and other benefits expected to be achieved by combining the Company and Finisar, we compared the financial projections to current industry and economic trends, the historic financial performance of the acquired business, the Company’s history with other acquisitions, and forecasted performance of guideline public companies. We also performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from changes in the significant assumptions. We involved our valuation specialist to assist in evaluating the methodologies used to estimate the fair value of the customer relationship and technology intangible assets and to test certain significant assumptions, including the royalty rate, which included a comparison of the selected royalty rate to a range of royalty rates we identified by performing an independent search of comparable licensing agreements.

/s/ Ernst & Young LLP

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

Pittsburgh, Pennsylvania
August 26, 2020
60

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, 2017,2020, based on criteria established in Internal Control—IntegratedControl-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’Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, 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 Finisar Corporation (“Finisar”), which is included in the June 30, 2020 consolidated financial statements of the Company and constituted $3.1 billion and $2.8 billion of total and net assets, respectively, as of June 30, 2020 and $938.4 million and $94.6 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 Finisar.

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, 2020 and 2019, 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, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 26, 2020 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’sCompany’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 Public Company Accounting Oversight Board (United States).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.


61

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.

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 Integrated Photonics, Inc., which is included in the 2017 consolidated financial statements of II-VI Incorporated and Subsidiaries and constituted $59.8 million and $45.3 million of total and net assets, respectively, as of June 30, 2017 and approximately $1.3 million and $0.1 million of total revenues and net income, respectively, for the fiscal year then ended. Our audit of internal control over financial reporting of II-VI Incorporated and Subsidiaries also did not include an evaluation of the internal control over financial reporting of Integrated Photonics

In our opinion, II-VI Incorporated and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 2017 and 2016, and 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, 2017 of II-VI Incorporated and Subsidiaries and our report dated August 21, 2017 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP


Pittsburgh, PA

Pennsylvania

August 21, 2017

26, 2020

62

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of


II-VI Incorporated and Subsidiaries

We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 2017 and 2016, and 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, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of II-VI Incorporated and Subsidiaries at June 30, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), II-VI Incorporated and Subsidiaries' internal control over financial reporting as of June 30, 2017, 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 21, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Pittsburgh, PA

August 21, 2017


II-VI Incorporated and Subsidiaries

Consolidated Balance Sheets

($000)

June 30,

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

271,888

 

 

$

218,445

 

Accounts receivable - less allowance for doubtful accounts of $1,314 at June 30, 2017 and $2,016 at June 30, 2016

 

 

193,379

 

 

 

164,817

 

Inventories

 

 

203,695

 

 

 

175,133

 

Prepaid and refundable income taxes

 

 

6,732

 

 

 

6,535

 

Prepaid and other current assets

 

 

26,602

 

 

 

18,033

 

Total Current Assets

 

 

702,296

 

 

 

582,963

 

Property, plant & equipment, net

 

 

367,728

 

 

 

242,857

 

Goodwill

 

 

250,342

 

 

 

233,755

 

Other intangible assets, net

 

 

133,957

 

 

 

124,590

 

Investment

 

 

11,727

 

 

 

11,354

 

Deferred income taxes

 

 

3,023

 

 

 

7,848

 

Other assets

 

 

8,224

 

 

 

8,614

 

Total Assets

 

$

1,477,297

 

 

$

1,211,981

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

20,000

 

 

$

20,000

 

Accounts payable

 

 

65,540

 

 

 

53,796

 

Accrued compensation and benefits

 

 

58,178

 

 

 

59,012

 

Accrued income taxes payable

 

 

12,178

 

 

 

12,588

 

Other accrued liabilities

 

 

29,056

 

 

 

25,846

 

Total Current Liabilities

 

 

184,952

 

 

 

171,242

 

Long-term debt

 

 

322,022

 

 

 

215,307

 

Capital lease obligation

 

 

23,415

 

 

 

-

 

Deferred income taxes

 

 

15,345

 

 

 

11,103

 

Other liabilities

 

 

31,000

 

 

 

31,991

 

Total Liabilities

 

 

576,734

 

 

 

429,643

 

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 - 74,081,451 shares at June 30, 2017; 72,840,257 shares at June 30, 2016

 

 

269,638

 

 

 

243,812

 

Accumulated other comprehensive income (loss)

 

 

(13,778

)

 

 

(14,017

)

Retained earnings

 

 

748,062

 

 

 

652,788

 

 

 

 

1,003,922

 

 

 

882,583

 

Treasury stock, at cost - 10,940,062 shares at June 30, 2017 and 10,965,925 shares at June 30, 2016

 

 

(103,359

)

 

 

(100,245

)

Total Shareholders' Equity

 

 

900,563

 

 

 

782,338

 

Total Liabilities and Shareholders' Equity

 

$

1,477,297

 

 

$

1,211,981

 


June 30,20202019
Assets
Current Assets
Cash and cash equivalents$493,046 $204,872 
Accounts receivable - less allowance for doubtful accounts of $1,698 at June 30, 2020 and $1,292 at June 30, 2019598,124 269,642 
Inventories619,810 296,282 
Prepaid and refundable income taxes12,279 11,778 
Prepaid and other current assets65,710 30,337 
Total Current Assets1,788,969 812,911 
Property, plant & equipment, net1,214,772 582,790 
Goodwill1,239,009 319,778 
Other intangible assets, net758,368 139,324 
Investments73,767 76,208 
Deferred income taxes22,938 8,524 
Other assets136,891 14,238 
Total Assets$5,234,714 $1,953,773 
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt$69,250 $23,834 
Accounts payable268,773 104,462 
Accrued compensation and benefits157,557 71,847 
Operating lease current liabilities24,634 — 
Accrued income taxes payable33,341 20,476 
Other accrued liabilities119,338 49,944 
Total Current Liabilities672,893 270,563 
Long-term debt2,186,092 443,163 
Deferred income taxes45,551 23,913 
Operating lease liabilities94,701 — 
Other liabilities158,674 82,925 
Total Liabilities3,157,911 820,564 
Shareholders' Equity
Preferred stock, 0 par value; authorized - 5,000,000 shares; 0ne issued— — 
Common stock, 0 par value; authorized - 300,000,000 shares; issued - 105,916,068 shares at June 30, 2020; 76,315,337 shares at June 30, 20191,486,947 382,423 
Accumulated other comprehensive loss(87,383)(24,221)
Retained earnings876,552 943,581 
2,276,116 1,301,783 
Treasury stock, at cost - 13,356,447 shares at June 30, 2020 and 12,603,781 shares at June 30, 2019(199,313)(168,574)
Total Shareholders' Equity2,076,803 1,133,209 
Total Liabilities and Shareholders' Equity$5,234,714 $1,953,773 
See Notes to Consolidated Financial Statements.



63

II-VI Incorporated and Subsidiaries

Consolidated Statements of Earnings

(Loss)

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

($000, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

972,046

 

 

$

827,216

 

 

$

741,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs, Expenses and Other Expense (Income)

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

583,693

 

 

 

514,403

 

 

 

470,363

 

Internal research and development

 

 

96,810

 

 

 

60,354

 

 

 

51,260

 

Selling, general and administrative

 

 

176,002

 

 

 

160,646

 

 

 

143,539

 

Interest expense

 

 

6,809

 

 

 

3,081

 

 

 

3,863

 

Other expense (income), net

 

 

(10,056

)

 

 

(1,223

)

 

 

(6,176

)

Total Costs, Expenses and Other Expense (Income)

 

 

853,258

 

 

 

737,261

 

 

 

662,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Taxes

 

 

118,788

 

 

 

89,955

 

 

 

79,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

23,514

 

 

 

24,469

 

 

 

13,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

95,274

 

 

$

65,486

 

 

$

65,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

1.52

 

 

$

1.07

 

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

1.48

 

 

$

1.04

 

 

$

1.05

 


Year Ended June 30,202020192018
($000, except per share data)
Revenues$2,380,071 $1,362,496 $1,158,794 
Costs, Expenses and Other Expense (Income)
Cost of goods sold1,560,521 841,147 696,591 
Internal research and development339,073 139,163 116,875 
Selling, general and administrative440,998 233,518 208,565 
Interest expense89,409 22,417 18,352 
Other expense (income), net13,998 (2,562)(3,783)
Total Costs, Expenses and Other Expense (Income)2,443,999 1,233,683 1,036,600 
Earnings (Loss) Before Income Taxes(63,928)128,813 122,194 
Income Tax Expense3,101 21,296 34,192 
Net Earnings (Loss)$(67,029)$107,517 $88,002 
Basic Earnings (Loss) Per Share$(0.79)$1.69 $1.41 
Diluted Earnings (Loss) Per Share$(0.79)$1.63 $1.35 
See Notes to Consolidated Financial Statements.




64

II-VI Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income

(Loss)

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

95,274

 

 

$

65,486

 

 

$

65,975

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(2,275

)

 

 

(15,651

)

 

 

(8,497

)

Pension adjustment, net of taxes of $674, ($1,886), and $($602) for the years ended June 30, 2017, 2016, and 2015, respectively

 

 

2,514

 

 

 

(7,031

)

 

 

(2,244

)

Other comprehensive income (loss)

 

 

239

 

 

 

(22,682

)

 

 

(10,741

)

Comprehensive income

 

$

95,513

 

 

$

42,804

 

 

$

55,234

 


Year Ended June 30,202020192018
($000)
Net earnings (loss)$(67,029)$107,517 $88,002 
Other comprehensive income (loss):
Foreign currency translation adjustments(15,969)(14,319)7,152 
Change in fair value of interest rate swap(44,085)— — 
Pension adjustment, net of taxes of ($851), ($1,642) and $763 for the years ended June 30, 2020, 2019, and 2018, respectively(3,108)(6,122)2,846 
Other comprehensive income (loss)(63,162)(20,441)9,998 
Comprehensive income (loss)$(130,191)$87,076 $98,000 

See Notes to Consolidated Financial Statements.



65

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, 2014

 

 

70,935

 

 

$

 

213,573

 

 

$

 

19,406

 

 

$

 

521,327

 

 

 

(9,482

)

 

$

 

(79,263

)

 

$

 

675,043

 

Shares issued under share-based compensation plans

 

 

773

 

 

 

 

5,196

 

 

 

 

-

 

 

 

 

-

 

 

 

(75

)

 

 

 

(1,085

)

 

 

 

4,111

 

Net earnings

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

65,975

 

 

 

-

 

 

 

 

-

 

 

 

 

65,975

 

Purchases of treasury stock

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

(936

)

 

 

 

(12,729

)

 

 

 

(12,729

)

Treasury stock under deferred compensation arrangements

 

 

72

 

 

 

 

418

 

 

 

 

-

 

 

 

 

-

 

 

 

(72

)

 

 

 

(418

)

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

 

-

 

 

 

 

(8,497

)

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(8,497

)

Share-based compensation expense

 

 

-

 

 

 

 

11,340

 

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

11,340

 

Pension adjustment, net of taxes of ($602)

 

 

-

 

 

 

 

-

 

 

 

 

(2,244

)

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(2,244

)

APIC pool reclassification

 

 

-

 

 

 

 

(3,812

)

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(3,812

)

Tax deficiency from share-based compensation expense

 

 

-

 

 

 

 

(106

)

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(106

)

Balance - June 30, 2015

 

 

71,780

 

 

$

 

226,609

 

 

$

 

8,665

 

 

$

 

587,302

 

 

 

(10,565

)

 

$

 

(93,495

)

 

$

 

729,081

 

Shares issued under share-based compensation plans

 

 

1,046

 

 

 

 

9,653

 

 

 

 

-

 

 

 

 

-

 

 

 

(112

)

 

 

 

(2,004

)

 

 

 

7,649

 

Net earnings

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

65,486

 

 

 

-

 

 

 

 

-

 

 

 

 

65,486

 

Purchases of treasury stock

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

(381

)

 

 

 

(6,284

)

 

 

 

(6,284

)

Treasury stock under deferred compensation arrangements

 

 

14

 

 

 

 

(1,538

)

 

 

 

-

 

 

 

 

-

 

 

 

92

 

 

 

 

1,538

 

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

 

-

 

 

 

 

(15,651

)

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(15,651

)

Share-based compensation expense

 

 

-

 

 

 

 

9,675

 

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

9,675

 

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

 

Shares issued under share-based compensation plans

 

 

1,204

 

 

 

 

15,092

 

 

 

 

-

 

 

 

 

-

 

 

 

(159

)

 

 

 

(4,136

)

 

 

 

10,956

 

Net earnings

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

95,274

 

 

 

-

 

 

 

 

-

 

 

 

 

95,274

 

Treasury stock under deferred compensation arrangements

 

 

37

 

 

 

 

(1,022

)

 

 

 

-

 

 

 

 

-

 

 

 

185

 

 

 

 

1,022

 

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

 

-

 

 

 

 

(2,275

)

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

(2,275

)

Share-based compensation expense

 

 

-

 

 

 

 

11,756

 

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

 

11,756

 

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

 


Accumulated
Other
Common StockComprehensiveRetainedTreasury Stock
SharesAmountIncome (Loss)EarningsSharesAmountTotal
($000, including share amounts)
Balance - June 30, 201774,081 $269,638 $(13,778)$748,062 (10,940)$(103,359)$900,563 
Share-based and deferred compensation activities1,612 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, 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)
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 

See Notes to Consolidated Financial Statements.



66

II-VI Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

Year Ended June 30,202020192018

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities

Net earnings

 

$

95,274

 

 

$

65,486

 

 

$

65,975

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)Net earnings (loss)$(67,029)$107,517 $88,002 
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

 

 

50,894

 

 

 

44,324

 

 

 

41,114

 

Depreciation156,690 75,745 66,202 

Amortization

 

 

12,743

 

 

 

12,339

 

 

 

11,969

 

Amortization64,192 16,620 14,568 

Share-based compensation expense

 

 

11,756

 

 

 

9,675

 

 

 

11,340

 

Share-based compensation expense68,480 21,946 15,312 

Impairment of intangible assets

 

 

-

 

 

 

-

 

 

 

1,964

 

(Gains) losses on foreign currency remeasurements and transactions

 

 

(1,275

)

 

 

(51

)

 

 

2,178

 

Earnings from equity investment

 

 

(744

)

 

 

(29

)

 

 

(948

)

Amortization of discount on convertible debt and debt issuance costsAmortization of discount on convertible debt and debt issuance costs22,150 12,550 10,057 
Debt extinguishment expenseDebt extinguishment expense3,960 — — 
Gains on disposals of property, plant and equipmentGains on disposals of property, plant and equipment(1,461)— — 
Losses on foreign currency remeasurements and transactionsLosses on foreign currency remeasurements and transactions14,442 3,155 850 
Earnings from equity investmentsEarnings from equity investments(2,775)(3,214)(3,594)

Deferred income taxes

 

 

(1,184

)

 

 

977

 

 

 

(3,781

)

Deferred income taxes(42,454)(10,462)945 

Excess tax benefits from share-based compensation expense

 

 

-

 

 

 

(589

)

 

 

(335

)

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

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of investmentImpairment of investment4,980 — — 
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

 

 

(26,247

)

 

 

(20,770

)

 

 

(10,742

)

Accounts receivable(91,981)(50,764)(21,044)

Inventories

 

 

(24,992

)

 

 

(8,650

)

 

 

(4,207

)

Inventories112,572 (36,392)(38,732)

Accounts payable

 

 

6,704

 

 

 

5,715

 

 

 

61

 

Accounts payable45,026 15,999 17,436 

Income taxes

 

 

735

 

 

 

13,416

 

 

 

7,589

 

Income taxes40,061 366 7,380 

Other operating net assets

 

 

(5,048

)

 

 

1,127

 

 

 

7,189

 

Other operating net assets(29,561)25,409 3,632 

Net cash provided by operating activities

 

 

118,616

 

 

 

122,970

 

 

 

129,366

 

Net cash provided by operating activities297,292 178,475 161,014 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

Additions to property, plant & equipment

 

 

(138,517

)

 

 

(58,170

)

 

 

(52,313

)

Additions to property, plant & equipment(136,877)(137,122)(153,438)

Proceeds from the sale of business

 

 

-

 

 

 

45,000

 

 

 

-

 

Purchases of businesses, net of cash acquired

 

 

(40,015

)

 

 

(122,157

)

 

 

-

 

Purchases of businesses, net of cash acquired(1,036,609)(83,067)(80,503)

Other investing activities

 

 

1,291

 

 

 

161

 

 

 

67

 

Purchases of technology intangible assetsPurchases of technology intangible assets(3,750)— — 
Purchase of equity investments and other investing activitiesPurchase of equity investments and other investing activities(2,054)(3,787)(51,009)

Net cash used in investing activities

 

 

(177,241

)

 

 

(135,166

)

 

 

(52,246

)

Net cash used in investing activities(1,179,290)(223,976)(284,950)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

Proceeds from borrowings

 

 

129,000

 

 

 

125,200

 

 

 

3,000

 

Payments on borrowings

 

 

(25,000

)

 

 

(65,700

)

 

 

(68,500

)

Payment on earnout consideration

 

 

(2,000

)

 

 

-

 

 

 

-

 

