INNOVATIVE
MATERIALS
2 0 15 A N N U A L R E P O R T
Our industry-leading zinc selenide material,
optics and components are at the heart of our
customers’ workstations that enable CO2 laser
systems to operate at peak performance
to manufacture the products that are
vital to our daily lives.
II-VI is a worldwide leader
in delivering an unbeatable
combination of innovation,
quality, and expertise in
engineered materials and
opto-electronic components
that enable our customers’
success.
Life science applications
require a wide variety of
high-performance optical
components. With advanced
fabrication and assemblies
in China and state-of-the-art
coating technologies and
capabilities, II-VI offers
performance optics, filters,
flow cells and assemblies
for today’s life science
applications.
Our silicon carbide (SiC)
material is essential for
high-power, high-frequency
SiC-based microwave
devices used in next
generation wireless
telecommunication
applications.
High-precision optical assemblies,
systems and components are critical
materials in our customers’ innovative
military platforms for targeting,
navigation and surveillance.
About II-VI
II-VI Incorporated, a global leader in engineered materials and opto-electronic components, is a vertically integrated
manufacturing company that develops innovative products for diversified applications in the industrial, optical com-
munications, military, life sciences, semiconductor equipment and consumer markets. Headquartered in Saxonburg,
Pennsylvania, with research and development, manufacturing, sales, service and distribution facilities worldwide, the
Company produces a wide variety of application-specific photonic and electronic materials and components and
deploys them in various forms, including integrated with advanced software, to enable our customers’ success.
Financial Summary
For the year ended June 30
($000 except per share data)
Bookings
Revenues
Net earnings
Diluted earnings per share
Adjusted diluted earnings per share
As of June 30
Total assets
Total shareholders’ equity
Working capital
2015
761,692
741,961
65,975
1.05
0.94
$
$
$
$
$
$ 1,058,164
729,081
$
373,812
$
• Adjusted diluted earnings per share excludes a one-time settlement of certain payment obligations of $0.11 per share.
• Prior periods have been adjusted to present the Company’s tellurium product line on a discontinued operations basis.
2014
691,333
683,261
38,449
0.60
0.60
$
$
$
$
$
$ 1,071,926
675,043
$
370,666
$
CAGR – Compounded Annual Growth Rate
II-VI Incorporated 2015 Annual Report
1
Shareholder Letter
Dear II-VI Shareholders,
Fiscal year 2015 was very busy. As we said in last year’s
letter, the task before us was to align II-VI Incorporated
to a more “market-focused” company by reducing our
operating segments to three:
II-VI Laser Solutions addressing broad applications
in the industrial markets,
II-VI Photonics centering on the optical communica-
tions and precision optical assemblies markets, and
II-VI Performance Products serving diverse specialty
markets for our unique engineered materials–based
products.
We anticipated that simplifying the organization would not
be easy, but when achieved, would enable us to derive
maximum business advantage by leveraging recent
acquisitions through vertical and horizontal integration.
By June 30, 2015, we accomplished the following:
Technical Innovation: The Company prides itself on
developing and marketing innovative materials that are
critical to our customers’ success. During 2015, our
talented teams of engineers and scientists expanded our
core competency in material science by introducing new
and innovative products that helped drive our improved
financial results. During the year, we introduced our new
high-power laser chip on sub-mount at II-VI Laser
Enterprise, thus addressing the continued development
of direct diode lasers. We also introduced fiber laser
optics at our II-VI Photop operations, which are used in
both high-power applications for cutting and welding, as
well as low-power applications for precision marking and
engraving. In addition, we introduced a Reconfigurable
Optical Add Drop Multiplexer (ROADM) Optical Channel
Monitor at our Optical Communications Group. We
normally invest 7-9% of total annual revenues in research,
development and engineering (RD&E) activities through
internal and external funding; during FY2015, we invested
$51.3 million and employed over 1,000 people in RD&E
functions, 645 of whom are engineers or scientists.
2
II-VI Incorporated 2015 Annual Report
Consolidation and Product Rationalization: We
eliminated redundant processes and personnel. We
restructured military manufacturing facilities by moving
Florida-based activities to our California location in light
of lower market demand. We also eliminated some
low-margin products and streamlined operations in the
II-VI Photonics segment by closing some locations,
combining similar types of work and consolidating
recently-acquired brand names under the II-VI trademark
as we continue to build the power and recognition of the
II-VI brand.
Integration: We combined and coordinated separate
businesses into a unified whole. The result is greater
horizontal sourcing across operating segments. For
example, an increase in demand for our II-VI Photonics
segment’s 980nm pump module created a strong internal
demand for laser chips from the II-VI Laser Solutions
segment. And, during the fourth quarter, II-VI Laser
Solutions not only produced strong growth from its own
products but also pulled through complementary products
from our other two segments.
Capital Investments: We invested $52.3 million in
growing the business – including for technology platform
development, expanding our manufacturing capabilities
to a new state-of-the-art manufacturing laser materials
processing technology center in Berlin and adding a new
sales and service center in South Korea.
Disciplined Operations: These actions, plus a consistent
focus on continuous improvement of both products and
processes, yielded a gross margin improvement of 340
basis points and an operating margin increase of 360
basis points compared to last year.
Outcomes: It was another record year for II-VI Incorporated.
Bookings for fiscal 2015 were $762 million, up 10% from
fiscal 2014, and the backlog as we entered fiscal 2016
was $242 million. Our book-to-bill ratio for the past year
was 1.03.
Reported annual revenues for fiscal 2015 of $742 million
grew 9% from fiscal 2014. If we add back the estimated
$12 million negative impact of foreign currency, our revenue
Vincent D. (Chuck) Mattera, Jr.
Francis J. Kramer
growth rate would have been 11%. Adjusted earnings
were $0.94 per share (excluding an acquisition-related
settlement in our favor during the second quarter of $0.11)
for a reported EPS of $1.05 compared to the $0.60 per
share we reported for fiscal 2014.