Proceeds from borrowings of Term A FacilityProceeds from borrowings of Term A Facility1,241,000 — — 
Proceeds from borrowings of Term B FacilityProceeds from borrowings of Term B Facility720,000 — — 
Proceeds from borrowings of Revolving Credit FacilityProceeds from borrowings of Revolving Credit Facility160,000 — — 
Proceeds from borrowings under prior Credit FacilityProceeds from borrowings under prior Credit Facility10,000 150,000 100,000 
Proceeds from issuance of 0.25% convertible senior notes due 2022Proceeds from issuance of 0.25% convertible senior notes due 2022— — 345,000 
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)(292,000)
Payments on borrowings under Term A FacilityPayments on borrowings under Term A Facility(46,538)— — 
Payments on borrowings under Term B FacilityPayments on borrowings under Term B Facility(5,400)— — 
Payments on borrowings under Revolving Credit FacilityPayments on borrowings under Revolving Credit Facility(86,000)— — 
Debt issuance costsDebt issuance costs(63,510)(5,589)(10,061)

Proceeds from exercises of stock options

 

 

15,092

 

 

 

9,653

 

 

 

5,196

 

Proceeds from exercises of stock options13,467 8,698 10,469 
Common stock repurchasesCommon stock repurchases(1,625)(1,616)(49,875)

Payments in satisfaction of employees' minimum tax obligations

 

 

(4,136

)

 

 

(2,004

)

 

 

(1,089

)

Payments in satisfaction of employees' minimum tax obligations(28,700)(7,092)(6,564)

Debt issuance costs

 

 

(1,384

)

 

 

-

 

 

 

-

 

Purchases of treasury stock

 

 

-

 

 

 

(6,284

)

 

 

(12,729

)

Payments on holdback arrangements

 

 

-

 

 

 

-

 

 

 

(2,350

)

Other financing activities

 

 

-

 

 

 

587

 

 

 

408

 

Other financing activities(2,339)(4,524)— 

Net cash provided by (used in) financing activities

 

 

111,572

 

 

 

61,452

 

 

 

(76,064

)

Net cash provided by financing activitiesNet cash provided by financing activities1,173,625 4,877 96,969 

Effect of exchange rate changes on cash and cash equivalents

 

 

496

 

 

 

(4,445

)

 

 

(2,082

)

Effect of exchange rate changes on cash and cash equivalents(3,453)(1,542)2,117 

Net increase (decrease) in cash and cash equivalents

 

 

53,443

 

 

 

44,811

 

 

 

(1,026

)

Net increase (decrease) in cash and cash equivalents288,174 (42,166)(24,850)

Cash and Cash Equivalents at Beginning of Period

 

 

218,445

 

 

 

173,634

 

 

 

174,660

 

Cash and Cash Equivalents at Beginning of Period204,872 247,038 271,888 

Cash and Cash Equivalents at End of Period

 

$

271,888

 

 

$

218,445

 

 

$

173,634

 

Cash and Cash Equivalents at End of Period$493,046 $204,872 $247,038 
Cash paid for interestCash paid for interest$62,190 $8,680 $6,555 

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

 

 

$

-

 

 

$

-

 

Purchases of business - earnout consideration recorded in accrued liabilitiesPurchases of business - earnout consideration recorded in accrued liabilities$900 $4,397 $— 

Additions to property, plant & equipment included in accounts payable

 

$

4,428

 

 

$

-

 

 

$

-

 

Additions to property, plant & equipment included in accounts payable$21,801 $10,986 $12,313 

See Notes to Consolidated Financial Statements.




67

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 componenetscomponents 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. We are 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 we
operate. At the onset of the COVID-19 outbreak, we began focusing intensely on mitigating the adverse impacts of COVID-19
on our foreign and domestic operations starting by protecting our 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.

Business Segments. Effective July 1, 2019, the Company realigned its organizational structure into 2 reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. Refer to Note 14 for further information on reporting segments.
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.

The Company factored a portion of the accounts receivable of its Japan subsidiary during each of the years ended June 30, 2017 and 2016. Factoring is done with high credit quality financial institutions in Japan. During the years ended June 30, 2017 and 2016, $23.1 million and $20.5 million, respectively, of accounts receivable had been factored. As of June 30, 2017 and 2016, the amount included in Other accrued liabilities representing the Company’s obligation to the bank for these receivables factored with recourse was immaterial.

issues that it has identified.

Inventories. Inventories are valued at the lower of cost or market (“LCM”),net realizable value, with cost determined on the first-in, first-out basis. Inventory costs include material, labor and manufacturing overhead. Market cannot exceedIn evaluating the net realizable value (i.e., estimated selling price in the ordinary course of business less reasonably predicted costs of completion and disposal) and market shall not be less than net realizable value reduced by an allowance for an approximately normal profit margin. In evaluating LCM,inventory, management also considers, if applicable, other factors, as well, including known trends, market conditions, currency exchange rates and other such issues. The Company generally records ana reduction to the carrying value of inventory reserve 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 reservecharge may be recorded for product on hand that is in excess of product sold to customers over the same periods noted above. Inventories are presented net of reserves. The reserves totaled $18.5 million and $17.7 million at June 30, 2017 and 2016, respectively.


68


Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair market value upon acquisition. Major improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its 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 ASC 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 Notes 2 and 12 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.
On September 24, 2019, the Company completed the acquisition of Finisar Corporation (“Finisar”). The Company accountsCompany’s Consolidated Financial Statements include the operating results of Finisar from the date of acquisition. Refer to Note 3 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 contingency and not recognized in other expense (income), net until all contingencies have been satisfied.

Finisar acquisition.

Goodwill. The excess purchase price over the fair market 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 andand/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 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 two-step processquantitative 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 two-step process.quantitative assessment. Otherwise, the Company will forego the two-step processquantitative assessment and does not need to perform any further testing.

As of April 1 of fiscal years 2020 and 2019, 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 market 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.

Equity Method Investments.

69

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 has andetermines 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 investmentinterest in Guangdong Fuxin Electronic Technology based in Guangdong Province, China of 20.2%, whichthe 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 and 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 under ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of accounting. The total carrying valueFinancial 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 investment recorded at June 30, 2017voting shares and June 30, 2016 was $11.7 million and $11.4 million, respectively. During the years ended June 30, 2017, 2016 and 2015, the Company’s pro-rata share of earnings from this investment was $0.7 million, $0.1 million and $0.9 million, respectively, and was recorded indetermines that other expense (income), net in the Consolidated Statements of Earnings. During the years ended June 30, 2017, 2016 and 2015, the Company received dividends from this equity investment of $0.4 million, $0.6 million and $0.6 million, respectively.

holders do not have substantive participating rights.


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 no0 material loss contingency liabilities at June 30, 20172020 related to commitments and contingencies.

Accrued Bonus Compensation and Benefits. The Company records bonus and profit sharing estimates as a charge against earnings. These estimates are adjusted to actual based on final results of operations achieved during the fiscal year. Certain partial bonus amounts are paid on an interim basis, and the remainder is paid after the fiscal year end after the final determination of the applicable percentage or amounts. Other bonuses are paid annually.

Warranty Reserve. The Company records a warranty reserve as a charge against earnings based on a percentage of revenues utilizing actual returns over a period that approximates historical warranty experience with adjustments possible for changes in product lines or unusual conditions that come to the Company’s attention.  



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 adopted anCompany’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 (“Direct Ship Parts”) to the 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.
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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.

We establish an allowance for doubtful accounts based on historical experience and believe the collectionentity’s performance completed to date. The majority of revenues, net of this reserve, is reasonably assured. Our reserve estimate has historically been proven to be materially correct based upon actual charges incurred.

contracts typically require payment within 90 days.

The Company’sCompany's revenue recognition policy is consistently applied across the Company’sCompany's segments, product lines, and geographical locations. Further forFor the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions, creditsthe Company measures revenue based on the amount of consideration it expects to be entitled to in exchange for products, 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 less than 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 expensesexpenses. 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 accompanying Consolidated Statementsamount of Earnings. Total shippingproduct returns and handlingreduces revenue and costs included in revenues and in selling, general and administrative expenses were not significantat the time of shipment for the fiscal years ended June 30, 2017, 2016estimated 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 2015.

workmanship. The Company establishes an accrual for estimated warranty expenses at the time 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 the product or (2) a credit against future purchases.

Research and Development. Internal research and development costs and costs not related to customer and government funded research and development contracts are expensed 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.

Workers’ Compensation. The Company is self-insured for certain losses related to workers’ compensation for the majority of its U.S. employees. When estimating the self-insurance liability, the Company considers a number of factors, including historical claims experience, demographic and severity factors and valuations provided by independent third-party consultants. At least annually, management reviews its assumptions and valuations to determine the adequacy of the self-insurance liability.

Accumulated Other Comprehensive Income.Loss. Accumulated other comprehensive incomeloss 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 incomeloss is a component of shareholders’ equity and consists of accumulated foreign currency translation adjustments, changes in the fair value of ($8.4) million and ($6.2) million as of June 30, 2017 and 2016, respectively,interest rate swap derivative instruments, and pension adjustments of ($5.4) million and ($7.8) million as of June 30, 2017 and 2016, respectively.

adjustments.

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.

Capital Leases. 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 Capital lease obligations, 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 Statement of Earnings.

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Note 2.  Recently Issued Financial Accounting Standards

Adopted Pronouncements

Leases
In April 2015,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”("ASU") 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.2016-02, Leases (Topic 842). This ASU requires entitiesmodifies lease accounting for lessees to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability, consistent with debt discounts.increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted ASU 2015-03, as clarified by ASU 2015-15, which did not have a material impactthis standard on July 1, 2019, and has elected to utilize the Company’s Consolidated Financial Statements other than corresponding reductions to total assetsoptional transition method. See Note 12.
Derivatives and total liabilities on the Condensed Consolidated Balance Sheets. Prior to adoption, the Company recorded deferred financing costs as Other assets. Upon adoption, the Company reclassified these costs as a reduction to long term debt and retrospectively reclassified $0.6 million that were previously presented as deferred financing costs, an asset on the Consolidated Balance Sheets as of June 30, 2016. There was no effect on the Consolidated Statements of Earnings as a result of the adoption.

Hedging


In September 2015,August 2017, the FASB issued ASU 2015-16, Business Combinations2017-12, Derivatives and Hedging (Topic 805)815): Simplifying theTargeted Improvements to Accounting for Measurement-Period Adjustments. This update requires thatHedging Activities (“ASU 2017-12”), which more closely aligns an acquirer recognize adjustmentsentity’s risk management activities and financial reporting for hedging relationships through changes to provisional amounts that are identified duringboth the designation and measurement period inguidance for qualifying hedging relationships and the reporting period in which the adjustment amounts are determined.presentation of hedge results. The Company adopted this standard on July 1, 2019. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance about whether a cloud computing arrangement includes a software license. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update affects reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern. This update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The adoption of this ASU did not have a material effect on the Company’s Consolidated Financial Statements.


Revenue Recognition Pronouncement Currently Under Evaluation

In May 2014, the FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606) which supersedes virtually all existing revenue recognition guidance under U.S. GAAP. The update's core principle is 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 or services. The update allows for the use of either the retrospective or modified retrospective approach of adoption. On July 9, 2015, the FASB approved a one year deferral of the effective date of the update. The update will be effective for the Company’s 2019 fiscal year (July 1, 2018). In May 2016, the FASB issued an amendment which did not change the core principles of the guidance in Topic 606. Rather, the amendments in this update affect only narrow aspects of Topic 606.

We commenced our evaluation of the impact of the ASU in fiscal 2017 by evaluating its impact on selected contracts at each of our business segments.  As the ASU will supersede all existing revenue guidance affecting U.S. GAAP, it could impact revenue and cost recognition on our contracts across all our business segments, as well as our business processes and our information technology.  As a result, our evaluation of the effect of the ASU will extend through fiscal year 2018. To date, the Company has completed its assessment of its military related contracts that comprise approximately 10% of consolidated revenues and have tentatively concluded that the Company will accelerate the recognition of revenue under the ASU for these contracts as the customer obtains control of the goods or service promised in the contract. For the commercial portion of the Company’s business, we will complete our assessment in fiscal year 2018. Based upon our evaluation to date, we cannot currently estimate the impacts of adopting the ASU. We have periodically updated our Audit Committee on our progress made towards this adoption.  The Company will adopt this ASU using the modified retrospective method whereby the cumulative effect of applying the ASU would be recognized at the beginning of the year of adoption.

Other Pronouncements Currently Under Evaluation

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The new guidance will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The standard will be effective for the Company’s 2018 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, Consolidation (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. 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 January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This standard removes the second step of the goodwill impairment test, where a determination 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. The Company will adopt this for any impairment test performed after July 1, 2017 as permitted under the standard.

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. 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 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 Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.


In June 2016, the FASB issued ASUNo. 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 aboutInstruments (“ASU 2016-13”), which among other things, requires the measurement of all expected credit losses and other commitments to extend creditof financial assets held byat the reporting entity. The standard replaces the incurred loss impairment methodology indate based on historical experience, current GAAP with one that reflects expected credit lossesconditions, and requires consideration of a broader range of reasonable and supportable forecasts. Financial institutions and other organizations will now use forward looking information to better inform their credit loss estimates. The update will beIn addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for the Company’s 2021annual periods beginning after December 15, 2019, and interim periods within those fiscal year. Early adoption is permitted.years. The Company is evaluatinghas completed the evaluation of the impact of this guidance on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.2016-13. 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. The standard will be effective for the Company’s 2018 fiscal year. Early adoption is permitted. The adoption of this ASUpronouncement is not expected to have a material effect onimpact to the Company’s Consolidated Financial Statements.


In March 2016,October 2018, the FASB issued ASU 2016-07, Investments – Equity Method2018-16, Derivatives and Joint VenturesHedging (Topic 323)815): SimplifyingInclusion of the Transition toSecured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2018-16”), which permits the Equity Methoduse of Accounting. This update eliminates the requirement to retrospectively applyOIS rate based on SOFR as a U.S. benchmark interest rate eligible for hedge accounting purposes. For public business entities that already have adopted the equity methodamendments in previous periods when an investor obtains significant influence over an investee. The standard will beASU 2017-12, the amendments in ASU 2018-16 are effective for the Company’s 2018 fiscal year.years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The adoptionpermitted in any interim period upon issuance of this update if an entity already has adopted ASU 2017-12. The Company is not expected to have a material effect onin the Company’s Consolidated Financial Statements.

process of evaluating the impact of the update.


In February 2016,March 2020, the FASB issued ASU 2016-02, Leases2020-04, Reference Rate Reform (Topic 842)848): This update requires that a lessee recognize leased assets with terms greater than 12 monthsFacilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients to ease the balance sheetpotential burden of accounting for the rightseffects of reference rate reform as it pertains to contract modifications of debt and obligations created by those leases. The standard willlease contracts and derivative contracts identified in a hedging relationship. These amendments are effective immediately and may be effective for the Company’s 2020 fiscal year. Early adoption is permitted.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 guidance on the Company’s Consolidated Financial Statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Recognition and measurement of Financial Assets and Financial Liabilities (Topic 825): This update requires that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income. This ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. Early adoption is permitted. The standard will be effective for the Company’s 2018 fiscal year. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

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. The new inventory measurement requirements will be effective for the Company’s 2018 fiscal year and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.

pronouncement.

Note 2.

Acquisitions


Acquisition of Integrated Photonics, Inc.

In June 2017,

Note 3.  Acquisitions

Finisar Corporation
On September 24, 2019 (the “Closing Date”), the Company acquired all the outstanding sharescompleted its acquisition of Integrated Photonics, Inc. (“IPI”)Finisar, a privately held company based in New Jersey. IPI is aglobal technology leader in engineered magneto-optic materials that enable high-performance directionalfor subsystems and components such as optical isolators for the optical communications market. Underfiber optic communications.
Pursuant to the terms of the merger agreement,Agreement and Plan of Merger, dated as of November 8, 2018 (the “Merger Agreement”), Mutation Merger Sub Inc., a wholly owned subsidiary of the Company (“Merger Sub”), merged with and into Finisar (the “Merger”), with Finisar surviving the Merger. Each issued and outstanding share of Finisar’s common stock was automatically
72

cancelled and converted into the right to receive the following consideration (collectively, the “Merger Consideration”), at the election of the holder of the share of Finisar’s common stock:
•$26.00 in cash, without interest (the “Cash Consideration”),
•0.5546 of a share of the Company’s common stock (the “Stock Consideration”), or
•a combination of $15.60 in cash, without interest, and 0.2218 of a share of the Company’s common stock (the “Mixed Consideration”).