Cash Generation and Debt Reduction: Cash flow from
operations was a record $129 million compared to $95
million for fiscal 2014. We paid down $66 million in debt.
Some of these initiatives will continue to be priorities in
fiscal 2016 as we implement our vision for a “Strategic
House,” which will provide us with a long-term view of our
priorities and focus while serving as an effective tool for
communicating to our Stakeholders. Our Strategic House
will also provide the foundation while we work toward
building a scalable and sustainable growth company.
We thank each of our 8,500 employees worldwide who
contributed to a successful 2015. In particular, we salute
James Martinelli who will retire this fall after 29 years with
II-VI. Jim currently is Vice President – Strategic Resources
Group; he joined our Company in 1986 and served as
Chief Financial Officer and Treasurer from 1994-2000.
In the following pages, we invite you to explore the
materials we create, the processes by which we produce
them, the innovations they have made possible in the
past and the possibilities they promise for the future.
During this year we will continue to work to establish
new capabilities in the Company, including a world-class
semiconductor laser platform. We enter the year with
renewed energy and enthusiasm to deliver increased
value for our shareholders.
Francis J. Kramer
Chairman and Chief Executive Officer
Vincent D. (Chuck) Mattera, Jr.
President and Chief Operating Officer
II-VI Incorporated 2015 Annual Report
3
II-VI Laser Solutions
Materials We Create:
CVD Diamond
Zinc Selenide
Zinc Sulfide
Zinc Sulfide Multi Spectral
Our Processes:
Chemical vapor deposition
Epitaxial growth
Plasma-assisted chemical vapor deposition
II-VI Incorporated is a leader in engineered materials.
We transform starting materials into solid-state materials
of unparalleled quality and purity. We design and man-
ufacture precision parts and components from these
and other materials using our expertise in low-damage
surface processing, micro-fabrication, thin-film coating
and exacting metrology.
We lead change through innovation. Innovation starts by
listening to our customers whose product and technology
requirements we address in our Research & Development
facilities worldwide.
II-VI Laser Solutions provides a continuum of product
solutions to satisfy customer requirements for high-precision
and performance, efficient, clean, and cost-effective
semiconductor lasers in smaller packages for industrial
applications. Today our customers are processing lighter,
stronger and more advanced materials for products such
as fuel-efficient vehicles, energy-efficient appliances and
electronics, and cutting-edge medical instruments.
Our CO2 laser optics have addressed this core market
since our founding in 1971 and are in demand for 2,700
> 1 kilowatt new CO2 machines each year, as well as
for replacement optics servicing an installed base of
approximately 75,000 machines. In addition, we expect
that our product innovation and global footprint will allow
us to penetrate the large and growing market for < 1
kilowatt CO2 machines. II-VI Infrared is the largest supplier
to this $500M worldwide market.
CO2 lasers are complemented by II-VI HIGHYAG one-
micron solid-state fiber and direct diode laser processing
heads and fiber beam delivery systems used for cutting,
welding, brazing and surface-treatment applications.
HIGHYAG’s Thulium-doped active gain material optical
fibers deliver up to 8 kilowatts of power with user-friendly
process-control software for a precise cut and controlled
seam. HIGHYAG heads offer the most efficient laser light
delivery for the most demanding advanced manufacturing
applications in this $700M market.
Our technologies for emerging markets include poly-
crystalline CVD diamond whose outstanding physical
properties include extreme hardness and strength, high
thermal conductivity and low thermal expansion, excellent
dielectric properties, resistance to chemical attack, and
Industry-leading
manufacturer of
high-powered semicon-
ductor laser components
enabling fiber and direct
diode systems for
material processing,
medical, consumer and
printing applications.
4
II-VI Incorporated 2015 Annual Report
Automotive Manufacturing
Wireless Mouse
Network Servers
Clockwise from top: 850nm SM TO46; High-Power VCSEL Array;
TBC VCSEL; 850nm SM Chip
optical transmission over a wide spectral range. This
material is ideal for applications such as high-energy
microwave windows, radiation detectors for particle
physics, thermal management solutions, and CO2 laser
and windows for applications such as extreme ultraviolet
lithography.
Lastly, at the forefront of our industrial product portfolio,
II-VI Laser Enterprise provides high-power semiconductor
laser components enabling fiber and direct diode laser
systems for material processing, medical, consumer and
printing applications. In addition, we manufacture pump
lasers for optical amplifiers for both terrestrial and
submarine applications and vertical cavity surface emitting
lasers (VCSELs) for optical navigation, high-speed
datacom transceivers and optical sensing for consumer
electronics applications. Beginning early in 2015, we
experienced strong demand for VCSELs in consumer
applications as well as increasing demand for high-speed
VCSEL chips in the rapidly growing data center market,
where VCSELs enable short-distance optical lengths
and faster communications by removing bandwidth
bottlenecks.
High-powered VCSELs are being
developed for consumer and next generation
Datacom applications.
Zinc Selenide Optics
Industrial Laser
Zinc Selenide is a key component of our
industry-leading vertically integrated process
that produces CO2 laser optics and compo-
nents, critical to over 75,000 CO2 laser
systems deployed worldwide.
High-Power Laser Diodes and Pump Lasers
II-VI Incorporated 2015 Annual Report
5
II-VI Photonics
Materials We Engineer:
Amorphous Silicon
Barium Borate Oxide
Calcium Fluoride
Potassium Titanyl Phosphate
Terbium Gallium Garnet (TGG)
Yttrium Aluminum Garnet (YAG)
Yttrium Lithium Fluoride
Yttrium Vanadate
Our Process:
Czochralski crystal growth process
II-VI Photonics provides optical components and crystals
to OEM manufacturers of laser systems for the industrial,
medical, life science and instrumentation markets. The
materials we grow and the components we design and
manufacture provide essential optical building blocks for
systems that carry digital voice and data over fiber and
wireless networks around the globe. These worldwide
communication networks are growing rapidly and reaching
new populations in remote areas. Bandwidth continues
to increase signal speed, scaling up from 40G to 100G
and 400G as higher numbers of digital consumers
demand access to applications like Netflix, iTunes,
YouTube, Facebook, Amazon and other Internet content-
rich, streaming applications on their computers, tablets
and smart phones. These demands are among those
contributing to the growth of the II-VI Photonics business
segment.