The per share Cash Consideration and Stock Consideration were subject to adjustment pursuant to the terms of the Merger Agreement such that the aggregate Merger Consideration consisted of initialapproximately 60.0% cash and approximately 40.0% shares of the Company’s common stock (assuming a per share price of the Company’s common stock equal to the closing price as of November 8, 2018, which was $46.88 per share) across all shares of Finisar’s common stock (the “Proration Adjustment”).  Following the Proration Adjustment, the resulting consideration for Cash Consideration was adjusted to $15.94 in cash and 0.2146 shares of the Company’s Common Stock. No adjustment was made to the Stock Consideration and Mixed Consideration.
The total fair value of consideration paid atin connection with the acquisition date of $39.4 million, netFinisar consisted of cash acquired and a working capital adjustment of $0.7 million. In addition, the agreement provides up to a maximum of $2.5following (in $000):
SharesPer ShareTotal Consideration
Cash paid for outstanding shares of Finisar common stock$1,879,086 
II-VI common shares issued to Finisar stockholders26,712,822 $36.98 987,707 
Replacement equity awards attributable to pre-combination service41,710 
$2,908,503 

The Company recorded $44.4 million of additional cash earnout opportunities based upon IPI achieving certain agreed upon financial and transitional objectives, which if earned would be payableacquisition related costs in the amountyear ended June 30, 2020, representing professional and other direct acquisition costs. These costs are recorded within selling, general, and administrative expense in our Consolidated Statements of $2.5Earnings (Loss).
On the Closing Date, the Company entered into an Amended and Restated Credit Agreement, dated as of September 24, 2019 (the “Credit Agreement”), by and among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lender parties thereto. Refer to Note 9 for additional information on the credit facility.
From the Closing Date, Finisar contributed $938.4 million of our consolidated revenue for the year ended June 30, 2020. Finisar’s contribution to our consolidated net loss for the year ended June 30, 2020 was a loss of $94.6 million. Finisar's contribution included amortization expense of $47.4 million for the achievementyear ended June 30, 2020. Finisar's contribution to our consolidated net loss includes $26.1 million of severance, restructuring, and related expense for the year ended June 30, 2020. Additionally, a $87.7 million fair value adjustment to inventory was expensed through cost of goods sold during the year ended June 30, 2020.
The Company allocated the fair value of the annual target.

purchase price consideration to the tangible assets, liabilities, and intangible assets acquired, based on estimated fair values. The following table presentsexcess purchase price over those fair values is recorded as goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates with respect to intangible assets. In determining the fair value of intangible assets acquired, the Company must make assumptions about the future performance of the acquired business, including among other things, the forecasted revenue growth attributable to the asset group and projected operating expenses inclusive of expected synergies, future cost savings, and other benefits expected to be achieved by combining the Company and Finisar. The Company’s intangible assets are comprised of customer relationships, trade names and developed technology. The estimated fair value of the customer relationships, trade names and developed technology are determined using the multi-period excess earnings method and relief from royalty methods. Both methods require forward looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future economic and market conditions. The estimated fair value of the developed technology is also dependent on the selection of the royalty rate used in the valuation method.

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Certain data necessary to complete 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. Any such revisions or changes may be material. The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price atallocation. Income-based valuation approaches included the dateuse of acquisition ($000):

the multi-period excess earnings and relief-from-royalty methods for certain acquired intangible assets.

Net cash paid at acquisition

 

$

39,436

 

Fair value of cash earnout arrangement

 

 

2,250

 

Purchase price

 

$

41,686

 


The following table presents theOur preliminary allocation of the purchase price of Finisar, based on the assets acquired and liabilities assumed at the date of acquisition, as the Company intends to finalize its accounting for the valuation of property, plant and equipment, identifiable intangibles and deferred income tax liabilities and anticipates completion of the valuation within one year from the date of the acquisition ($000):

Assets

 

 

 

 

Accounts receivable

 

$

2,083

 

Inventories

 

 

3,968

 

Prepaid and other assets

 

 

322

 

Property, plant & equipment

 

 

11,257

 

Intangible assets

 

 

22,213

 

Goodwill

 

 

17,107

 

Total assets acquired

 

$

56,950

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

846

 

Other accrued liabilities

 

 

1,032

 

Long-term debt assumed

 

 

3,834

 

Deferred tax liabilities

 

 

9,552

 

Total liabilities assumed

 

 

15,264

 

Net assets acquired

 

$

41,686

 

The goodwill of $17.1 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. Theestimated 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 for the year ended June 30, 2017.

The amount of revenues and net earnings of IPI included in the Company’s Consolidated Statement of Earnings since the acquisition was immaterial. Pro forma information was omitted due to the immaterial impact of IPI financial results.

Acquisition of DirectPhotonics Industries GmbH

During the quarter ended December 31, 2016, the Company purchased certain assets, mainly inventory and fixed assets, of DirectPhotonics Industries GmbH located in Berlin, Germany for approximately $0.6 million. This business was combined with the Company’s II-VI HIGHYAG division in the II-VI Laser Solutions segment. Due to the insignificant amount of the acquisition purchase price, certain business combinations disclosures typically required under U.S. GAAP have been omitted.

Acquisition of EpiWorks, Inc.

In February 2016, the Company acquired all the outstanding shares of EpiWorks, Inc. (“EpiWorks”) a privately held company based in Illinois. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $43.0 million, net of cash acquired and a working capital adjustment of $0.2 million. In addition, the agreement provided up 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 in the amount of $2.0 million for the achievement of each specific annual target over the next three years. EpiWorks develops and manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices and high-speed communication systems. EpiWorks is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.

The following table presents the allocation of the purchase price at the date of acquisition ($000):

Net cash paid at acquisition

 

$

42,981

 

Cash paid for working capital adjustment

 

 

163

 

Fair value of cash earnout arrangement

 

 

4,352

 

Purchase price

 

$

47,496

 


The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed as of the Closing Date, is as follows (in $000):

Preliminary Purchase Price Allocation
PreviouslyMeasurement
ReportedReclassificationPeriodAs Adjusted
September 30, 2019Adjustments
Adjustments (a)
(preliminary)
Cash and cash equivalents$842,764 $(287)$— $842,477 
Accounts receivable260,864 — (1,523)259,341 
Inventories437,867 — 1,841 439,708 
Property, plant & equipment (b)
748,858 — (91,145)657,713 
Intangible assets (c)
827,689 — (162,489)665,200 
Other assets (d) (h)
82,624 287 (6,443)76,468 
Deferred tax assets (e)
— — 16,267 16,267 
Accounts payable(123,707)— — (123,707)
Other accrued liabilities (d) (f) (h)
(148,425)(43,964)(9,727)(202,116)
Deferred tax liabilities (e)
(197,809)43,964 86,805 (67,040)
Debt(575,000)— — (575,000)
Goodwill759,239 — 159,953 919,192 
Total Purchase Price (g)
$2,914,964 $— $(6,461)$2,908,503 
(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 following measurement period adjustments were based upon information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of the amounts recognized at that date.

(b) The Company estimated the fair value of the property, plant, and equipment acquired as part of the Finisar acquisition to be $657.7 million. Upon finalization of the valuation, the fair value of the property, plant, and equipment was decreased by $91.1 million as of June 30, 2020 with a corresponding increase to goodwill.

(c) The Company estimated the fair value of the intangible assets acquired as part of the Finisar acquisition to be $665.2 million. Upon finalization of the valuation, the fair value of the intangible assets was decreased by $162.5 million as of June 30, 2020 with a corresponding increase to goodwill.

(d) The Company reassessed the lease term and discount rates on the right of use assets acquired as part of the Finisar acquisition. ($000):

As a result, the preliminary fair value of the right of use assets acquired were decreased by $16.0 million during the measurement period with a corresponding decrease in the lease liability.

Assets

 

 

 

 

Accounts receivable

 

$

2,121

 

Inventories

 

 

2,435

 

Prepaid and other assets

 

 

68

 

Property, plant & equipment

 

 

9,043

 

Intangible assets

 

 

14,124

 

Goodwill

 

 

27,588

 

Total assets acquired

 

$

55,379

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

605

 

Other accrued liabilities

 

 

859

 

Deferred tax liabilities

 

 

6,419

 

Total liabilities assumed

 

 

7,883

 

Net assets acquired

 

$

47,496

 


(e) The Company has adjusted its deferred tax asset and liability positions as of June 30, 2020, to $16.3 million and $67.0 million respectively, as a result of measurement period adjustments.

(f) In addition to the $16.0 million reduction of lease liabilities described in (d) above, the Company recorded approximately $11.5 million of uncertain tax positions, approximately $13.4 million of warranty reserve liabilities, and approximately $5.5 million of increases in other liabilities, as measurement period adjustments.

(g) Total purchase price decreased $6.5 million for the deferred tax impact of the purchase price component associated with replacement equity awards attributable to pre-combination service of Finisar employees.
74


(h) Other assets and other accrued liabilities increased $6.8 million for a litigation matter and related insurance recovery.
As of June 30, 2020, the goodwill has been recorded within the Photonic Solutions reporting unit. As of June 30, 2020, the other intangible assets have been recorded within the Photonic Solutions and Compound Semiconductors segments. The preliminary goodwill of $27.6$919.2 million is included inarising from the II-VI Laser Solutions segment andacquisition is attributed to the expected synergies, including future cost savings, and the assembled workforce of EpiWorks. Noneother benefits expected to be generated by combining II-VI and Finisar. Substantially all of the goodwill recognized is not expected to be deductible for income tax purposes. See Note 8 for additional information on goodwill and intangibles.
Supplemental Pro Forma Information (Unaudited)
The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, and is not indicative of future operating results or financial position.  The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.
The following unaudited supplemental pro forma information presents the combined results of operations for the years ended June 30, 2020 and 2019 as if Finisar had been acquired as of July 1, 2018.  The supplemental pro forma information includes adjustments to amortization and depreciation for acquired intangible assets, property, plant and equipment, adjustments to share-based compensation expense, fair value adjustments on the inventories acquired, transaction costs, and interest expense and amortization of accounts receivable acquired was $2.1 million withdebt issuance costs related to the gross contractual amount being $2.1 million. AtSenior Credit Facilities as defined in Note 9.
The unaudited supplemental pro forma financial information for the timeperiod presented is as follows (in $000):
Year Ended June 30, 2020Year Ended June 30, 2019
Revenue$2,638,278 $2,625,714 
Net Earnings (Loss)$12,902 $(138,452)

Note 4.  Other Investments
Purchase of acquisition, the Company expected to collect all of the accounts receivable. Equity Investment
The Company expensed transaction costsholds an equity investment in a privately-held company (“Equity Investment”), which it acquired for $51.5 million. The Company’s pro-rata share of $0.4earnings from this investment was $1.1 million and $1.3 million for the yearyears ended June 30, 2016.

The purchase price allocation was finalized in the 2017 first quarter2020 and did not result in any adjustments to the preliminary fair values.

Acquisition of ANADIGICS, Inc.

In March 2016, the Company acquired all the outstanding shares of ANADIGICS (Nasdaq:ANAD), which was a publicly traded company based in New Jersey. Under the terms of the merger agreement, the consideration consisted of both a working capital advance of $3.5 million2019, respectively, and cash paid of $78.2 million at the acquisition date, net of cash acquired of $2.7 million. ANADIGICS has a 6-inch gallium arsenide wafer fabrication capability allowing for the production of high performance lasers and integrated circuits in high volume. In addition, at the time of the acquisition, ANADIGICS designed and manufactured innovative radio frequency (RF) solutions for CATV infrastructure, small-cell, WIFI and cellular markets. The Company divested this portion of the business in June 2016. In conjunction with the sale of the RF business, the Company renamed ANADIGICS as II-VI Optoelectronic Devices Division. OED is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.

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

 

$

3,973

 

Inventories

 

 

8,322

 

Prepaid and other assets

 

 

2,347

 

Property, plant & equipment

 

 

25,810

 

Intangible assets

 

 

1,060

 

Goodwill

 

 

48,312

 

Total assets acquired

 

$

89,824

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

3,586

 

Other accrued liabilities

 

 

7,226

 

Total liabilities assumed

 

 

10,812

 

Net assets acquired

 

$

79,012

 


The goodwill of $48.3 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of ANADIGICS. None of the goodwill is deductible for income tax purposes. In conjunction with the June 3, 2016 sale of the RF business noted below, the Company disposed of $35.4 million of goodwill. The fair value of accounts receivable acquired was $4.0 million with the gross contractual amount being $4.0 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $2.9 million for the year ended June 30, 2016.

The purchase price allocation was finalized in the 2017 first quarter and did not result in any adjustments to the preliminary fair values.

Deferred Income Taxes

In connection with the acquisitions of EpiWorks and ANADGICS, the Company adopted an accounting policy 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. During fiscal year 2016, the Company recorded a $36.2 million valuation allowance within purchase accounting as a result of the Company incurring a cumulative U.S. three year loss.

Divesture of the RF Business of ANADIGICS

On June 3, 2016, the Company sold the RF business of ANADIGICS that it acquired on March 15, 2016. The consideration consisted of $45.0 million of cash received at closing, a working capital adjustment of $0.6 million to be received within 60 days after closing and $5.0 million contingent consideration to be earned based upon supplying minimum volumes of wafers to the purchaser over an 18-month period through December 2017. The $5.0 million contingent consideration will be recognized in net earnings when earned and received from the purchaser. The Company believes the sale of this non-strategic business will allow the Company to focus its financial resources and devote greater attention to the 6-inch wafer fab business. The Company incurred approximately $0.4 million in transaction expenses and recorded an immaterial gain of less than $0.1 million on the sale of the RF business.

The following table presents the carrying value of the assets and liabilities included as part of the disposal of the RF business of ANADIGICS ($000):

Assets

 

 

 

 

Inventories

 

$

5,378

 

Equipment

 

 

5,813

 

Goodwill

 

 

35,352

 

 

 

$

46,543

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

$

963

 

 

 

 

 

 

Total Consideration

 

$

45,580

 

In conjunction with the sale of the RF business, the Company recorded approximately $7.5 million of severance expense for employees of the business. The amount of revenue and net loss from the RF business of ANADIGICS from the acquisition date to the date of sale included in the Company’s Consolidated Statements of Earnings were $10.1 million and $8.4 million, respectively, for the year ended June 30, 2016.

Note 3.

Inventories

The components of inventories, net of reserves, were as follows:

June 30,

 

2017

 

 

2016

 

($000)

 

 

 

 

 

 

 

 

Raw materials

 

$

78,979

 

 

$

70,623

 

Work in progress

 

 

61,679

 

 

 

57,566

 

Finished goods

 

 

63,037

 

 

��

46,944

 

 

 

$

203,695

 

 

$

175,133

 


Note 4.

Property, Plant and Equipment

Property, plant and equipment consist of the following:

June 30,

 

2017

 

 

2016

 

($000)

 

 

 

 

 

 

 

 

Land and land improvements

 

$

5,667

 

 

$

4,990

 

Buildings and improvements

 

 

144,293

 

 

 

110,219

 

Machinery and equipment

 

 

492,042

 

 

 

409,551

 

Construction in progress

 

 

88,458

 

 

 

34,602

 

 

 

 

730,460

 

 

 

559,362

 

Less accumulated depreciation

 

 

(362,732

)

 

 

(316,505

)

 

 

$

367,728

 

 

$

242,857

 

During the quarter ended March 31, 2017, the Company sold its manufacturing facility located in Newport Ritchey, Florida. The Company received $1.7 million, net of customary closing costs and a $0.3 million reserve held in escrow for environmental purposes. The gain on sale of $0.3 million was recorded in other expense (income), net in the Consolidated StatementStatements of Earnings.

Depreciation expenseEarnings (Loss).

This investment is accounted for under the equity method of accounting. The following table summarizes the Company's equity in this nonconsolidated investment:
LocationInterest TypeOwnership % as of June 30, 2020Equity as of June 30, 2020 ($000)
USAEquity Investment93.8%$58,751 

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 $50.9acquired, 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.
75

As of June 30, 2020, the Company’s maximum financial statement exposure related to the Equity Investment was approximately $58.8 million, $44.3 millionwhich is included in Investments on the Consolidated Balance Sheet as of June 30, 2020.
In August 2020, the Company agreed to purchase the remaining 6.2% ownership from the minority holders.

Note 5.  Revenue from Contracts with Customers
The following table summarizes disaggregated revenue by market and $41.1 millionproduct for the fiscal yearsyear ended June 30, 2017, 20162020 ($000):
Year Ended June 30, 2020
Photonic SolutionsCompound SemiconductorsUnallocated & OtherTotal
Commercial
Direct Ship Parts$1,524,799 $607,318 $22,051 $2,154,168 
Services11,991 36,224 — 48,215 
U.S. Government
Direct Ship Parts— 158,790 — 158,790 
Services— 18,898 — 18,898 
Total Revenues$1,536,790 $821,230 $22,051 $2,380,071 

The following table summarizes disaggregated revenue by market and 2015, respectively.

product for the year ended June 30, 2019 ($000):

Year Ended June 30, 2019
Photonic SolutionsCompound SemiconductorsUnallocated & OtherTotal
Commercial
Direct Ship Parts$631,407 $563,102 $— $1,194,509 
Services7,482 14,164 — 21,646 
U.S. Government
Direct Ship Parts— 130,313 — 130,313 
Services— 16,028 — 16,028 
Total Revenues$638,889 $723,607 $— $1,362,496 
Contracts with the U.S. government disclosed above are through the U.S. Government's prime contractors.
Contract Liabilities

Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the year ended June 30, 2020, the Company recognized revenue of $9.4 million related to customer payments that were included in the consolidated balance sheet as of July 1, 2019. As of June 30, 2020, the Company had $38.7 million of contract liabilities recorded in the consolidated balance sheet.