Photonics continues to differentiate and lead the market
by providing both cooled and uncooled Dual-Chip 980nm
Pump Laser Modules. Dual-chip solutions offer a signifi-
cant advantage in terms of component density, transient
control, reliability, reduced power consumption and cost
for both terrestrial and submarine optical communication
applications.
As baby boomers age and consume more healthcare
services, markets for laser-based medical applications
will continue to grow. These include medical diagnostics
dentistry, ophthamological uses like laser eye surgery and
Nd:YAG post-cataract-surgery treatment, Nd:YAG-based
dermatology services, and Erbium-doped YAG lasers in
cosmetic and corrective procedures, as well as applica-
tions in microsurgery and accelerated wound healing.
DNA Double Helix
With an integrated global manufacturing
footprint in China, Florida, California and
Vietnam, Photop optics provide comprehen-
sive products, including high-end thin-film
filters, laser crystals, NLO crystals, laser
cavities, precision optical components, and
high-energy laser optics and components.
6
II-VI Incorporated 2015 Annual Report
PACC Filters
Photop optics is a recognized
leader in the manufacture and supply
of crystals, fiber optics, precision
optics and optical assemblies for
optical communications, industrial
lasers, and life science and
instrumentation applications.
Photop is the largest supplier of micro-optics for wave-
length selective switches used in optical communications
systems. As a key supplier to a variety of industrial markets,
II-VI Photonics’ optics and laser gain material products
can be found in solid-state and fiber lasers used in high-
power applications such as cutting and lower-power
applications such as marking and engraving. These
products also address opportunities in the semiconductor
processing, instrumentation, test and measurement,
and research markets.
By combining the capabilities of our business segments
and operating units, II-VI Incorporated has created the
climate for each business to address manufacturing
opportunities across multiple disciplines and markets
while reducing cost and lead times. This enhances our
competitiveness, time to market and profitability. For
example, II-VI Photonics supplies the TGG crystals used
in a II-VI HIGHYAG isolator to minimize optical loss, making
it particularly effective in high-power applications. II-VI
LaserTech ultra-hard material cutting, drilling and micro-
machining laser systems employ YAG rods and mirrors
produced by II-VI Photonics, while the II-VI Photonics’
980nm pump lasers are powered by technology sourced
from our II-VI Laser Enterprise Zurich Fab and are cooled
using Marlow’s thermoelectric coolers.
Micro Prisms
II-VI Photonics is committed to customers and their
success through joint development and engineering of
high-quality photonic and optical networking solutions.
II-VI Incorporated’s internal supply chain, expertise in
design and low-cost manufacturing enables fast ramping
from pilot production to high volume manufacturing to
support customers by the rapid introduction of new,
differentiated products.
Optical Amplifiers are used to boost
optical signals to higher power, often used
both at launch and within a signal network
to maintain a high signal power. The amplifier
is based on erbium doped fiber and can be
incorporated directly into an optical network,
avoiding the need to convert optical signals
to electrical signals for amplification and
re-launch. The fiber is pumped at 980nm to
excite erbium ions in the fiber. These add
gain to a signal as the ions are stimulated
to emit an optical signal at around 1550nm
passing through the fiber.
Fiber Optics
Clockwise from top: EDFA Amplifier; Optical Isolator;
Amplifier Modules; EDFA Amplifier
II-VI Incorporated 2015 Annual Report
7
II-VI Performance Products
Materials We Engineer:
Aluminum Silicon Carbide
Bismuth Telluride
Germanium
Sapphire
Silicon Carbide
Our Processes:
Advanced Physical Vapor Transport
Axial Gradient Transport
Modified and High-pressure
Bridgman-Stockbarger technique
Materials We Refine
& Process:
Aluminum Silicon Carbide
Rare Earth Elements
Reaction Bonded Silicon Carbide and Boron Carbide
Selenium
At II-VI Performance Products, innovation begins in
our laboratories. Here we are dedicated to pushing the
boundaries by conducting internally and externally funded
research and development of materials and processes
that lead to market-transforming products and state-of-
the-art manufacturing processes.
We recently introduced the world’s first 200mm-diameter
Silicon Carbide (SiC) wafer, which will provide the market
with leading-edge quality substrates at diameters that
enable more cost-effective semiconductor device
manufacturing. This 200mm SiC wafer demonstrates
our market-leading crystal growth and fabrication technol-
ogies, as well as our commitment to collaborate with our
customers. Devices built on SiC substrates are used in a
wide range of applications requiring high-power density
and system efficiency, such as electric vehicles, inverters
for photovoltaic solar energy conversion into electricity,
and other renewable energy installations.
We use our germanium and sapphire materials to produce
optical modules, windows and assemblies that are key
components of advanced military platforms for targeting,
navigation and surveillance. Our sapphire windows are
used on multiple Department of Defense targeting systems,
increasing their ability to find and affect targets with greater
precision and from greater ranges. We functionalize
the windows and other surfaces with electro-magnetic
gridding to counter electronic interference, as well as to
make the aircraft nearly invisible to radar detection.
II-VI M Cubed supplies
the semiconductor
equipment market with
advanced ceramics for
critical components used
in front-end process
equipment, as well as
various key material used
in back-end processing
of integrated circuits.
8
II-VI Incorporated 2015 Annual Report
Cutaway image of a Reaction Bonded Silicon Carbide Water Cooled Mirror
Microchip Wafers
Wireless Base Station
Silicon Carbide Wafer
II-VI Marlow, a subsidiary of II-VI Incorporated, is the
world leader in quality thermoelectric cooling technology
for the aerospace, defense, medical, industrial, power
generation and telecommunications markets. At Marlow,
we produce bismuth telluride alloys and pride ourselves
on designing and producing custom modules and
assemblies for thermal management. Promising new
markets are emerging in personal comfort, and Marlow
is currently working with leading companies to develop
unique consumer market solutions, including product
displays, home theater seating, and personal and climate-
controlled beds. We are also developing a suite of
thermoelectric power generators that can provide efficient,
reliable, remote power to sensors incorporated into oil
and gas pipelines.
We have succeeded in integrating recent acquisitions and
weaving them neatly into the fabric of II-VI Incorporated.
Now, the task before us is to continue to provide our
customers with the products they need in smaller, lighter
packages that consume less power. We are well positioned
to invent our future, and it is bright.
The unique electronic and thermal
properties of silicon carbide make it ideally
suited for advanced high-power and high-
frequency semiconductor devices that
operate well beyond the capabilities of
either silicon or gallium arsenide devices.
Silicon Carbide Wafer
Microchip Wafers
Silicon Carbide Wafer Chuck
II-VI Incorporated 2015 Annual Report
9
II-VI Incorporated
Our Strategic House
VISION
To be the global leader developing a stream of innovative solutions,
for a safer, healthier, closer and more efficient world.
Quality
Driven
Fully Engaged
Employees
Manufacturing
Excellence
Innovation
Fully Satisfied
Customers
Exceptional
Business Results
VALUES
Customers First • Honesty & Integrity • Open Communications
Teamwork • Continuous Improvement & Learning • Manage by the Facts
A Safe, Clean and Orderly Workplace
10
II-VI Incorporated 2015 Annual Report
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
for the fiscal year ended June 30, 2015
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
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of
incorporation or organization)
375 Saxonburg Boulevard
Saxonburg, PA
(Address of principal executive offices)
25-1214948
(I.R.S. Employer
Identification No.)
16056
(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
Common Stock, no par value
Name of Each Exchange on Which Registered
Nasdaq 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 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, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
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 31, 2014, was
approximately $798,334,460 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 20, 2015, was 61,222,480.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2015 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. These statements can be identified as those that may predict,
forecast, indicate or imply future results, performance or advancements and by forward-looking words such as “expects,”
“anticipates,” “intends,” “plans,” “projects,” “believes,” “estimates” or similar expressions. Forward-looking statements address,
among other things, our expectations, our growth strategies, our efforts to increase bookings, sales and revenues, projections of our
future profitability, results of operations, capital expenditures, our financial condition or other “forward-looking” information and
include statements about revenues, earnings, spending, margins, costs or our 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. II-
VI Incorporated believes that all forward-looking statements made by it have a reasonable basis, but there can be no assurance that
these expectations, beliefs or projections will actually occur or prove to be correct. Actual results could materially differ from such
statements.
The following 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 2016 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:
Dependency on international sales and successful management of global operations,
Our ability to develop and market new products and processes,
Our ability to keep pace with key industry developments,
Our ability to successfully integrate and capitalize on newly acquired businesses,
Decline in the operating performance of a business segment resulting in impairment of the segment’s goodwill and
indefinite-lived intangible assets,
Global economic and political uncertainties,
Our ability to protect our intellectual property,
Changes in or interpretations of U.S. and non-U.S. laws governing trade, funds flow, employment, social and property
taxes and foreign investment,
Potential costs for violations of applicable environmental, health and safety laws and the costs of complying with
governmental regulations,
Disruption of information and communication technologies, including outages or control breakdowns,
The future availability and prices of raw materials,
The use of defective or contaminated materials in our products which we may be unable to detect until deployment by
customers,
Changes in defense spending and cancellation or changes in defense programs or initiatives,
Changes in tax rates, liabilities or accounting rules,Competition in the markets that we serve,
Our ability to attract and retain key personnel,
The impact of natural disasters or other global or regional catastrophic events in our areas of operation,
Historically high cyclicality of our customers’ end markets,
Impact of commodity prices,
2
The fluctuation of the price of our Common Stock, andProvisions in our Articles of Incorporation and By-Laws, which may limit the
price investors are willing to pay for our Common Stock.The foregoing and additional risk factors are described in more detail herein
under Item 1A. “Risk Factors”. In addition, we operate in a highly competitive and rapidly changing environment and therefore, new
risk factors can arise. It is not possible for management to predict all such risk factors, assess the impact of all such risk factors on our
business nor estimate 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 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 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.
3
Item 1.
BUSINESS
Introduction
PART I
II-VI Incorporated (“II-VI,” the “Company,” “we,” “us,” or “our”) was incorporated in Pennsylvania in 1971. Our executive offices
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-owned subsidiaries. The Company’s name is pronounced “Two Six Incorporated.” The majority of our
revenues are attributable to the sale of engineered materials and opto-electronic components for industrial, military and medical laser
applications, optical communications products, compound semiconductor substrate-based products and elements for material
processing and refinement. Reference to “fiscal” or “fiscal year” means our fiscal year ended June 30 for the year referenced.
Effective July 1, 2014, the Company realigned its organizational structure into three reporting segments for the purpose of making
operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance
Products. The segment information (revenue through operating income) for all periods presented in this document reflects the
realigned segment organization.
The II-VI Laser Solutions segment contains the former Infrared Optics segment, the semiconductor laser portion of the
former Active Optical Products segment (now II-VI Laser Enterprise), and smaller units of high-power laser technology
from the former Near-Infrared Optics segment (now II-VI Suwtech) and the former Advanced Products Group segment
(now II-VI Lasertech).
The II-VI Photonics segment contains the remaining majority of the former Near-Infrared Optics segment (now part of
both II-VI Photop and II-VI Optical Communications) as well as the pump laser and optical amplifier businesses of the
former Active Optical Products segment (now II-VI Optical Communications).
The II-VI Performance Products segment contains the former Military & Materials and the majority of the former
Advanced Products Group segments.