76

Note 6.  Inventories
The components of inventories were as follows:
June 30,20202019
($000)
Raw materials$190,237 $119,917 
Work in progress298,577 101,091 
Finished goods130,996 75,274 
Total Inventories$619,810 $296,282 


Note 7.  Property, Plant & Equipment
Property, plant & equipment consists of the following:
June 30,20202019
($000)
Land and land improvements$18,396 $9,001 
Buildings and improvements345,736 249,238 
Machinery and equipment1,352,835 739,330 
Construction in progress111,394 71,425 
Finance lease right-of-use asset25,000 — 
1,853,361 1,068,994 
Less accumulated depreciation(638,589)(486,204)
Property, plant, and equipment, net$1,214,772 $582,790 
Included in the costtable above is a building acquired under a finance lease. As of June 30, 2020 and June 30, 2019, the accumulated depreciation of property, plantthe finance lease right-of-use asset was $5.8 million and equipment is the effect of foreign currency translation on the portion relating to the Company’s foreign subsidiaries.

$4.2 million, respectively.

Note 5.

Note 8.  Goodwill and Other Intangible Assets

Effective July 1, 2019, the Company realigned its organizational structure into 2 reporting segments for the purpose of
making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions.
All applicable information has been restated to reflect this change. See Note 14 for further information regarding this segment realignment.
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 market value at the date of acquisition.

Changes in the carrying amount of goodwill were as follows ($000):

 

Year Ended June 30, 2017

 

 

II-VI Laser

 

 

II-VI

 

 

II- VI Performance

 

 

 

 

 

Year Ended June 30, 2020

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Photonic SolutionsCompound SemiconductorsTotal

Balance-beginning of period

 

$

84,105

 

 

$

96,760

 

 

$

52,890

 

 

$

233,755

 

Balance-beginning of period$134,057 $185,721 $319,778 

Goodwill acquired

 

 

-

 

 

 

17,107

 

 

 

-

 

 

 

17,107

 

Goodwill acquired919,192 — 919,192 

Foreign currency translation

 

 

75

 

 

 

(595

)

 

 

-

 

 

 

(520

)

Foreign currency translation(755)794 39 

Balance-end of period

 

$

84,180

 

 

$

113,272

 

 

$

52,890

 

 

$

250,342

 

Balance-end of period$1,052,494 $186,515 $1,239,009 

 

 

Year Ended June 30, 2016

 

 

 

II-VI Laser

 

 

II-VI

 

 

II- VI Performance

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Total

 

Balance-beginning of period

 

$

43,578

 

 

$

99,426

 

 

$

52,890

 

 

$

195,894

 

Goodwill acquired

 

 

75,900

 

 

 

-

 

 

 

-

 

 

 

75,900

 

Goodwill attributed to the RF business sold

 

 

(35,352

)

 

 

-

 

 

 

-

 

 

 

(35,352

)

Foreign currency translation

 

 

(21

)

 

 

(2,666

)

 

 

-

 

 

 

(2,687

)

Balance-end of period

 

$

84,105

 

 

$

96,760

 

 

$

52,890

 

 

$

233,755

 


The Company reviews the recoverability of goodwill at least annually and any time business conditions indicate a potential change in recoverability. The measurement of a potential impairment begins with comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill). The Company primarily used a discounted cash flow (DCF) model and 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. The Company has the option to perform a qualitative assessment of goodwill 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. As of April 1 of fiscal years 2017 and 2016, the Company completed its annual impairment tests of its reporting units. Based on the results of these analyses, the Company’s goodwill was not impaired.


77


Year Ended June 30, 2019
Photonic SolutionsCompound SemiconductorsTotal
Balance-beginning of period$109,670 $161,008 $270,678 
Goodwill acquired26,069 25,569 51,638 
Foreign currency translation(1,682)(856)(2,538)
Balance-end of period$134,057 $185,721 $319,778 

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 20172020 and 20162019 were as follows ($000):

 

 

June 30, 2017

 

 

June 30, 2016

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

Carrying

 

 

Accumulated

 

 

Book

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

Technology and Patents

 

$

65,438

 

 

$

(27,313

)

 

$

38,125

 

 

$

54,344

 

 

$

(22,724

)

 

$

31,620

 

Trade Names

 

 

15,806

 

 

 

(1,340

)

 

 

14,466

 

 

 

15,869

 

 

 

(1,209

)

 

 

14,660

 

Customer Lists

 

 

123,058

 

 

 

(41,740

)

 

 

81,318

 

 

 

112,141

 

 

 

(33,912

)

 

 

78,229

 

Other

 

 

1,571

 

 

 

(1,523

)

 

 

48

 

 

 

1,571

 

 

 

(1,490

)

 

 

81

 

Total

 

$

205,873

 

 

$

(71,916

)

 

$

133,957

 

 

$

183,925

 

 

$

(59,335

)

 

$

124,590

 


June 30, 2020June 30, 2019
Gross
Carrying
Amount		Accumulated
Amortization		Net
Book
Value		Gross
Carrying
Amount		Accumulated
Amortization		Net
Book
Value
Technology$444,315 $(68,048)$376,267 $91,637 $(39,679)$51,958 
Trade Names22,369 (3,669)18,700 15,759 (1,601)14,158 
Customer Lists456,223 (92,822)363,401 132,872 (59,664)73,208 
Other1,570 (1,570)— 1,572 (1,572)— 
Total$924,477 $(166,109)$758,368 $241,840 $(102,516)$139,324 

Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 was $12.7$64.2 million, $12.3$16.6 million, and $12.0$14.6 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 100133 months. The customer lists are being amortized over 60 to 240 months with a weighted-average remaining life of approximately 149134 months.


In conjunction with the acquisitionsacquisition of IPI,Finisar, the Company recorded $11.3 million of technology and patents and $10.9 million of customer lists. The intangibles were recorded based on the Company’s preliminary purchase price allocation which is expected to be finalized within one year from the date of the acquisition.

following intangible assets ($000):

Gross Carrying AmountWeighted Average Assigned Useful Life (Years)
Technology$334,700 12.5
Trade Names6,700 3.0
Customer Lists323,800 10.2
$665,200 
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade names of $14.0$14.3 million as of June 30, 20172020 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 20172020 and 2016.2019. Based on the results of these tests, the trade names were not impaired in fiscal years 2017 and 2016.  

During the year ended June 30, 2015, the Company recognized an impairment charge on two of its indefinite lived trade names in the II-VI Photonics reporting unit as these trade names were abandoned as a result of the Company’s rebranding efforts. Total impairment recorded during the year ended June 30, 2015 was $2.0 million, which represented the entire carrying value of these two trade names and was recorded in other expense (income), net in the Consolidated Statements of Earnings.

Included in the gross carrying amount and accumulated amortization of the Company’s technology and patents, customer list and other component of intangible assets and goodwill is the effect of the foreign currency translation on the portion relating to the Company’s German and China subsidiaries. impaired.

The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows ($000):

Year Ending June 30,

 

 

 

 

 

 

Year Ending June 30,

2018

 

 

 

$

13,800

 

2019

 

 

 

 

13,500

 

2020

 

 

 

 

12,500

 

2021

 

 

 

 

11,800

 

2021$77,011 

2022

 

 

 

 

10,300

 

202274,252 
2023202373,380 
2024202464,394 
2025202562,334 

Note 6.

Debt


78

Note 9.  Debt
The components of debt for the periods indicated were as follows ($000):

June 30,

 

2017

 

 

2016

 

Line of credit, interest at LIBOR, as defined, plus 1.5%

 

$

252,000

 

 

$

188,000

 

Term loan, interest at LIBOR, as defined, plus 1.5%

 

 

85,000

 

 

 

45,000

 

Yen denominated line of credit, interest at LIBOR, as

   defined, plus 0.625%

 

 

2,679

 

 

 

2,917

 

Note payable assumed in IPI acquisition

 

 

3,834

 

 

 

-

 

Total debt

 

 

343,513

 

 

 

235,917

 

Current portion of long-term debt

 

 

(20,000

)

 

 

(20,000

)

Unamortized debt issuance costs

 

 

(1,491

)

 

 

(610

)

Long-term debt, less current portion

 

$

322,022

 

 

$

215,307

 



June 30, 2020June 30, 2019
Term A Facility, interest at LIBOR, as defined, plus 2.00%$1,194,463 $— 
Revolving Credit Facility, interest at LIBOR, as defined, plus 2.00%74,000 — 
Debt issuance costs, Term A Facility and Revolving Credit Facility(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 — 
0.25% convertible senior notes345,000 345,000 
0.25% convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount(30,688)(43,859)
Term loan, interest at LIBOR, as defined, plus 1.75%— 45,000 
Line of credit, interest at LIBOR, as defined, plus 1.75%— 115,000 
Credit facility unamortized debt issuance costs— (761)
Yen denominated line of credit, interest at LIBOR, as defined, plus 1.75%— 2,783 
Note payable assumed in IPI acquisition— 3,834 
Total debt2,255,342 466,997 
Current portion of long-term debt(69,250)(23,834)
Long-term debt, less current portion$2,186,092 $443,163 
The scheduled maturities of principal amounts of debt obligations for the next five years and thereafter is as follows ($000):

Year Ending
June 30,
2021$69,250 
202284,138 
2023414,250 
202469,250 
20251,027,463 
Thereafter678,600 
Total$2,342,951 

Senior Credit Facilities
On July 28, 2016,September 24, 2019, in connection with the Finisar acquisition, the Company amended and restated its existing credit agreement. The Third Amended and Restatedentered into a Credit Agreement (the “Amended"Credit Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.
79

The Credit Agreement provides for senior secured financing of $2.425 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”) 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 revolvingletter of credit facilitysub-facility not to exceed $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million.
The Company is obligated to repay the outstanding principal amount of $325 million, as well as a $100 million term loan. The term loan is being repaidthe Term A Facility in consecutive quarterly installments equal to 1.25% of the initial aggregate principal payments onamount of the first business day of each January, April, July and October,Term A Facility, 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 principaloutstanding balance due and payable on the maturity datefifth anniversary of July 2021. Amounts borrowed under the revolving credit facility areClosing Date. Similarly, the Company is obligated to repay the outstanding principal amount of the Term B Facility in quarterly installments equal to 0.25% of the initial aggregate principal amount of the Term B Facility, with the remaining outstanding balance due and payable on the maturity date.seventh anniversary of the Closing Date. The AmendedCompany is obligated to repay the aggregate principal amount of all outstanding revolving loans made under the Revolving Credit Facility is unsecured, but ison the fifth anniversary of the Closing Date.
The Company’s obligations under the Senior Credit Facilities are guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiary of the Company. Company’s existing or future direct and indirect domestic subsidiaries, including Finisar and its 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 will become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25% Convertible Senior Notes 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.
The Company hasvoluntarily may prepay, at any time or from time to time, any amounts outstanding under the optionSenior Credit Facilities in whole or in part without premium or penalty; except for the Term B Facility, pursuant to request an increasewhich in the event of (a) a repayment made before September 24, 2020, (b) the occurrence of a repricing event, or (c) a change to the sizelenders, the Company will be subject to a prepayment premium in an amount equal to one percent of: (i) the principal amount of the revolving credit facilityTerm B Facility that is prepaid under an optional or mandatory prepayment due to a repricing event, (ii) the aggregate outstanding principal amount of the Term B Facility resulting from an amendment to the Credit Agreement, and (iii) the principal amount of the Term B Facility that is mandatorily assigned. The Company may be subject to mandatory prepayment of amounts outstanding under the Senior Credit Facilities under certain circumstances, including in an aggregate additional amount notconnection with certain asset sales or other dispositions of property and debt issuances.
The Company also may be required to exceed $100 million. The Amended Creditprepay amounts under the Term B Facility has a five-year term through July 28, 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 Company’s excess cash flow (as calculated in accordance with the terms of the Credit Agreement) for the Company’s prior fiscal year beginning with its fiscal year ending June 30, 2020 and the Company’s consolidated secured net leverage ratio (as calculated in accordance with the terms of consolidated indebtednessthe Credit Agreement) as of the end of such fiscal year.
Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to consolidated EBITDA. Additionally,an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the Amendedhighest 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 Facility is subject toAgreement. The applicable interest rate would increase under certain covenants, including thosecircumstances relating to minimumevents 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.
80

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 3.00:1.00. 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 Closing Date, commencing with the first full fiscal quarter after the Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and maximum leverage ratios.including the eighth fiscal quarter after the Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2017,2020, the Company was in compliance with all financial covenants under its Amendedthe Credit Facility.  

Agreement.

The Company incurred $69.8 million of debt issuance costs in connection with the Senior Credit Facilities. The Company evaluated these costs to determine appropriate recognition of expense under Accounting Standards Codification 470, Debt, to account for debt modification and extinguishment. As a result of the Company’s Yen denominated lineassessment, $65.8 million have been capitalized in the Consolidated Balance Sheet. Debt extinguishment costs of credit is a 500$4.0 million Yen ($4.9 million)were expensed in other expense (income), net in the Consolidated Statements of Earnings (Loss) during the year ended June 30, 2020.  The Company expensed $8.8 millionof capitalized debt issuance costs during the year ended June 30, 2020, in interest expense in the Consolidated Statements of Earnings (Loss). The capitalized costs are being amortized to interest expense using the effective interest rate method from the issuance date of September 24, 2019, through the end of each facility. The Yen lineunamortized discount amounted to $56.9 million as of credit matures August 2020. The interest rateJune 30, 2020 and is being amortized over five and seven years, for the Term A Facility and Revolving Credit Facility, and the Term B Facility, respectively.
On June 30, 2020, the Company announced its intention to offer, in concurrent underwritten public offerings, newly issued shares of its common stock and newly issued shares of its Series A Mandatory Convertible Preferred Stock. On July 7, 2020, the Company used the proceeds from the public offerings to pay off the remaining balance of $715 million of the Term B Loan Facility. See Note 21 for further details.
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 Euro-Rate,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/or shares of the Company’s common stock, subject to the terms of the Finisar Indenture.
Under the terms of the Finisar Indenture, the consummation and effectiveness of the Merger on the Closing Date constituted a Fundamental Change (as defined in the loan agreement,Finisar Indenture) and a Make-Whole Fundamental Change (as defined in the Finisar Indenture). Accordingly, in accordance with the terms of the Finisar Indenture, each holder of Finisar Notes had the right to (i) convert its Finisar Notes into cash and/or shares of Company Common Stock, at Finisar’s option, or (ii) require that Finisar repurchase such holder’s Finisar Notes for an amount in cash equal to one hundred percent (100)% of the principal amount of such Finisar Notes plus 1.00%accrued and unpaid interest.
Holders of approximately $560.1 million in aggregate principal amount of Finisar Notes exercised the repurchase right. The Company repurchased those Finisar Notes on October 23, 2019 for an aggregate consideration of approximately $561.1 million in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed $561.0 million under a delayed draw on its Term Loan A to 2.25%. At  June 30, 2017,fund the Company had 300 million yen outstanding underpayment to the lineholders of credit. Additionally,Finisar Notes that exercised the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios.repurchase right. As of June 30, 2020, approximately $14.9 million in aggregate principal amount of Finisar Notes remain outstanding.
81

0.25% Convertible Senior Notes
In August 2017, the Company had $2.7issued and sold $345 million outstandingaggregate principal amount of 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.
As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount. 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.
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 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 $346.2 million as of June 30, 2020 and $268.0 million as of June 30, 2019 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended). 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. As of June 30, 2020, the II-VI Notes are not yet convertible based upon the II-VI Notes’ conversion features.  Holders of the II-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.
The following table sets forth total interest expense recognized related to the II-VI Notes for the years ended June 30, 2020, 2019 and 2018:
Year Ended
June 30, 2020		Year Ended
June 30, 2019		Year Ended
June 30, 2018
0.25% contractual coupon$876 $874 $731 
Amortization of debt discount and debt issuance costs including initial purchaser discount13,172 12,550 10,058 
Interest expense$14,048 $13,424 $10,789 

The effective interest rate on the liability component for the periods presented was in compliance with all financial covenants under its Yen facility.

4.5%. The unamortized discount amounted to $26.8 million as of June 30, 2020, and is being amortized over 3 years.

Aggregate Availability
The Company had aggregate availability of $73.5 million and $37.7$374.6 million under its linesline of credit as of June 30, 2017 and 2016, respectively. 2020.
Weighted Average Interest Rate
The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30, 2017 and 2016, total outstanding letters of credit supported by the credit facilities were $1.3 million and $1.2 million, respectively.

The weighted-averageweighted average interest rate of total borrowings was 3.4% and 1.6% for each of the years ended June 30, 20172020 and 2016 was 2.2% and 1.6%,2019, respectively. The weighted-average of total borrowings for the fiscal years ended June 30, 2017 and 2016 was $272.1 million and $193.7 million, respectively.

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, 2017 and 2016, 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, 2017 and June 30, 2016. At June 30, 2017 and 2016, 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, 2017 and 2016, respectively.

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 May 2019.

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, 2017, 2016 and 2015 were $6.1 million, $3.1 million and $4.0 million, respectively.

Remaining annual principal payments under the Company’s existing credit facilities and note payable as of June 30, 2017 were as follows ($000):

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar

 

 

 

 

 

 

 

 

 

 

 

Term

 

 

Yen Line

 

 

Line of

 

 

Note

 

 

 

 

 

Period

 

Loan

 

 

of Credit

 

 

Credit

 

 

Payable

 

 

Total

 

Year 1

 

$

20,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

20,000

 

Year 2

 

 

20,000

 

 

 

-

 

 

 

-

 

 

 

3,834

 

 

$

23,834

 

Year 3

 

 

20,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

$

20,000

 

Year 4

 

 

20,000

 

 

 

2,679

 

 

 

-

 

 

 

-

 

 

$

22,679

 

Year 5

 

 

5,000

 

 

 

-

 

 

 

252,000

 

 

 

-

 

 

$

257,000

 

Thereafter

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

$

-

 

Total

 

$

85,000

 

 

$

2,679

 

 

$

252,000

 

 

$

3,834

 

 

$

343,513

 


Note 7.