In August 2013, the Company announced that its subsidiary, II-VI Performance Metals, a business in the II-VI Performance Products
segment, would discontinue its tellurium product line. In addition, the Company downsized its selenium product line and now only
provides selenium metal to the Company’s II-VI Laser Solutions segment, while maintaining production of its rare earth element. The
Company’s goal was to provide a reliable supply of selenium for the Company’s internal needs while significantly decreasing write-
downs and profit volatility associated with minor metal index pricing. Financial and operational data included herein for all periods
presented reflects the presentation of the tellurium product line as a discontinued operation.
Our Internet address is 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”): 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
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Schedule 14A related to our annual shareholders’ meetings as well as reports filed by our directors, officers and ten-percent beneficial
owners pursuant to Section 16 of the Exchange Act. In addition, all filings are available via the SEC’s website (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 various board committees. All such documents are located on the Investors page of
our website and are available free of charge.
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, 2015 are set forth in the Consolidated Statements of Earnings and in Note 11 to the Company’s 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 of this Annual Report on Form 10-K related to our foreign operations, which are incorporated herein
by reference.
General Description of Business
We develop and manufacture engineered materials, opto-electronic components and products for precision use in industrial, optical
communications, military, semiconductor and life science applications. We use advanced engineered material growth technologies
coupled with proprietary high-precision fabrication, micro-assembly, thin-film coating and electronic integration to enable complex
opto-electronic 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:
Laser cutting, welding and marking operations,
Optical communication products,
Intelligence, surveillance and reconnaissance,
Semiconductor processing and tooling,
Medical procedures and
Thermo electric cooling and power generation solutions.
A key Company strategy is to develop and manufacture high performance materials that are differentiated from those produced by our
competitors. We focus on providing critical components to the heart of our customers’ assembly lines for products serving the above
noted applications.
Our U.S. production and research and development operations are located in Pennsylvania, California, New Jersey, Texas, Mississippi,
Massachusetts, Connecticut, Delaware, New York and Florida and our non-U.S. production operations are based in China, Singapore,
Vietnam, the Philippines, Germany and Switzerland. We also utilize contract manufacturers in Thailand and China. In addition to
sales offices at most of our manufacturing sites, we have sales and marketing subsidiaries in Hong Kong, Japan, Germany, China,
Switzerland, Belgium, the United Kingdom (“U.K.”), Italy and South Korea. Approximately 63% of our revenues for the fiscal year
ended June 30, 2015 were generated from sales to customers outside of the U.S.
Our Products
The main products for each of our markets are described as follows:
II-VI Laser Solutions Segment
II-VI Infrared Optics Group:
We supply a broad line of precision infrared opto-electronic components such as lenses, output couplers, windows, mirrors
and scan-lenses for use in CO2 lasers. Our precision opto-electronic components are used to attenuate the amount of laser
energy, enhance the properties of the laser beam and focus and direct laser beams to a target work surface. The opto-
electronic components include both reflective and transmissive optics and are made from materials such as zinc selenide,
zinc sulfide, copper, silicon, gallium arsenide and germanium. Transmissive optics used with CO2 lasers are predominately
made from zinc selenide. We believe we are the largest manufacturer of zinc selenide in the world. We supply replacement
optics to end users of CO2 lasers. Over time, optics may become contaminated and must be replaced to maintain peak laser
operations. This aftermarket portion of our business continues to grow as laser applications proliferate worldwide and the
installed base of serviceable laser systems increases each year. We estimate that 85% to 90% of our infrared optics sales
service this installed base of CO2 laser systems. We serve the aftermarket via a combination of selling to OEMs and directly
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to system end users. We are also one of the leading producers of CVD Diamond substrates for applications including multi-
spectral laser optics, dielectric windows, heat sinks, and other applications. Diamond is the ultimate material for a wide
variety of applications because of its outstanding physical properties, including extreme hardness and strength, high thermal
conductivity, low thermal expansion, excellent dielectric properties, resistance to chemical attack, and optical transmission
over a wide spectral range.
II-VI HIGHYAG Division:
Our broad expertise in laser technology, optics, sensor technology and laser applications enables us to supply a broad array
of tools for laser materials processing, including modular laser processing heads for fiber lasers, YAG lasers and other one-
micron laser systems. We also manufacture beam delivery systems including fiber optic cables and modular beam systems.
II-VI Laser Enterprise Division:
Our semiconductor laser diode products cover a broad wavelength from 750 nm to 1500 nm and varying optical output
power ranges. The laser diode products are available as integrated modules with and without active cooling, fiber pigtails or
assemblies.
II-VI Suwtech Division:
We supply high-power laser, green laser, narrow linewidth laser and Q-switched laser solutions for various applications,
including laser leveling, range finding, bio-medical instrumentation, Raman spectroscopy, machine vision, laser
entertainment and display, and digital printing.
II-VI Lasertech Division:
The need for industry to be able to process very hard materials is growing as more applications for materials such as CVD
and PCD Diamond, Poly Crystalline Boron Nitride, and ultra-hard ceramics emerge. The laser cutting machines
manufactured by II-VI Lasertech are specifically designed to cut, drill and etch these kinds of materials.
II-VI Photonics Segment
II-VI Photop Group:
We manufacture products across a broad spectral range in the visible and near-infrared wavelengths. We offer a wide variety
of standard and custom laser gain materials, optics, optical components and optical module assemblies for optical
communications, laser systems, and photonic applications in the medical, life science, industrial, scientific and research and
development markets. Laser gain materials are produced to stringent industry specifications and precisely fabricated to
customer specifications. Key materials and precision optical components for YAG, fiber lasers and other solid-state laser
systems are an important part of our product offerings. We manufacture lenses, windows, prisms, mirrors, gratings, wave-
plates, and polarizers for visible and near-infrared applications, which are used to control or alter visible or near-infrared
energy and its polarization. In addition, we manufacture specialty coated glass wafers used as optical filters in the life
science and optical communications markets, and coated windows used as debris shields in the industrial and medical laser
aftermarkets. We offer fiber optics, micro optics and photonic crystal parts for optical communications, instrumentation and
laser applications, optical components and modules for optical communication networks, as well as diode pumped solid-
state laser devices for optical instruments, display and biotechnology.