Income Taxes


Note 10.  Income Taxes

The components of earnings (losses)(loss) before income taxes were as follows:

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

Year Ended June 30,202020192018

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

U.S. loss

 

$

(6,944

)

 

$

(5,809

)

 

$

(5,326

)

U.S. loss$(302,027)$(34,241)$(15,207)

Non-U.S. income

 

 

125,732

 

 

 

95,764

 

 

 

84,438

 

Non-U.S. income238,099 163,054 137,401 

Earnings before income taxes

 

$

118,788

 

 

$

89,955

 

 

$

79,112

 

Earnings (loss) before income taxesEarnings (loss) before income taxes$(63,928)$128,813 $122,194 

82

The components of income tax expense were as follows:

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

Year Ended June 30,202020192018

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Current:

Federal

 

$

2,133

 

 

$

3,704

 

 

$

(146

)

Federal$7 $1,755 $699 

State

 

 

253

 

 

 

5

 

 

 

86

 

State496 472 401 

Foreign

 

 

22,312

 

 

 

19,783

 

 

 

16,978

 

Foreign45,052 29,531 32,147 

Total Current

 

$

24,698

 

 

$

23,492

 

 

$

16,918

 

Total Current$45,555 $31,758 $33,247 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred:

Federal

 

$

(6,963

)

 

$

2,759

 

 

$

(2,762

)

Federal$(43,955)$(3,764)$(3,064)

State

 

 

(1,251

)

 

 

1,302

 

 

 

(251

)

State1,007 (2,010)1,615 

Foreign

 

 

7,030

 

 

 

(3,084

)

 

 

(768

)

Foreign494 (4,688)2,394 

Total Deferred

 

$

(1,184

)

 

$

977

 

 

$

(3,781

)

Total Deferred$(42,454)$(10,462)$945 

Total Income Tax Expense

 

$

23,514

 

 

$

24,469

 

 

$

13,137

 

Total Income Tax Expense$3,101 $21,296 $34,192 


Principal items comprising deferred income taxes were as follows:

June 30,

 

2017

 

 

2016

 

June 30,20202019

($000)

 

 

 

 

 

 

 

 

($000)

Deferred income tax assets

 

 

 

 

 

 

 

 

Deferred income tax assets

Inventory capitalization

 

$

6,338

 

 

$

6,814

 

Inventory capitalization$19,372 $5,687 
Interest rate swapInterest rate swap9,847 — 

Non-deductible accruals

 

 

1,705

 

 

 

2,212

 

Non-deductible accruals9,325 1,251 

Accrued employee benefits

 

 

9,738

 

 

 

15,543

 

Accrued employee benefits11,095 9,797 

Net-operating loss and credit carryforwards

 

 

53,048

 

 

 

43,516

 

Net-operating loss and credit carryforwards182,625 54,192 

Share-based compensation expense

 

 

12,386

 

 

 

11,693

 

Share-based compensation expense8,110 7,192 

Other

 

 

1,761

 

 

 

1,770

 

Other9,736 5,488 
Right of use assetRight of use asset31,573 — 

Valuation allowances

 

 

(42,562

)

 

 

(42,641

)

Valuation allowances(54,559)(16,558)

Total deferred income tax assets

 

$

42,414

 

 

$

38,907

 

Total deferred income tax assets$227,124 $67,049 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

Deferred income tax liabilities

Tax over book accumulated depreciation

 

$

(7,803

)

 

$

(9,759

)

Tax over book accumulated depreciation$(25,926)$(28,184)

Intangible assets

 

 

(38,108

)

 

 

(29,628

)

Intangible assets(160,577)(28,202)

Tax on unremitted earnings

 

 

(6,210

)

 

 

(797

)

Tax on unremitted earnings(21,785)(11,662)
Convertible debtConvertible debt(6,006)(8,662)
Lease liabilityLease liability(29,768)— 

Other

 

 

(2,615

)

 

 

(1,978

)

Other(5,676)(5,728)

Total deferred income tax liabilities

 

$

(54,736

)

 

$

(42,162

)

Total deferred income tax liabilities$(249,738)$(82,438)

Net deferred income taxes

 

$

(12,322

)

 

$

(3,255

)

Net deferred income taxes$(22,614)$(15,389)



83




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,

 

2017

 

 

%

 

 

2016

 

 

%

 

 

2015

 

 

%

 

Year Ended June 30,2020%2019%2018%

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($000)     

Taxes at statutory rate

 

$

41,576

 

 

 

35

 

 

$

31,484

 

 

 

35

 

 

$

27,689

 

 

 

35

 

Taxes at statutory rate$(13,425)21 $27,051 21 $34,284 28 

Increase (decrease) in taxes resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in taxes resulting from:

State income taxes-net of federal benefit

 

 

(641

)

 

 

-

 

 

 

864

 

 

 

1

 

 

 

(196

)

 

 

-

 

State income taxes-net of federal benefit1,194 (2)(1,212)(1)1,426 1 

Taxes on non U.S. earnings

 

 

(12,907

)

 

 

(11

)

 

 

(13,860

)

 

 

(15

)

 

 

(11,687

)

 

 

(15

)

Taxes on non U.S. earnings(915)1 (5,857)(5)(16,058)(13)

Valuation allowance

 

 

(806

)

 

 

(1

)

 

 

8,464

 

 

 

9

 

 

 

678

 

 

 

1

 

Valuation allowance(9,365)15 (6,703)(5)(6,008)(5)

Research and manufacturing incentive deductions

 

 

(3,346

)

 

 

(3

)

 

 

(3,074

)

 

 

(3

)

 

 

(2,573

)

 

 

(3

)

Research and manufacturing incentive deductions and creditsResearch and manufacturing incentive deductions and credits(15,836)25 (11,756)(9)(7,024)(6)
Stock compensationStock compensation4,334 (7)(1,914)(1)(4,103)(3)
Repatriation taxRepatriation tax— — 14,108 11 36,777 30 
GILTI and FDIIGILTI and FDII36,067 (56)6,437 5 — — 
Impact of U.S. tax rate change on deferred balancesImpact of U.S. tax rate change on deferred balances— — — — (4,209)(3)

Other

 

 

(362

)

 

 

-

 

 

 

591

 

 

 

-

 

 

 

(774

)

 

 

(1

)

Other1,047 (2)1,142 1 (893)(1)

 

$

23,514

 

 

 

20

 

 

$

24,469

 

 

 

27

 

 

$

13,137

 

 

 

17

 

 $3,101 (5)$21,296 17 $34,192 28 

U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes 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.  As of December 31, 2018, the Company completed its analysis of the impact of the Tax Act in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) and the amounts are no longer considered provisional.  The Company’s transition tax increased due to finalization of calculations and consideration of Notices and regulations issued by the US Department of Treasury and the Internal Revenue Service; however, the increase is offset by available net operating loss and credit carryforwards which currently have a valuation allowance.  Consequently, the tax expense reported is reduced by the release of the valuation allowance on the U.S. deferred tax assets, and as result, there was no material financial statement impact due to finalization.

The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded 0 deferred income taxes.  As a result of the Act, among other things, the Company determined 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 in certain states and foreign withholding taxes.  Foreign currency gains/losses related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed.  The Company has estimated the associated withholding tax to be $21.8 million.
Furthermore, 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 inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.  These changes are included in the Company’s 2020 fiscal year income tax expense.

During the fiscal years ended June 30, 2017, 2016,2020, 2019, and 2015,2018, net cash paid by the Company for income taxes was $23.6$39.5 million, $18.5$26.3 million, and $13.0$21.3 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 0.31%(8.91)%, 0.37%0.25% and 0.22%0.17% for the fiscal years ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively, and the impact of the tax holidays on diluted earnings per share is immaterial.

The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was approximately $715 million at June 30, 2017. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an additional deferred tax liability of approximately $108 million would have been required as of June 30, 2017. It is the Company’s intention to permanently reinvest substantially all of its undistributed earnings of its foreign subsidiaries; therefore, no provision has been made for future income taxes on the undistributed earnings of the majority of foreign subsidiaries, as they are considered indefinitely reinvested. The Company has provided a deferred tax liability for future income taxes on the earnings of certain foreign subsidiaries as these earnings are planned to be repatriated.  

84


The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2017:

2020:

Type

 

Amount

 

 

Expiration Date

($000)

 

 

 

 

 

 

Tax credit carryforwards:

 

 

 

 

 

 

Federal research and development credits

 

$

10,953

 

 

June 2019-June 2037

Foreign tax credits

 

 

4,539

 

 

June 2024-June 2027

State tax credits

 

 

4,820

 

 

June 2018-June 2037

Operating loss carryforwards:

 

 

 

 

 

 

Loss carryforwards - federal

 

$

100,922

 

 

June 2020-June 2037

Loss carryforwards - state

 

 

71,536

 

 

June 2018-June 2037

Loss carryforwards - foreign

 

 

2,610

 

 

June 2018-June 2024


TypeAmountExpiration Date
($000)
Tax credit carryforwards:
Federal research and development credits$71,694June 2021-June 2040
Foreign tax credits14,354June 2022-June 2030
State tax credits14,364June 2021-June 2035
State tax credits (indefinite)40,316Indefinite
Operating loss carryforwards:
Loss carryforwards - federal$166,643June 2021-June 2036
Loss carryforwards - state110,587June 2021-June 2039
Loss carryforwards - foreign10,683June 2021-June 2040
Loss carryforwards - foreign (indefinite)36,806Indefinite

The Company has recorded a valuation allowance against the majority of the loss and credit carryforwards. The Company’s U.S. federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resultedresulting 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, 2017, 20162020, 2019 and 20152018 were as follows:

 

 

2017

 

 

2016

 

 

2015

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Year

 

$

5,559

 

 

$

4,022

 

 

$

2,775

 

Increases in current year tax positions

 

 

895

 

 

 

2,146

 

 

 

2,450

 

Increases in prior year tax positions

 

 

2,605

 

 

 

190

 

 

203

 

Decreases in prior year tax positions

 

 

-

 

 

 

(67

)

 

 

-

 

Settlements

 

 

(1,143

)

 

 

-

 

 

 

-

 

Expiration of statute of limitations

 

 

(339

)

 

 

(732

)

 

 

(1,406

)

Balance at End of Year

 

$

7,577

 

 

$

5,559

 

 

$

4,022

 



202020192018
($000)
Beginning balance$11,520 $9,892 $7,577 
Increases in current year tax positions1,506 191 2,536 
Increases in prior year tax positions— 376 224 
Decreases in prior year tax positions— — (9)
Acquired business31,791 6,036 — 
Expiration of statute of limitations(2,014)(4,975)(436)
Ending balance$42,803 $11,520 $9,892 


The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal year 2017,years 2020, 2019 and 2018, there was $0.5$0.6 million, $(0.1) million and $0.3 million of interest and penalties within income tax expense. During the fiscal year 2016, there was no interest and penalties within income tax expense.  During the fiscal year 2015, there was a benefit of $0.1 million of interest and penalties within tax expense.expense, respectively. The Company had $0.3$3.8 million, $0.1$1.2 million and $0.1$0.6 million of interest and penalties accrued at June 30, 2017, 2016,2020, 2019 and 2015,2018, 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, except for $7.4 million which is expected to be paid within a 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 $1.3$24.3 million, $6.2 million and $0.5$1.6 million at June 30, 20172020, 2019 and 2016,2018, respectively. The Company expects a decrease of $0.4$4.9 million of unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.

Fiscal years 20142017 to 20172020 remain open to examination by the Internal Revenue Service, fiscal years 20122015 to 20172020 remain open to examination by certain state jurisdictions, and fiscal years 20072009 to 20172019 remain open to examination by certain foreign taxing jurisdictions. The Company’sCompany is currently under examination for the certain subsidiary companies in Australia for the years ended April 30, 2010 through April 30, 2014; India for the year ended March 31, 2016; Philippines for the year ended June 30, 2018; Germany has been notified of an examination to start in fiscal year 2018.for the years ended June 30, 2012 through June 30, 2015; and Vietnam for the years June 30, 2015 through June 30, 2016. The Company believes its income tax reserves for these tax matters are adequate.

Note 8.

Earnings Per Share


85

Note 11.  Earnings Per Share
The following table sets forth the computation of earnings (loss) per share for the periods indicated. Weighted-averageBasic earnings (loss) per share has been computed using the weighted average number of shares issuable uponof common stock outstanding during the exerciseperiod. Diluted earnings (loss) per share has been computed using the weighted average number of common shares outstanding during the period plus dilutive potential shares of common stock from (1) stock options, that were not included inperformance and restricted shares (under the treasury stock method) and (2) convertible debt (under the If-Converted method) outstanding during the period.

Year Ended June 30,202020192018
($000 except per share)
Net earnings (loss)$(67,029)$107,517 $88,002 
Divided by:
Weighted average shares84,828 63,584 62,499 
Basic earnings (loss) per common share$(0.79)$1.69 $1.41 
Net earnings (loss)$(67,029)$107,517 $88,002 
Divided by:
Weighted average shares84,828 63,584 62,499 
Dilutive effect of common stock equivalents— 2,220 2,634 
Diluted weighted average common shares84,828 65,804 65,133 
Diluted earnings (loss) per common share$(0.79)$1.63 $1.35 
The following table presents potential shares of common stock excluded from the calculation were 140,000, 153,000 and 576,000of diluted net income per share, as their effect would have been antidilutive ($000):

Year Ended June 30,202020192018
Stock options and restricted shares2,345 115 135 
0.25% Convertible Senior Notes due 20227,331 7,331 7,331 
0.50% Finisar Convertible Notes289 — — 
Total anti-dilutive shares9,965 7,446 7,466 

86

Note 12.  Leases
On July 1, 2019, the Company adopted Topic 842 using the modified retrospective transition approach. The reported results for the fiscal yearsyear ended June 30, 2017, 20162020 reflect the application of Topic 842, while prior period amounts have not been adjusted and 2015, respectively, because they were anti-dilutive.

continue to be reported in accordance with our historical accounting under Topic 840.

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

($000 except per share)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

95,274

 

 

$

65,486

 

 

$

65,975

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

62,576

 

 

 

61,366

 

 

 

61,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.52

 

 

$

1.07

 

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

95,274

 

 

$

65,486

 

 

$

65,975

 

Divided by:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

62,576

 

 

 

61,366

 

 

 

61,219

 

Dilutive effect of common stock equivalents

 

 

1,931

 

 

 

1,543

 

 

 

1,367

 

Diluted weighted average common shares

 

 

64,507

 

 

 

62,909

 

 

 

62,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.48

 

 

$

1.04

 

 

$

1.05

 

Note 9.

Operating Leases

The Company elected the practical expedient package permitted under the transition approach. As such, the Company did not reassess whether any expired or existing contracts are or contain leases, certain property under operatingdid not reassess historical lease classification, and did not reassess initial direct costs for any leases that expireexisted prior to July 1, 2019.

As of the date of adoption, the Company recognized operating lease assets and liabilities of approximately $80.1 million on the Consolidated Balance Sheet. In addition, we acquired approximately $29 million of operating lease assets and liabilities through the acquisition of Finisar.
All existing leases that were classified as capital leases under Topic 840 are classified as finance leases under Topic 842. As of the date of adoption, the Company recognized finance lease assets of $25 million in property, plant and equipment, net, with corresponding finance lease liabilities of $24 million on the Consolidated Balance Sheet.
We determine if an arrangement is a lease at various dates. Future rental commitments applicableinception 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 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’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.









87

The following table presents lease costs, which include short-term leases, at June 30, 2017 are as follows:

Year Ending June 30,

 

 

 

 

($000)

 

 

 

 

2018

 

$

14,400

 

2019

 

 

12,400

 

2020

 

 

10,500

 

2021

 

 

6,800

 

2022

 

 

4,600

 

Thereafter

 

 

17,900

 

Rent expense was approximately $14.7 million, $14.2 million,lease term, and $15.0 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.


discount rates ($000):

Note 10.

Share-Based Compensation Plans

Year Ended
June 30, 2020
Finance Lease Cost
Amortization of right-of-use assets$1,667
Interest on lease liabilities1,328
Total finance lease cost2,995
Operating lease cost32,466
Sublease income368
Total lease cost$35,093
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases1,328
Operating cash flows from operating leases30,816
Financing cash flows from finance leases1,026
Assets Obtained in Exchange for Lease Liabilities
Right-of-use assets obtained in Finisar acquisition29,247
Right-of-use assets obtained in exchange for new operating lease liabilities29,458
Total assets obtained in exchange for new operating lease liabilities58,705
Weighted-Average Remaining Lease Term (in Years)
Finance leases11.5
Operating leases7.2
Weighted-Average Discount Rate
Finance leases5.6%
Operating leases7.3%

The following table presents future minimum lease payments, which include short-term leases ($000):
Future YearsOperating LeasesFinance LeasesTotal
Year 1$31,100 $2,419 $33,519 
Year 223,964 2,486 26,450 
Year 320,621 2,554 23,175 
Year 417,906 2,624 20,530 
Year 515,381 2,697 18,078 
Thereafter52,316 19,419 71,735 
Total minimum lease payments$161,288 $32,199 $193,487 
Less: amounts representing interest41,953 8,752 50,705 
Present value of total lease liabilities$119,335 $23,447 $142,782 

88

Note 13.  Share-Based Compensation
The Company’s Board of Directors adopted the II-VI Incorporated Amended and Restated 20122018 Omnibus Incentive Plan (the “Plan”“II-VI Plan”), which was approved by the shareholders at the Annual Meeting in November 2014.2018. 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 Stockcommon stock authorized for issuance under the Plan is limited to 4,900,0003,550,000 shares of Common Stock,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.

Upon consummation of the acquisition, the Company assumed approximately 6.6 million restricted stock units previously granted by Finisar under the Amended and Restated Finisar Corporation 2005 Stock Incentive Plan (each an “Assumed RSU”). Each Assumed RSU is subject to substantially the same terms and conditions as applied to the Assumed RSU immediately prior to the consummation of the acquisition, except that the number of shares of the Company’s common stock subject to each Assumed RSU has been adjusted in accordance with the terms of the Merger Agreement. Other than the Assumed RSUs, the Company did not assume any other awards outstanding under the Amended and Restated Finisar Corporation 2005 Stock Incentive Plan (the “Finisar Plan”). As of the Closing Date, the Company also assumed the unused capacity under the Finisar 2005 Plan.
As of June 30, 2017,2020, there were approximately 1,644,0003.1 million shares available to be issued under the II-VI Plan and the Finisar Plan collectively, 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 awards and cash-based performance share unit awards as liability awards, in accordance with applicable accounting standards.

Share-based compensation expense for the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 is as follows ($000):

$000:

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

Stock Options and Cash-Based Stock Appreciation Rights

 

$

5,611

 

 

$

4,309

 

 

$

5,158

 

Restricted Share Awards and Cash-Based Restricted Share Unit Awards

 

 

6,799

 

 

 

4,401

 

 

 

5,182

 

Performance Share Awards and Cash-Based Performance Share  Unit Awards

 

 

3,626

 

 

 

2,196

 

 

 

2,649

 

 

 

$

16,036

 

 

$

10,906

 

 

$

12,989

 

Year Ended June 30,202020192018
Stock Options and Cash-Based Stock
   Appreciation Rights		$11,893 $6,801 $6,605 
Restricted Share Awards, Restricted Share
   Units, and Cash-Based Restricted Share Units		49,957 9,242 7,850 
Performance Share Awards and Cash
   Based Performance Share Unit Awards		11,977 8,920 5,221 
$73,827 $24,963 $19,676 

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 grantees.


Share-based compensation expense associated with liability awards was $4.3$5.3 million, $1.2$3.0 million, and $1.6$4.4 million, in the fiscal years ended June 30, 2017, 2016,2020, 2019 and 2015,2018, 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. During the fiscal years ended June 30, 2017, 20162020, 2019 and 2015,2018, the weighted-average fair value of options granted under the stock option plan was $8.88, $7.35$14.79, $20.66 and $5.76,$14.23, respectively, per option using the following assumptions:

Year Ended June 30,

 

2017

 

 

2016

 

 

2015

 

Year Ended June 30,202020192018

Risk-free interest rate

 

 

1.43

%

 

 

1.68

%

 

 

1.71

%

Risk-free interest rate1.50 %2.80 %2.00 %

Expected volatility

 

 

37

%

 

 

38

%

 

 

41

%

Expected volatility39 %37 %37 %

Expected life of options

 

6.28 years

 

 

6.43 years

 

 

5.94 years

 

Expected life of options6.91 years6.96 years6.43 years

Dividend yield

 

None

 

 

None

 

 

None

 

Dividend yieldNaNNaNNaN


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
89

Company’s Common Stockcommon 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 18.71%.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.


Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 20172020 was as follows:

 

Stock Options

 

 

Cash-Based Stock Appreciation Rights

 

 

Number of

 

 

Weighted Average

 

 

Number of

 

 

Weighted Average

 

Stock OptionsCash-Based Stock Appreciation Rights

 

Shares

 

 

Exercise Price

 

 

Rights

 

 

Exercise Price

 

Number of
Shares		Weighted Average
Exercise Price		Number of
Rights		Weighted Average
Exercise Price

Outstanding - July 1, 2016

 

 

4,251,926

 

 

$

17.15

 

 

 

178,234

 

 

$

17.13

 

Outstanding - July 1, 2019Outstanding - July 1, 20193,761,283 $23.74 227,496 $28.09 

Granted

 

 

771,900

 

 

$

23.15

 

 

 

86,705

 

 

$

22.51

 

Granted774,116 $34.75 76,651 $34.95 

Exercised

 

 

(858,445

)

 

$

17.58

 

 

 

(44,856

)

 

$

17.42

 

Exercised(774,382)$17.39 (65,488)$21.25 

Forfeited and Expired

 

 

(84,466

)

 

$

19.62

 

 

 

(5,616

)

 

$

19.39

 

Forfeited and Expired(39,216)$32.99 (8,285)$33.76 

Outstanding - June 30, 2017

 

 

4,080,915

 

 

$

18.15

 

 

 

214,467

 

 

$

19.17

 

Exercisable - June 30, 2017

 

 

2,242,901

 

 

$

16.97

 

 

 

34,334

 

 

$

17.59

 

Outstanding - June 30, 2020Outstanding - June 30, 20203,721,801 $26.99 230,374 $32.13 
Exercisable - June 30, 2020Exercisable - June 30, 20202,192,315 $21.53 79,459 $31.75 


As of June 30, 2017, 20162020, 2019 and 2015,2018, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $69.3$79.8 million, $10.1$56.4 million and $14.3$96.1 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, 2017,2020, 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, 2017.2020. 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, 2017, 2016,2020, 2019, and 20152018 was $12.3$20.2 million, $4.5$14.7 million, and $2.9$14.7 million, respectively. As of June 30, 2017,2020, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $12.0$15.4 million. This cost is expected to be recognized over a weighted-average period of approximately three years.

Outstanding and exercisable stock options at June 30, 20172020 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

 

 

1,093,446

 

 

 

4.80

 

 

$

13.18

 

 

 

717,394

 

 

 

3.59

 

 

$

12.74

 

$15.41 - $23.45

 

 

2,852,141

 

 

 

6.61

 

 

$

19.12

 

 

 

1,331,371

 

 

 

4.76

 

 

$

18.13

 

$23.49 - $35.50

 

 

328,075

 

 

 

3.78

 

 

$

25.53

 

 

 

228,470

 

 

 

1.29

 

 

$

23.65

 

$39.65 - $39.65

 

 

21,720

 

 

 

9.62

 

 

 

39.65

 

 

 

-

 

 

 

-

 

 

$

-

 

 

 

 

4,295,382

 

 

 

5.95

 

 

$

18.20

 

 

 

2,277,235

 

 

$

4.04

 

 

$

16.98

 

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 - $17.69618,493 3.21$15.25 611,301 3.19$15.21 
$17.70 - $19.15763,173 4.18$18.62 635,346 3.88$18.43 
$19.16 - $26.46842,141 5.21$21.38 658,659 4.91$20.86 
$26.47 - $36.32799,316 8.09$33.77 226,693 6.88$34.56 
$36.33 - $49.90929,052 8.62$42.20 139,775 7.86$47.18 
3,952,175 6.08$27.29 2,271,774 4.54$21.65 

Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Unit Awards:

Restricted share awards, restricted share units, and cash-based restricted share unit awards 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) or the stock price at the period end date (for cash-based restricted share unit awards), and is being recognized over the vesting period. Generally, the restricted share awards, restricted share units, and cash-based restricted share unit awards have a three year cliff-vesting-year tranche vesting provision and an estimated forfeiture rate of 13.0%4.6%.

Restricted share, restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30, 2017,2020, 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, 2016

 

 

760,915

 

 

$

17.49

 

 

 

105,935

 

 

$

16.67

 

Granted

 

 

271,113

 

 

$

23.23

 

 

 

67,790

 

 

$

22.09

 

Vested

 

 

(200,799

)

 

$

17.22

 

 

 

(29,470

)

 

$

17.22

 

Forfeited

 

 

(19,396

)

 

$

18.32

 

 

 

(3,328

)

 

$

18.61

 

Nonvested - June 30, 2017

 

 

811,833

 

 

$

19.45

 

 

 

140,927

 

 

$

19.12

 

90


Restricted Share AwardsRestricted Share UnitsCash-Based Restricted Share Units
Number of
Shares		Weighted Average
Grant Date 
Fair Value		Number of
Shares		Weighted Average
Grant Date Fair Value		Number of
Units		Weighted Average
Grant Date Fair Value
Nonvested - June 30, 2019183,429 $30.30 175,737 $47.13 77,642 $37.19 
Assumed in Finisar Acquisition— $— 3,652,191 $36.98 — $— 
Granted— $— 250,736 $36.35 49,444 $34.84 
Vested(130,382)$28.03 (1,475,663)$37.49 (43,699)$32.31 
Forfeited(2,520)$35.34 (360,589)$36.97 (1,384)$40.99 
Nonvested - June 30, 202050,527 $35.92 2,242,412 $39.46 82,003 $38.31 

As of June 30, 2017,2020, total unrecognized compensation cost related to non-vested restricted share, restricted share unit, and cash-based restricted share unit awards was $9.5$63.2 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The restricted share 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 shares 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, restricted share unit, and cash-based restricted share unit awards granted during the years ended June 30, 2017, 20162020, 2019 and 2015,2018, was $7.8$10.9 million, $6.3$9.9 million and $5.9$7.5 million, respectively. The total fair value of restricted sharesshare, restricted share unit and cash-based restricted share unit awards vested was $6.2$75.2 million, $5.5$19.9 million and $5.1$17.0 million during fiscal years 2017, 20162020, 2019 and 2015,2018, respectively.

Performance Share Awards and Cash-Based Performance Share Unit Awards:

The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees performance share awards and performance share unit awards under the Plan. As of June 30, 2017,2020, the Company had outstanding grants covering performance periods ranging from 12 to 36 months. These awards 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 awards 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 planPlan during the year ended June 30, 2017,2020, was as follows:

 

Performance Share Awards

 

 

Cash-Based Performance Share Units

 

 

Number of

 

 

Weighted Average

 

 

Number of

 

 

Weighted Average

 

 Performance Share AwardsCash-Based Performance Share Units

 

Shares

 

 

Grant Date Fair Value

 

 

Units

 

 

Grant Date Fair Value

 

Number of
Shares		Weighted Average
Grant Date Fair Value		Number of
Units		Weighted Average
Grant Date Fair Value

Nonvested - June 30, 2016

 

 

293,541

 

 

$

16.12

 

 

 

98,659

 

 

$

18.44

 

Nonvested - June 30, 2019Nonvested - June 30, 2019413,651 $36.80 24,224 $37.47 

Granted

 

 

234,174

 

 

$

21.67

 

 

 

10,808

 

 

$

21.67

 

Granted414,464 $30.29 30,199 $31.79 

Vested

 

 

(88,354

)

 

$

15.56

 

 

 

(58,654

)

 

$

18.52

 

Vested(414,582)$26.21 (17,200)$21.67 

Forfeited

 

 

(61,651

)

 

$

17.16

 

 

 

(33,661

)

 

$

18.70

 

Forfeited(4,287)$35.07 (2,035)$29.50 

Nonvested - June 30, 2017

 

 

377,710

 

 

$

19.52

 

 

 

17,152

 

 

$

19.37

 

Nonvested - June 30, 2020Nonvested - June 30, 2020409,246 $40.96 35,188 $38.54 

As of June 30, 2017,2020, total unrecognized compensation cost related to non-vested performance share and cash-based performance share unit awards was $4.2$13.0 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
91

during the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 was $5.3$15.4 million, $2.4$10.0 million and $2.3$3.8 million, respectively. The total fair value of performance shares vested during the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 was $5.9$6.2 million, $1.5$10.5 million and $1.6$3.6 million, respectively.

For our relative Total Shareholder Return or TSR,(“TSR”) performance-based awards, which are based on market performance of our stock as compared to the Russel 2000 Index, the compensation cost is recognized over the performance period on a straight-line basis net of forfeitures, because the awards 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 awards using the Monte-Carlo simulation model.



Note 11.

Note 14.  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.

Effective July 1, 2019, the Company realigned the composition of its operating segments. The Company combined II-VI Laser Solutions and II-VI Performance Products and renamed the combined segment Compound Semiconductors.  All applicable segment information has been restated to reflect this change. Additionally, the Company changed the name of II-VI Photonics to Photonic Solutions.
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 segments are managed separately due to the market, production requirements and facilities unique to each segment.  

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 Solutions is directed by the President of II-VI Laser Solutions, while each geographic location is directed by a general manager, and is further divided into production and administrative units that are directed by managers. II-VI Laser SolutionsThis segment designs, manufactures and marketsmarkets: (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 tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise


brand names. II-VI Laser Solutionsnames; (ii) infrared optical components and high-precision optical assemblies for aerospace and defense, medical and commercial laser imaging applications; (iii) semiconductor lasers and detectors for optical interconnects and sensing applications with InP; and (iv) unique engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, aerospace and defense and medical markets. Compound Semiconductors also manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices, and high-speed communication systems and manufactures 6-inch gallium arsenideGaAs 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.

The II-VI PhotonicsPhotonic Solutions segment is locatedhas locations in the United States, China, Vietnam, Germany, Japan, the United Kingdom.,Kingdom, Italy, Malaysia, Australia, and Hong Kong. II-VI Photonics is directed by the President of II-VI Photonics and is further divided into production and administrative units that are directed by managers. II-VI PhotonicsThis segment manufactures crystal materials, optics, microchip lasers and optoelectronic modules for use in optical communication networks and other diverse consumer and commercial applications.  In addition, 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.

The II-VI Performance Products segment is located in the United States, Vietnam, Japan, China, Germany and the Philippines. II-VI Performance Products is directed by the President of II-VI Performance Products, while each geographic location is directed by a general manager. 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 June 19, 2017,September 2019, the Company completed its acquisition of IPI.Finisar. See Note 2. Acquisitions.3. The operating results of this acquisition have been reflected in the selected financial information of the Company’s II-VI PhotonicsPhotonic Solutions segment

and Compound Semiconductors Segment beginning on October 1, 2019, with the results from September 24, 2019 to September 30, 2019 reflected in 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 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

 

($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

 

 

 

-

 

 

 

115,541

 

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

 


92

 

 

II-VI

 

 

 

 

 

 

II-VI

 

 

 

 

 

 

 

 

 

 

 

Laser

 

 

II-VI

 

 

Performance

 

 

 

 

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Eliminations

 

 

Total

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

303,002

 

 

$

325,879

 

 

$

198,335

 

 

$

-

 

 

$

827,216

 

Inter-segment revenues

 

 

24,290

 

 

 

12,081

 

 

 

7,274

 

 

 

(43,645

)

 

 

-

 

Operating income

 

 

36,184

 

 

 

37,849

 

 

 

17,780

 

 

 

-

 

 

 

91,813

 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,081

)

Other income, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,223

 

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(24,469

)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

65,486

 

Depreciation and amortization

 

 

17,222

 

 

 

19,855

 

 

 

19,586

 

 

 

-

 

 

 

56,663

 

Expenditures for property, plant & equipment

 

 

25,620

 

 

 

21,096

 

 

 

11,454

 

 

 

-

 

 

 

58,170

 

Segment assets

 

 

469,754

 

 

 

467,486

 

 

 

274,741

 

 

 

-

 

 

 

1,211,981

 

Equity investment

 

 

-

 

 

 

-

 

 

 

11,354

 

 

 

-

 

 

 

11,354

 

Goodwill

 

 

84,105

 

 

 

96,760

 

 

 

52,890

 

 

 

-

 

 

 

233,755

 


 

II-VI

 

 

 

 

 

 

II-VI

 

 

 

 

 

 

 

 

 

 

Laser

 

 

II-VI

 

 

Performance

 

 

 

 

 

 

 

 

 

 

Solutions

 

 

Photonics

 

 

Products

 

 

Eliminations

 

 

Total

 

Photonic SolutionsCompound SemiconductorsUnallocated
& Other		Total

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($000)

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20202020

Revenues

 

$

287,881

 

 

$

260,825

 

 

$

193,255

 

 

$

-

 

 

$

741,961

 

Revenues$1,536,790 $821,230 $22,051 $2,380,071 

Inter-segment revenues

 

 

21,021

 

 

 

13,210

 

 

 

9,325

 

 

 

(43,556

)

 

 

-

 

Inter-segment revenues31,515 164,884 (196,399)— 

Operating income

 

 

55,039

 

 

 

7,208

 

 

 

14,552

 

 

 

-

 

 

 

76,799

 

Operating income (loss)Operating income (loss)49,930 62,279 (72,730)39,479 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,863

)

Interest expense— — — (89,409)

Other income, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,176

 

Other income (expense), netOther income (expense), net— — — (13,998)

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,137

)

Income taxes— — — (3,101)

Net earnings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

65,975

 

Net earnings (loss)Net earnings (loss)— — — (67,029)

Depreciation and amortization

 

 

14,127

 

 

 

21,073

 

 

 

17,883

 

 