II-VI Optical Communications Group:
We manufacture a broad range of passive optical components and modules, leveraging our core micro optics platform for
the filtering, combining, splitting, attenuating and monitoring of optical wavelengths within optical communication systems.
We supply a broad portfolio of cooled and uncooled pumps, both single and multi-mode designs in single chip and multi-
chip configurations based on our gallium arsenide (GaAs) chip technology, facet passivation processes and wafer fab and
module manufacturing capabilities. The single chip designs are predominantly used as low noise pump sources for EDFA
covering gain block, single channel to multi-channel data wavelength-division multiplexing (DWDM), addressing access,
cross-connect, metro and also long haul requirements of the telecom market. Our dual chip pump solutions are designed and
able to address the arrayed amplifier market where 8 or 16 amplification stages are required. Our single mode high-power
uncooled pump modules address both the single channel and small form factor terrestrial market and also the stringent high
reliability demands of the submarine (subsea) network market. The latter is a testament to the stability of our chip, module
design technology and manufacturing capabilities. Finally, we are able to address segments of the cable television market
with both single mode and uncooled multimode GaAs pump lasers, typically used for distribution amplification. In addition,
we offer a wide variety of standard, semi-custom and customer amplifiers. These products are offered at varying levels of
sophistication ranging from a simple collection of active and passive components mounted to a printed circuit board
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assembly (“PCBA”) through assemblies with large amounts of firmware and software which are either mounted onto our
customer’s PCBA’s controlled amplifier modules or plug directly into our customers’ equipment shelf line cards. We offer
EDFA and Raman amplifiers as well as amplifiers which are combined with wavelength selective switches. Also, we are
starting to offer a range of 40G and 100G transceivers which are focused on meeting the transmission needs within data
centers.
II-VI Performance Products Segment
II-VI Optical Systems operation:
We offer optics and optical sub-assemblies for UV, Visible, and Infrared systems including thermal imaging, night vision,
laser designation, missile warning, targeting and navigation systems. Our product offering is comprised of missile domes,
electro-optical windows and sub-assemblies, imaging lenses, UV filter assemblies, laser cavity optics and prisms and other
optical components. Our precision optical products utilize optical materials such as sapphire, germanium, zinc sulfide, zinc
selenide, silicon and spinel. In addition, our products also include crystalline materials such as calcium fluoride, barium
fluoride, YAG, YLF and fused silica. Our products are currently utilized on the F-35 Joint Strike Fighter, F-16 fighter jet,
Apache Attack Helicopter, unmanned platforms such as the Predator and Reaper UAV and ground vehicles such as the
Abrams M-1 Tank and Bradley Fighting Vehicle.
II-VI Performance Metals operation:
Our product offering includes a rare earth element in specific purity levels and forms.
II-VI Marlow operation:
We supply a broad array of TEMs and related assemblies to various market segments. In the defense market, TEMs are used
in guidance systems, smart weapons and night vision systems, as well as soldier cooling. TEMs are also used in products
providing temperature stabilization for telecommunication lasers that generate and amplify optical signals for fiber optic
communication systems. TEMs are also used in the personal comfort market. We also produce and sell a variety of solutions
from thermoelectric components to complete sub-assemblies used in the medical equipment market and other industrial,
commercial and personal comfort applications. Thermoelectric modules, used as power generators, are also applied in a
range of end-use applications. We offer single-stage TEMs, micro TEMs, multi-stage TEMs, planar multi-stage TEMs,
extended life thermo-cyclers, thermoelectric thermal reference sources, power generators and thermoelectric assemblies.
II-VI M Cubed operation:
We supply a diverse array of products to several market segments. In the semiconductor market, reaction bonded SiC is used
to produce wafer chucks, robot end effectors, structural components, and mechanical stage assemblies. In the defense
market, we supply next generation personnel armor, monolithic helicopter seats, and vehicle and aviation armor sub systems.
In the industrial market, we supply wear resistant components, refractory assemblies, and precision optical substrates for
chemical, refractory, and scientific applications.
II-VI Advanced Materials operation:
Our product offerings include 6H-SiC (semi-insulating) and 4H-SiC (semi-insulating and semi-conducting) substrates
which are used in the wireless communications infrastructure, radio frequency (“RF”) electronics, thermal management,
highly efficient (green energy) power conversion and power switching markets. We are also one of the leading producers of
CVD Diamond substrates for applications including multi-spectral laser optics, dielectric windows, heat sinks, and other
applications. Diamond is the ultimate material for a wide variety of applications because of its outstanding physical
properties, including extreme hardness and strength, high thermal conductivity, low thermal expansion, excellent dielectric
properties, resistance to chemical attack, and optical transmission over a wide spectral range. Our CVD diamond materials
are being utilized in semiconductor equipment manufacturing, microwave frequency windows and thermal management
applications.
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Our Markets
Our market-focused businesses are organized by technology and products. Our businesses are composed of the following primary
markets:
II-VI Laser Solutions Segment
II-VI Infrared Optics Group:
Design, manufacture and marketing of engineered materials and opto-electronic components for industrial applications.
Increases in the installed worldwide base of laser machines for a variety of laser processing applications have driven CO2
laser optics component consumption. It is estimated that there are over 75,000 CO2 laser systems currently deployed in
the world. CO2 lasers offer benefits in a wide variety of cutting, welding, drilling, ablation, cladding, heat treating and
marking applications for materials such as steel alloys, non-ferrous metals, plastics, wood, paper, fiberboard, ceramics
and composites. Laser systems enable manufacturers to reduce parts cost and improve quality, as well as improve
process precision, speed, throughput, flexibility, repeatability and automation. Automobile manufacturers, for example,
deploy lasers both to cut body components and to weld those parts together in high-throughput production lines.