 

-

 

 

 

53,083

 

Depreciation and amortization112,203 104,936 3,743 220,882 

Expenditures for property, plant & equipment

 

 

27,349

 

 

 

11,324

 

 

 

13,640

 

 

 

-

 

 

 

52,313

 

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 


Photonic SolutionsCompound SemiconductorsUnallocated
& Other		Total
($000)
2019
Revenues$638,889 $723,607 $— $1,362,496 
Inter-segment revenues12,568 94,405 (106,973)— 
Operating income (loss)81,898 82,414 (15,643)148,668 
Interest expense— — — (22,417)
Other income (expense), 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 

Photonic SolutionsCompound SemiconductorsUnallocated
& Other		Total
($000)
2018
Revenues$486,485 $672,309 $— $1,158,794 
Inter-segment revenues24,867 37,723 (62,591)— 
Operating income63,152 73,611 — 136,763 
Interest expense— — — (18,352)
Other income, net— — — 3,783 
Income taxes— — — (34,192)
Net earnings— — — 88,002 
Depreciation and amortization23,242 57,528 — 80,770 
Expenditures for property, plant & equipment36,122 125,201 — 161,323 

93

Geographic information for revenues from the legal country of origin, (shipped from), and long-lived assets from the 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,

 

2017

 

 

2016

 

 

2015

 

Year Ended June 30,202020192018

($000)

 

 

 

 

 

 

 

 

 

 

 

 

($000)

United States

 

$

294,200

 

 

$

266,347

 

 

$

241,974

 

United States$1,432,492 $405,404 $373,735 

Non-United States

 

 

 

 

 

 

 

 

 

 

 

 

Non-United States
Hong KongHong Kong299,359 319,601 186,978 

China

 

 

208,595

 

 

 

172,292

 

 

 

140,586

 

China292,138 290,287 253,672 

Hong Kong

 

 

190,702

 

 

 

140,821

 

 

 

109,428

 

JapanJapan146,325 109,670 89,153 

Germany

 

 

88,304

 

 

 

72,070

 

 

 

77,524

 

Germany124,934 155,000 132,161 

Japan

 

 

76,212

 

 

 

57,287

 

 

 

52,864

 

Switzerland

 

 

50,497

 

 

 

54,760

 

 

 

56,940

 

Switzerland35,895 32,770 49,557 

Vietnam

 

 

22,497

 

 

 

24,267

 

 

 

24,307

 

Vietnam22,152 22,322 26,898 

Italy

 

 

10,791

 

 

 

10,160

 

 

 

9,313

 

United Kingdom

 

 

8,473

 

 

 

8,154

 

 

 

7,749

 

Belgium

 

 

7,503

 

 

 

6,026

 

 

 

5,731

 

Korea

 

 

6,584

 

 

 

3,887

 

 

 

-

 

Korea8,537 11,674 9,757 

Singapore

 

 

3,913

 

 

 

3,039

 

 

 

3,897

 

Singapore5,791 6,868 5,941 

Philippines

 

 

3,057

 

 

 

8,106

 

 

 

11,334

 

Philippines4,479 4,179 3,909 
United KingdomUnited Kingdom4,226 2,712 9,359 

Taiwan

 

 

718

 

 

 

-

 

 

 

-

 

Taiwan3,743 2,005 1,705 

Australia

 

 

-

 

 

 

-

 

 

 

314

 

BelgiumBelgium— 4 4,511 
ItalyItaly— — 11,458 

Total Non-United States

 

 

677,846

 

 

 

560,869

 

 

 

499,987

 

Total Non-United States947,579 957,092 785,059 

 

$

972,046

 

 

$

827,216

 

 

$

741,961

 

$2,380,071 $1,362,496 $1,158,794 

 

 

Long-Lived Assets

 

June 30,

 

2017

 

 

2016

 

 

2015

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

240,029

 

 

$

137,521

 

 

$

102,171

 

Non-United States

 

 

 

 

 

 

 

 

 

 

 

 

China

 

 

62,024

 

 

 

51,824

 

 

 

46,794

 

Switzerland

 

 

36,795

 

 

 

38,202

 

 

 

26,384

 

Germany

 

 

15,323

 

 

 

15,162

 

 

 

15,790

 

Vietnam

 

 

8,272

 

 

 

8,895

 

 

 

7,985

 

Philippines

 

 

6,115

 

 

 

4,399

 

 

 

6,003

 

Hong Kong

 

 

1,914

 

 

 

1,765

 

 

 

2,476

 

Other

 

 

1,100

 

 

 

1,146

 

 

 

1,282

 

Total Non-United States

 

 

131,543

 

 

 

121,393

 

 

 

106,714

 

 

 

$

371,572

 

 

$

258,914

 

 

$

208,885

 


Long-Lived Assets
June 30,20202019
($000)
United States$754,815 $345,866 
Non-United States
China369,544 108,688 
United Kingdom55,028 60,369 
Malaysia46,162 — 
Switzerland37,129 35,592 
Sweden24,270 — 
Germany18,631 14,857 
Australia12,321 — 
Vietnam11,140 11,656 
Philippines7,607 7,793 
Korea3,438 — 
Hong Kong2,870 5,032 
Other1,965 1,190 
Total Non-United States590,105 245,177 
$1,344,920 $591,043 

94

Note 12.

Note 15.  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, 2017, 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 quarter ended June 30, 2017.

In June 2017,expiration date. The Company designated this instrument as a cash flow hedge and deemed the Company entered into a contingent earnout arrangement which provides up to a maximumhedge relationship effective at inception 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.

contract. The fair values of these contingent earnout arrangements were measured using valuations based upon other unobservable inputs that are significant to the fair value measurement (Level 3).


The following tables provide a summary by level of the fair value of financial instruments that are measured on a recurring basis asthe interest rate swap of June 30, 2017 and 2016 ($000):

 

 

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

 

 

 

Fair Value Measurements at June 30, 2016 Using:

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

for Identical

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

 

June 30, 2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

511

 

 

$

-

 

 

$

511

 

 

$

-

 

Contingent earnout arrangement

 

$

4,352

 

 

$

-

 

 

$

-

 

 

$

4,352

 

The Company’s policy$44.1 million is to report transfers into and out of Levels 1 and 2 ofrecognized in the Consolidated Balance Sheet within other liabilities. Changes in fair value hierarchy at fair valuesare recorded within other comprehensive income (loss) on the Consolidated Balance Sheet and reclassified into the Consolidated Statements of Earnings (Loss) as of the beginning ofinterest expense in the period in which the transfers occur. There wereunderlying transaction affects earnings. Cash flows from hedging activities are reported in the Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations. The fair value of the interest rate swap is determined 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 transfersquoted prices in active markets, it uses observable market-based inputs, including interest rate curves. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and out of Levels 1 andthe single counterparty. The interest rate swap is classified as a Level 2 ofitem within the fair value hierarchy during fiscal years 2017 and 2016.

hierarchy.

The following table presents a reconciliationCompany estimated the fair value of the beginningII-VI Notes and endingFinisar Notes based on quoted market prices as of the last trading day prior to June 30, 2020; however, the II-VI Notes and Finisar Notes have only a limited trading volume and as such this fair value measurementsestimate is not necessarily the value at which the II-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 II-VI Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 9. Debt for details on the Company’s level 3 contingent earnout arrangement related todebt facilities. The fair value and carrying value of the acquisitions of II-VI EpiWorksNotes and IPIFinisar Notes were as follows at June 30, 2020 ($000):

 

Significant

 

 

Unobservable Inputs

 

 

(Level 3)

 

Balance at July 1, 2016

$

4,352

 

 

 

 

 

Contingent earnout arrangements:

 

 

 

Contingent earnout - IPI

 

2,250

 

Payments

 

(2,000

)

Changes in fair value recorded in other expense, (income)

 

1,193

 

 

 

 

 

Balance at June 30, 2017

$

5,795

 

Fair ValueCarrying Value
II-VI Notes$413,379 $314,312 
Finisar Notes$14,404 $14,888 


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 include variable interest rate, non-interest bearing debtincluding its lease obligations, excluding the 0.25% Convertible Notes 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.

Additionally, the Company remeasures certain assets to fair value, using Level 3 measurements, as a result of the occurrence of triggering events such as purchase accounting for acquisitions. See Note 3 for further information.

Note 13.

Derivative Instruments

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

95

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 market value of these contracts in the Company’s financial statements. These contracts had a total notional amount of $12.7 million and $9.2 million at June 30, 2017 and 2016, respectively. As of June 30, 2017, these forward contracts had expiration dates ranging from July 2017 through October 2017, with Japanese Yen denominations individually between 300 million and 400 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, 2017. The change in the fair value of these contracts for the fiscal year ended June 30, 2017, 2016 and 2015 was insignificant.

Note 14.

Note 16.  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 $4.3$6.1 million, $3.4$4.6 million, and $2.8$5.0 million for the years ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively.

The

On August 18, 2018, the 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% belowcommon stock for 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 Stockcommon stock available for purchase to 1,600,0002,000,000 shares. There were 477,949 and 492,913As of June 30, 2020, there have been 80,469 shares purchased on behalf of Common Stock available for purchasethe employees under the plan at June 30, 2017 and 2016, respectively.

2018 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 employee age and other factors. Employer contributions to the Swiss Plan for yearyears ended June 30, 20172020 and 2019 were $2.4 million. Expected employer contributions$3.4 million and $3.0 million, respectively. Net periodic pension cost is not material for any year presented.
The underfunded pension liability was $26.9 million and $20.8 million as of June 30, 2020 and 2019, respectively. The pension adjustment amount recognized in fiscal year 2018 are $2.6 million.


The funded status of the Swiss Plan inaccumulated other comprehensive income was $3.1 million and $11.8 million for the fiscal years ended June 30, 20172020 and 2016 were as follows:

Year Ended June 30,

 

2017

 

 

2016

 

Change in projected benefit obligation:

 

 

 

 

 

 

 

 

Projected benefit obligation, beginning of period

 

$

54,094

 

 

$

42,575

 

Service cost

 

 

3,689

 

 

 

2,680

 

Interest cost

 

 

163

 

 

 

434

 

Participant contributions

 

 

1,262

 

 

 

1,046

 

Benefits received

 

 

1,743

 

 

 

1,567

 

Actuarial (gain) loss on obligation

 

 

(2,777

)

 

 

8,071

 

Currency translation adjustment

 

 

1,344

 

 

 

(2,279

)

Projected benefit obligation, end of period

 

$

59,518

 

 

$

54,094

 

Change in plan assets:

 

 

 

 

 

 

 

 

Plan assets at fair value, beginning of period

 

 

35,857

 

 

 

32,509

 

Actual return on plan assets

 

 

805

 

 

 

431

 

Employer contributions

 

 

2,432

 

 

 

2,043

 

Participant contributions

 

 

1,262

 

 

 

1,046

 

Benefits received

 

 

1,743

 

 

 

1,567

 

Currency translation adjustment

 

 

891

 

 

 

(1,739

)

Plan assets at fair value, end of period

 

$

42,990

 

 

$

35,857

 

Amounts recognized in consolidated balance sheets:

 

 

 

 

 

 

 

 

Other non-current assets:

 

 

 

 

 

 

 

 

Deferred tax asset

 

$

3,496

 

 

$

3,857

 

Other non-current liabilities:

 

 

 

 

 

 

 

 

Underfunded pension liability

 

$

16,528

 

 

 

18,237

 

Amounts recognized in accumulated other comprehensive

income, net of tax:

 

 

 

 

 

 

 

 

Pension adjustment

 

$

2,514

 

 

$

(7,031

)

Accumulated benefit obligation, end of period

 

$

56,457

 

 

$

50,772

 

Net periodic pension cost associated with the Swiss Plan included the following components:

Year Ended June 30,

 

2017

 

 

2016

 

Service cost

 

$

3,689

 

 

$

2,680

 

Interest cost

 

 

163

 

 

 

434

 

Expected return on plan assets

 

 

(742

)

 

 

(1,097

)

Prior service cost

 

 

594

 

 

 

(234

)

Net period pension cost

 

$

3,704

 

 

$

1,783

 

2019, respectively. The projected and accumulated benefit obligations for the Swiss Plan were calculatedobligation was $84.9 million as of June 30, 2017 and 2016 using the following assumptions:

Year Ended June 30,

 

2017

 

 

2016

 

Discount rate

 

 

0.8

%

 

 

0.3

%

Salary increase rate

 

 

2.0

%

 

 

2.0

%

Expected return on plan assets

 

 

2.0

%

 

 

2.0

%

Expected average remaining working life (in years)

 

9.9

 

 

 

10.2

 

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 and 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 that 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,2020, compared to $69.7 million as are the assets of the plan. As of June 30, 2017, the Swiss Plan’s asset allocation was as follows:

2019.

Year Ended June 30,

 

2017

 

 

2016

 

Fixed income investments

 

 

10.0

%

 

 

15.0

%

Equity investments

 

 

52.0

%

 

 

51.0

%

Real estate

 

 

26.0

%

 

 

28.0

%

Cash

 

 

9.0

%

 

 

3.0

%

Alternative investments

 

 

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)

2018

 

$

2,683

 

2019

 

 

4,062

 

2020

 

 

1,575

 

2021

 

 

2,533

 

2021$4,100 

2022

 

 

2,681

 

20223,400 
202320233,700 
202420244,300 
202520255,300 

Next five years

 

 

19,163

 

Next five years$28,400 

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 $0.8 million, $1.2 million, and $0.7 million for the fiscal years ended June 30, 2017, 2016, and 2015, respectively. During the fiscal year ended June 30, 2017, the Company made a contribution of $0.1 million to the Compensation Plan on behalf of Dr. Mattera for his appointment as Chief Executive Officer. There were no employer contributions made to the Compensation Plan for the fiscal years ended June 30, 2016 and 2015.


Note 15.

Note 17.  Other Accrued Liabilities

The components of other accrued liabilities were as follows:

Year Ended June 30,

 

2017

 

 

2016

 

($000)

 

 

 

 

 

 

 

 

Deferred revenue

 

$

2,345

 

 

$

4,014

 

Warranty reserve

 

 

4,546

 

 

 

3,908

 

Current portion of earnout arrangements

 

 

3,930

 

 

 

1,935

 

Other accrued liabilities

 

 

18,235

 

 

 

15,989

 

 

 

$

29,056

 

 

$

25,846

 

June 30,20202019
($000)
Contract liabilities$17,328 $10,390 
Warranty reserves27,620 4,478 
Other accrued liabilities74,390 35,076 
$119,338 $49,944 



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 year ended June 30, 2017.

Year Ended June 30,

 

2017

 

($000)

 

 

 

 

Balance-Beginning of Year

 

$

3,908

 

Settlements during the period

 

 

(4,212

)

Additional warranty liability recorded

 

 

4,850

 

Balance-End of Year

 

$

4,546

 


96

Note 16.

Note 18.  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 penaltyliquidated damage provisions for early termination. The Company does not believe that a significant amount of penaltiesliquidated damages are reasonably likely to be incurred under these commitments based upon historical experience and current expectation.expectations. The Company also has commitments relating to earnout arrangements on its acquisitions of $2.5 million. Total future commitments areheld by II-VI as follows:

of June 30, 2020, were $196.9 million in fiscal 2021, and $2.7 million thereafter.

Year Ending June 30,

 

 

 

 

($000)

 

 

 

 

2018

 

$

21,988

 

2019

 

 

866

 

2020

 

 

578

 

2021

 

 

-

 

2022

 

 

-

 


Note 17.

Note 19.  Share Repurchase Programs

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its Common Stock. Thecommon stock through a share repurchase program has no expiration and(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 will beare retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30, 2017, the Company did not repurchase shareseach of its Common Stock. Duringthe fiscal years ended June 30, 20162020 and 2015, the June 30, 2019, the Company purchased 380,538 and 936,04950,000 shares of its Common Stockcommon stock for $6.3$1.6 million and $12.7 million respectively, under this repurchase program.


As of June 30, 2020, the Company has cumulatively purchased 1,416,587 shares of its common stock pursuant to the Program for approximately $22.3 million. The dollar value of shares as of June 30, 2020 that may yet be purchased under the Program is approximately $27.7 million.

Note 18.

Accumulated Other Comprehensive Income (Loss)


Note 20.  Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2017, 2016,2020, 2019, and 20152018 were as follows ($000):

 

 

Foreign

 

 

 

 

 

 

Total

 

 

 

Currency

 

 

Defined

 

 

Accumulated Other

 

 

 

Translation

 

 

Benefit

 

 

Comprehensive

 

 

 

Adjustment

 

 

Pension Plan

 

 

Income

 

AOCI - June 30, 2014

 

$

17,963

 

 

$

1,443

 

 

$

19,406

 

Other comprehensive income (loss) before reclassifications

 

 

(8,497

)

 

 

(2,244

)

 

 

(10,741

)

Amounts reclassified from AOCI

 

 

-

 

 

 

-

 

 

 

-

 

Net  current-period other comprehensive income

 

 

(8,497

)

 

 

(2,244

)

 

 

(10,741

)

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

)


Note 19.