Manufacturers of motorcycles, lawn mowers and garden tractors cut, trim, and weld metal parts with lasers to reduce
post-processing steps and, therefore, lower overall manufacturing costs. Furniture manufacturers utilize lasers because of
their easily reconfigurable, low-cost prototyping and production capabilities for customer-specified designs. In high-
speed food and pharmaceutical packaging lines, laser marking is used to provide automated product, date and lot coding
on containers. In addition to being installed by original equipment manufacturers (“OEMs”) of laser systems in new
machine builds, our optical components are purchased as replacement parts by end-users of laser machines to maintain
proper system performance. In newer and developing market segments, SiC and CVD Diamond both exhibit very high
thermal conductivities for use in high-end applications in the semiconductor and opto-electronic markets. CVD
Diamond also has applications in the windows, tooling, microwave and radiation detection markets. We believe that the
current addressable markets serviced by our II-VI Infrared Optics operations are approximately $500 million.
II-VI HIGHYAG Division:
Design, manufacture and marketing of customized technology for laser material processing to deliver both low-power and
high-power one-micron laser light for industrial applications.
In many areas of material processing, laser technology has proven to be a better alternative to conventional production
techniques. It has also enabled novel processing steps not previously achievable with legacy technologies. The precise
cut and elegant seam are visible proof of a laser beam’s machining efficiency. Industrial applications such as welding,
drilling and cutting have driven the recent market growth of the one-micron laser systems, and are demanding increased
performance, lower total cost of ownership, ease of use and portability of the one-micron laser systems. One-micron
laser systems require efficient and reliable tools, including modular laser processing heads for fiber lasers, beam delivery
systems, including fiber optic cables, and modular beam systems. We believe that the current addressable markets
serviced by our II-VI HIGHYAG operations are approximately $700 million.
II-VI Laser Enterprise Division:
Design, manufacture and marketing of advanced semiconductor laser diodes and low-power polarization locked laser diodes.
We market advanced laser technology diodes for material processing, medical, cosmetic, 3-D sensing and printing
applications and are exploring other new market opportunities for our high-power lasers. In addition, we sell low-power
polarization locked products for optical mouse and finger navigation applications. Our market opportunities for Vertical-
Cavity Surface-Emitting Laser (“VCSEL”) products are expanding to include optical high-speed datacom applications
and high-power sensing for consumer electronics applications. We believe that the current addressable markets serviced
by our II-VI Laser Enterprise operations are approximately $300 million.
II-VI Suwtech & II-VI Lasertech Divisions:
Design, manufacture and marketing of high-power lasers for industrial applications and green lasers for consumer, life
science and industrial applications by our II-VI Suwtech division.
Design, manufacture and marketing of ultra-hard material laser cutting machines for industrial applications by our II-VI
Lasertech division.
The need for high-power and green laser for industrial and medical applications continue to grow as does the need for a
laser cutting device capable of processing the next generation of ultra-hard materials like diamond. We believe that the
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current addressable markets serviced by our II-VI Lasertech and II-VI Suwtech operations are approximately
$400 million.
II-VI Photonics Segment
II-VI Photop Group:
Design, manufacture and marketing of a diverse range of customized optics, optical assemblies for consumer and commercial
applications such as fiber optic communications, projection and display products, lasers, medical equipment and bio-medical
instrumentation.
Design, manufacture and marketing of crystal ad optical components to OEM customers for fiber, solid state and gas laser
systems used in industrial and medical applications.
The II-VI Photop market is driven by applications in the optical communications, medical and life science, and industrial
markets. The optical communications market segment requires delivery of ever-increasing data bandwidth and
necessitates innovations in performance and cost of the underlying optics and optical components. Medical and life
science applications continue to gain traction in the market and include aesthetic, vision correction, dental, ophthalmic
and diagnostic lasers and instruments. Industrial market segments are addressed by solid state lasers and fiber lasers,
which are used in high-power applications such as cutting, welding, drilling, and lower power applications such as
marking and engraving. These industrial applications are demanding higher performance levels for less cost and more
efficiency, creating competition for other technologies. II-VI Photop also addresses opportunities in the semiconductor
processing, instrumentation, test and measurement and research segments. We believe that the current addressable
markets serviced by our II-VI Photop operations are approximately $1.4 billion.
II-VI Optical Communications Group:
Design, manufacture and marketing of optical components, assemblies and modules for use in telecommunications and
CATV networks and data centers.
Design, manufacture and marketing of 980 nanometer (“nm”) pump laser diodes for high-power, reliable pump sources for
EDFAs in terrestrial and submarine applications.
Design, manufacture and marketing of Erbium Doped Fiber Amplifiers (“EDFA”) used to compensate for losses in optical
fiber and other optical components and modules in optical transmission systems.
Design, manufacture and marketing of optical monitoring products for communications networks.
Design, manufacture and marketing of transceivers for data networks.
The optical communications market is being driven in part by demand for high-bandwidth communication capabilities
through increasing worldwide usage of the Internet and data services, the growing number of broadband users, mobile
device and cloud computing users, and the greater reliance on high-bandwidth capabilities in our daily lives. High-
bandwidth communication networks are being extended closer to the end user with fiber-to-the-home and other fiber
optic networks. Mobile data traffic also is increasing as smart phones continue to proliferate with increasingly
sophisticated audio, photo, video, email and Internet capabilities, as well as data connection and storage through cloud
computing networks. The resulting traffic, in turn, is felt throughout the network, including the core that depends on
optical technology. Our passive components, assemblies and modules are used for filtering, switching, combining and
routing optical wavelengths within optical networks. Our monitoring products are used for measuring the performance of
optical channels and systems. Our 980 nm pump laser diodes are designed for use as high-power, highly reliable pump
sources for EDFAs in terrestrial access, cross-connect, metro to long haul and undersea (submarine) repeater applications.