Capital Lease

Foreign
Currency
Translation
Adjustment		Interest
Rate
Swap		Defined
Benefit
Pension Plan		Total
Accumulated Other
Comprehensive
Income (Loss)
AOCI - June 30, 2017$(8,460)$— $(5,318)$(13,778)
Other comprehensive income (loss) before reclassifications7,152 — 2,643 9,795 
Amounts reclassified from AOCI— — 203 203 
Net current-period other comprehensive income7,152 — 2,846 9,998 
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)

During



97

Note 21.  Subsequent Event

On July 2, 2020, II-VI announced the quarter ended December 31, 2016,pricing of concurrent underwritten public offerings of (a) 9,302,235 shares of its common stock at a public offering price of $43.00 per share for gross proceeds to II-VI from the Company’s OptoElectronic Devices subsidiaryoffering of approximately $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “common stock offering”), and (b) 2,000,000 shares of its Series A Mandatory Convertible Preferred Stock at a public offering price of $200.00 per share for gross proceeds to II-VI from the offering of $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “preferred stock offering”). In addition, the underwriters had a 30-day option to purchase up to an additional (a) 1,395,335 shares of its common stock at the applicable public offering price, less underwriting discounts and commissions, and (b) 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 both the common stock and preferred stock options in full, raising an additional approximately $120 million in gross proceeds.

On July 7, 2020, the public offerings closed, and the Company raised a total of approximately $920 million in gross proceeds. The Company used the net proceeds from the public offerings to repay the remaining balance of $715 million of the Term B Loan Facility, and will use the remainder of net proceeds, to develop, enhance, invest in or acquire related, emerging or complementary technologies, products, or businesses and for other general corporate purposes.

On August 12, 2020, the Company announced that it 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

 

2018

 

$

2,579

 

2019

 

 

2,579

 

2020

 

 

2,579

 

2021

 

 

2,579

 

2022

 

 

2,579

 

Thereafter

 

 

24,503

 

Total minimum lease payments

 

$

37,398

 

Less amount representing interest

 

 

12,909

 

Present value of capitalized payments

 

$

24,489

 

Less: current portion

 

 

1,074

 

Long-term portion

 

$

23,415

 

The current and long-term portion of the capital lease obligation was recorded in Other accrued liabilities and Capital lease obligation, respectively, in the Company’s Consolidated Balance Sheet as of June 30, 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 as of June 30, 2017, with associated depreciation being recorded over the 15 year life of the lease. During the fiscal year ended June 30, 2017, the Company recorded $0.8 million of depreciation expense associated with the capital leased asset.

Note 20.

Subsequent Events

On July 26, 2017, the Company signed a definitive purchase agreement to acquire 100% of the outstanding stockshares of Kaim Laser Limited, a company located inAscatron AB ("Ascatron"), which will add essential elements to the United Kingdom for $80 million. TheCompany's vertically integrated SiC technology platform. On August 20, 2020, the Company will operate undercompleted the name II-VI Compound Semiconductor Ltd. and will be included in the II-VI Laser Solutions segment for financial reporting purposes. The preliminary purchase price allocation is incomplete at this time and will be accounted for in accordance with ASU 805 Business Combinations.

acquisition of Ascatron.

98


Quarterly Financial Data (unaudited)

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 (loss) before income taxes40,711 33,338 (107,455)(30,522)
Income taxes(10,550)27,417 (9,242)(4,524)
Net Earnings (Loss)$51,261 $5,921 $(98,213)$(25,998)
Basic earnings (loss) per share$0.56 $0.07 $(1.08)$(0.39)
Diluted earnings (loss) per share$0.53 $0.06 $(1.08)$(0.39)

Fiscal Year 2016

2019

 

 

September 30,

 

 

December 31,

 

 

March 31,

 

 

June 30,

 

Quarter Ended

 

2015

 

 

2015

 

 

2016

 

 

2016

 

($000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

189,207

 

 

$

191,434

 

 

$

205,105

 

 

$

241,470

 

Cost of goods sold

 

 

118,018

 

 

 

120,090

 

 

 

127,436

 

 

 

148,859

 

Internal research and development

 

 

13,151

 

 

 

12,155

 

 

 

14,946

 

 

 

20,102

 

Selling, general and administrative

 

 

36,310

 

 

 

37,408

 

 

 

43,333

 

 

 

43,595

 

Interest expense

 

 

649

 

 

 

597

 

 

 

769

 

 

 

1,066

 

Other expense (income) - net

 

 

(1,057

)

 

 

(994

)

 

 

1,257

 

 

 

(429

)

Earnings before income taxes

 

 

22,136

 

 

 

22,178

 

 

 

17,364

 

 

 

28,277

 

Income taxes

 

 

4,922

 

 

 

3,187

 

 

 

2,426

 

 

 

13,934

 

Net Earnings

 

$

17,214

 

 

$

18,991

 

 

$

14,938

 

 

$

14,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.28

 

 

$

0.31

 

 

$

0.24

 

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.27

 

 

$

0.30

 

 

$

0.24

 

 

$

0.23

 



Quarter EndedJune 30,
2019		March 31,
2019		December 31,
2018		September 30,
2018
($000, except per share)
2019
Net revenues$362,728 $342,496 $342,839 $314,433 
Cost of goods sold224,076 215,212 211,333 190,526 
Internal research and development36,202 36,026 33,764 33,171 
Selling, general and administrative61,731 60,128 58,136 53,523 
Interest expense5,606 5,647 5,580 5,584 
Other expense (income) - net384 (1,532)(701)(713)
Earnings before income taxes34,729 27,015 34,727 32,342 
Income taxes6,701 2,377 6,025 6,193 
Net Earnings$28,028 $24,638 $28,702 $26,149 
Basic earnings per share$0.44 $0.39 $0.45 $0.41 
Diluted earnings per share$0.43 $0.38 $0.44 $0.40 



99

SCHEDULE II

II-VI INCORPORATED AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JUNE 30, 2017, 2016, 20152020, 2019, AND

2018

(IN THOUSANDS OF DOLLARS)

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

Charged

 

 

Charged

 

 

Deduction

 

 

Balance

 

 

 

Beginning

 

 

to

 

 

to Other

 

 

from

 

 

at End

 

 

 

of Year

 

 

Expense

 

 

Accounts

 

 

Reserves

 

 

of Year

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR ENDED JUNE  30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

1,852

 

 

$

(482

)

 

$

-

 

 

$

(322

)

(2)

$

1,048

 

Warranty reserves

 

$

2,859

 

 

$

5,047

 

 

$

-

 

 

$

(4,655

)

 

$

3,251

 

(1)

Relates to the warranty reserve acquired from the 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, 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 
(2)
$— $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 
YEAR ENDED JUNE 30, 2018:
Allowance for doubtful accounts$1,314 $(129)$— $(348)
(3)
$837 
Warranty reserves$4,546 $3,821 $— $(3,688)$4,679 
Deferred tax asset valuation allowance$42,562 $(4,602)$(16,163)
(4)
$— $21,797 

(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.

(2) Related to the amounts assumed from the Finisar Acquisition.
(3) Primarily relates to write-offs of accounts receivable.
(4) Primarily relates to the Company’s deferred taxes on the conversion feature of the convertible debt.
100

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, 2017,2020, the Company’s disclosure controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system is designed

Refer to provide reasonable assurance concerning the reliability of the financial data used in the preparation of the Company’s 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. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we


conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2017. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inManagement’s Report on Internal Control – Integrated Framework (2013). Management excluded from the scopeOver Financial Reporting included in Item 8 of its assessmentthis Annual Report of internal control over financial reporting, the operations and related assets of Integrated Photonics Inc. which was acquired on June 19, 2017. The recent acquisition excluded from management’s assessment of internal controls over financial reporting represented approximately $59.8 million and $45.3 million of total assets and net assets, respectively, as of June 30, 2017 and approximately $1.3 million and $0.1 million of total revenues and net income, respectively, for the fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2017, the Company’s internal controls over financial reporting were effective.

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.

101

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 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 20172020 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 site 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 2017,2020,” “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.

102

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, 20172020 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.

103

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.
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

Incorporated herein by reference to Exhibit 3.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on August 19, 2014.

3.03Filed herewith.
4.01Incorporated 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, 2014.

2017.

  10.01

4.02

Third Amended

Included in Exhibit 4.01.
4.03Filed herewith
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 3.04.
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.

104

  10.02

10.03

Credit

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 year ended June 30, 2015.

  10.03

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.

  10.04

Amended and Restated Employment Agreement, dated September 19, 2008, by and between II-VI and Francis J. Kramer*

Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2008.

  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.

28, 2018.

  10.06

10.04

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

Secondment Engagement Letter, dated November 6, 2015, among Sherrard, German & Kelly, P.C., II-VI Incorporated, and Walter R. Bashaw II*

Incorporated herein by reference to Exhibit 10.02 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the Quarter ended December 31, 2015.

  10.10

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.


  10.11

Employment Agreement, dated March 6, 2017, by and between II-VI Incorporated and Jo Anne Schwendinger *

Filed herewith.

  10.12

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.

  10.13

Form of Employment Agreement*

Incorporated herein by reference to Exhibit 10.16 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.14

Form of Executive Employment Agreement

Filed herewith

  10.15

Form of Exhibit 1 to Employment Agreement

Filed herewith

  10.16

Form of Indemnification Agreement

Filed herewith

  10.17

Form of Representative Agreement between II-VI and its foreign representatives

Incorporated herein by reference to Exhibit 10.15 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.18

II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan

Incorporated herein by reference to Exhibit 10.04 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.19

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.

  10.20

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).

  10.21

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.

  10.22

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.

  10.23

10.07

Description of Management-By-Objective Plan*

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.

  10.24

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.


  10.25

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.

  10.26

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.


  10.27

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.

  10.28

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.

  10.29

10.12

Form of Restricted Share Award Agreement under the

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.

  10.30

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.

  10.31

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.

  10.32

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.

  10.33

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.

  10.34

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.

  10.35

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.


105

  10.36

10.16

Form of Restricted Share Award Agreement under the

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.

  10.37

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.

  10.38

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.

  10.39

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.


  10.40

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.

  10.41

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.

  10.42

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.

  10.43

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.

  10.44

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.

  10.45

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.

  10.46

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.


  10.47

10.18

Form of Stock Appreciation Rights Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

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.

  10.48

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.

  10.49

10.19

Form of Restricted Share Award Agreement (1 year) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

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.

  10.50

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.

  10.51

10.20

Filed herewith.


10.21Incorporated herein by reference to Exhibit 10.0810.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 13, 2018.
10.22Incorporated herein by reference to Exhibit 10.2 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on November 13, 2018.
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.

  10.52

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.

  10.53

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.

  10.54

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.

  10.55

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

Filed herewith.

106

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.
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.

(101.PRE)

(101.PRE)Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

*

Denotes management contract or compensatory plan, contract or arrangement.


*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.

107


Item 16.

Item 16.  FORM 10-K SUMMARY

None.


108


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 21, 2017

26, 2020

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.


Principal Executive Officer:

Date: August 21, 2017

26, 2020

By:

/s/ Vincent D. Mattera Jr.

Vincent D. Mattera Jr.

President and Chief Executive Officer

and Director

Principal Financial and Accounting Officer:

Date: August 21, 2017

26, 2020

By:

/s/ Mary Jane Raymond

Mary Jane Raymond

Chief Financial Officer and Treasurer

Date: August 21, 2017

26, 2020

By:

/s/ Francis J. Kramer

Francis J. Kramer

Chairman of the Board and Director

Date: August 21, 2017

26, 2020

By:

/s/ Joseph J. Corasanti 

Joseph J. Corasanti

Director

Date: August 21, 2017

26, 2020

By:

/s/ RADM Marc Y. E. Pelaez (retired) 

RADM Marc Y. E. Pelaez (retired)

Director

Date: August 21, 2017

26, 2020

By:

/s/ Howard H. Xia 

Howard H. Xia

Director

Date: August 21, 2017

26, 2020

By:

/s/ William Schromm

William Schromm

Director

Date: August 21, 2017

By:

/s/ Shaker Sadasivam

Shaker Sadasivam

Director

Date: August 26, 2020

By:

/s/ Enrico Digirolamo

Enrico Digirolamo

Director
Date: August 26, 2020By:/s/ Michael L. Dreyer
Michael L. Dreyer
Director
Date: August 26, 2020By:/s/ Patricia Hatter
Patricia Hatter
Director

EXHIBIT INDEX

Exhibit No.

Description

Location

    3.01

Amended and Restated Articles of Incorporation of II-VI Incorporated

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

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 14, 2014.

  10.01

Third Amended and Restated Credit Agreement, by and among II-VI Incorporated, each of the Guarantors party thereto, the Lenders party thereto, and PNC Bank, National Association, as Administrative and Documentation Agent, and Bank of America, N.A., as Syndication Agent, dated as of July 20, 2016.

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.

  10.02

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 10.02 to II-VI’s Annual Report on Form 10-K (File No. 000-16195) for the year ended June 30, 2015.

  10.03

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.

  10.04

Amended and Restated Employment Agreement, dated September 19, 2008, by and between II-VI and Francis J. Kramer*

Incorporated herein by reference to Exhibit 10.1 to II-VI’s Current Report on Form 8-K (File No. 000-16195) filed on September 24, 2008.

  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

Secondment Engagement Letter, dated November 6, 2015, among Sherrard, German & Kelly, P.C., II-VI Incorporated, and Walter R. Bashaw II*

Incorporated herein by reference to Exhibit 10.02 to II-VI’s Current Report on Form 10-Q (File No. 000-16195) for the Quarter ended December 31, 2015.

  10.10

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.



109

  10.11

Employment Agreement, dated March 6, 2017, by and between II-VI Incorporated and Jo Anne Schwendinger *

Filed herewith.

  10.12

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.

  10.13

Form of Employment Agreement*

Incorporated herein by reference to Exhibit 10.16 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.14

Form of Executive Employment Agreement

Filed herewith

  10.15

Form of Exhibit 1 to Employment Agreement

Filed herewith

  10.16

Form of Indemnification Agreement

Filed herewith

  10.17

Form of Representative Agreement between II-VI and its foreign representatives

Incorporated herein by reference to Exhibit 10.15 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.18

II-VI Incorporated Amended and Restated Employees’ Stock Purchase Plan

Incorporated herein by reference to Exhibit 10.04 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.19

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.

  10.20

II-VI Incorporated Amended and Restated Employees’ Profit-Sharing Plan and Trust Agreement, as amended

Incorporated herein by reference to Exhibit 10.05 to II-VI’s Registration Statement on Form S-1 (File No. 33-16389).

  10.21

Description of Bonus Incentive Plan*

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.

  10.22

Description of Discretionary Incentive Plan (now known as the Goal/ Results Incentive Program)*

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.

  10.23

Description of Management-By-Objective Plan*

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.

  10.24

Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods prior to January 1, 2015)*

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.

  10.25

Amended and Restated II-VI Incorporated Deferred Compensation Plan (applicable to periods after January 1, 2015)*

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.

  10.26

Trust Under the II-VI Incorporated Deferred Compensation Plan*

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.


  10.27

II-VI Incorporated 2009 Omnibus Incentive Plan*

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.

  10.28

Form of Nonqualified Stock Option Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*

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.

  10.29

Form of Restricted Share Award Agreement under the II-VI Incorporated 2009 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.28 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 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.

  10.31

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.

  10.32

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.

  10.33

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.

  10.34

II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.01 to II-VI’s Registration Statement on Form S-8 (File No. 333-199855) filed on November 4, 2014.

  10.35

Form of Nonqualified Stock Option Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

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.

  10.36

Form of Restricted Share Award Agreement under the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.31 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 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.

  10.38

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.

  10.39

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.


  10.40

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.

  10.41

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.

  10.42

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.

  10.43

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.

  10.44

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.

  10.45

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.

  10.46

Form of Nonqualified Stock Option Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

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.

  10.47

Form of Stock Appreciation Rights Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

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.

  10.48

Form of Restricted Share Award Agreement (3 year) under the II-VI Incorporated Second Amended and Restated 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.

  10.49

Form of Restricted Share Award Agreement (1 year) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

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.

  10.50

Form of Restricted Share Unit Award Agreement under the II-VI Incorporated Second Amended and Restated 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.

  10.51

Form of Performance Share Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.08 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  10.52

Form of Performance Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.09 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.


  10.53

Form of Performance Share Award Agreement (June 30, 2019) under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.10 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  10.54

Form of Total Shareholder Return Performance Share Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.11 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  10.55

Form of Total Shareholder Return Performance Unit Award Agreement under the II-VI Incorporated Second Amended and Restated Omnibus Incentive Plan*

Incorporated herein by reference to Exhibit 10.12 to II-VI’s Quarterly Report on Form 10-Q (File No. 000-16195) for the quarter ended September 30, 2016.

  21.01

List of Subsidiaries of II-VI Incorporated

Filed herewith.

  23.01

Consent of Ernst & Young LLP

Filed herewith.

  31.01

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith.

  31.02

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith.

  32.01

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith.

  32.02

Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith.

 101

Interactive Data File

(101.INS)

XBRL Instance Document

Filed herewith.

(101.SCH)

XBRL Taxonomy Extension Schema Document

Filed herewith.

(101.CAL)

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith.

(101.DEF)

XBRL Taxonomy Definition Linkbase

Filed herewith.

(101.LAB)

XBRL Taxonomy Extension Label Linkbase Document

Filed herewith.

(101.PRE)

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

*

Denotes management contract or compensatory plan, contract or arrangement.

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.

FORM 10-K SUMMARY

None.   

94