Single mode high-power uncooled modules are designed for both the single channel and small form factor terrestrial
market and also the stringent high reliability demands of the submarine (subsea) network market. In addition, we market
EDFAs which are used to compensate for losses in optical fiber and other optical components and modules in optical
transmission systems. We offer optical amplifiers at all levels of functionality, from simple optical modules through full
circuit cards, which plug directly into our customers’ equipment racks and service the metro, regional and long-haul
optical transmission markets. In some cases, we add additional switching and monitoring functionality to the base
amplifier. We believe that the currently addressable markets serviced by our II-VI Optical Communications Group
operations are approximately $1.9 billion.
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II-VI Performance Products Segment
II-VI Optical Systems operation:
Design, manufacture and marketing of Ultra Violet (“UV”), Visible (“VIS”) and Infrared (“IR”) optical components and high
precision optical assemblies, laser gain material and micro-fine conductive mesh patterns for intelligence, surveillance,
reconnaissance and other military, life science and commercial laser and imaging applications.
We provide several key assemblies and optical components such as windows, domes, laser rods and optics and related
subassemblies to military, semiconductor, medical, and life sciences markets for UV, Visible, and Infrared applications
in night vision, targeting, navigation, missile warning, and Homeland Security intelligence, surveillance and
reconnaissance (“ISR”) systems. Infrared window and window assemblies for navigational and targeting systems are
deployed on fixed and rotary-wing aircraft, such as the F-35 Joint Strike Fighter, F-16 fighter jet, Apache Attack
Helicopter, unmanned platforms such as the Predator and Reaper Unmanned Aerial Vehicle (“UAV”) and ground
vehicles such as the Abrams M-1 Tank and Bradley Fighting Vehicle. Additionally, multiple fighter jets, including the F-
16, are being equipped with large area sapphire windows, as a key component for the aircraft, providing advanced
targeting and imaging systems. Our ability to grow large sapphire materials and manufacture these materials into large
area sapphire windows has played a key role in our ability to provide an even larger suite of sapphire panels, which are a
key component of the F-35 Joint Strike Fighter Electro Optical Targeting System. Infrared domes are used on missiles
with infrared guidance systems ranging from small, man-portable designs to larger designs mounted on helicopters,
fixed-wing aircraft and ground vehicles. High-precision domes are an integral component of a missile’s targeting system,
providing efficient tactical capability, while serving as a protective cover to its internal components. The Company also
offers precision optical engineering and manufacturing, with particular efficiency in designing to customer end-item
specifications, assisting with co-engineering designs, and designing for manufacturability. The high precision optical
components and assemblies programs include Deep Impact Comet Flyby HRI & MRI, Lunar Reconnaissance Orbiter,
Hellfire II Missile Optics, Missile launch detection sensor optical assembly, and High Altitude Observatory telescopes
among others. In addition to imaging, many of these systems employ laser designation and range-finding capabilities
supported by our YAG material growth and competency in short wave infrared and visible optics. Turreted systems and
mounted targeting pods employ these capabilities in addition to hand-held soldier systems. Rotary and fixed-wing
platforms also use missile warning systems to protect against shoulder fired man-portable missiles. Our competencies in
material growth 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-optical applications for absorbing and
transmitting energy from the surfaces of aircraft and missiles. Our military optical and non-optical products are sold
primarily to U.S. Government prime contractors and directly to various U.S. Government agencies. Certain products
have applications in commercial, medical and life science markets. We believe that the current addressable markets
serviced by our II-VI Optical Systems operations business are approximately $1.6 billion.
II-VI Performance Metals operation:
Refinement, reclamation, and marketing of a rare earth element for a green energy application.
Rare earth elements are used in many electronic and alternative green energy applications. We believe that the current
addressable market serviced by our II-VI Performance Metals business for its rare earth element is approximately
$40 million.
II-VI Marlow operation:
Design, manufacture and marketing of thermoelectric modules and assemblies for cooling, heating and power generation
applications in the defense, telecommunications, medical, consumer and industrial markets.
Thermoelectric Modules (“TEMs”) are solid-state semiconductor devices that act as small heat pumps to cool, heat and
temperature stabilize a wide range of materials, components and systems. Conversely, the principles underlying
thermoelectrics allow TEMs to be used as a source of power when subjected to temperature differences. TEMs are more
reliable than alternative cooling solutions that require moving parts and provide more precise temperature control
solutions than competing technologies. TEMs also have many other advantages which have spurred their adoption in a
variety of industries and applications including defense and space applications that involve infrared cooled and uncooled
night vision technologies and thermal reference sources that are deployed in state-of-the-art weapons, as well as cooling
high-powered lasers used for range-finding target designation by military personnel. TEMs also allow for temperature
stabilization of telecommunication lasers that generate and amplify optical signals for fiber optics systems.
Thermoelectric-based solutions appear in a variety of medical applications including instrumentation and analytical
applications such as DNA replication, blood analyzers and medical laser equipment. The industrial, commercial and
consumer markets provide a variety of niche applications ranging from desktop refrigerators and wine coolers to
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personal comfort technology, semiconductor processes and test equipment. In addition, power generation applications
are expanding into fields such as waste heat recovery, heat scavenging and co-generation. We believe that the current
addressable markets serviced by our II-VI Marlow operations are approximately $250 million.
II-VI M Cubed operation:
Design, manufacture and marketing of advanced ceramic materials and precision products for the semiconductor, display,
industrial and defense markets.
Metal matrix composites (“MMC”) and reaction bonded ceramics products are found in applications requiring precision,
lightweight, strength, hardness and matched coefficient of thermal expansion. Each market has its own unique
requirements and applications that drive material selection. This is especially true in semiconductor tool applications that
require advanced materials to meet the need for increased tolerance, enhanced thermal stability, faster wafer transfer
speeds, increased yields and reduced stage settling times. The semiconductor markets employ SiC for wafer chucks,
light-wave scanning stages and high temperature, corrosion resistant wafer support systems. Cooled SiC mirrors are used
in the illumination systems of lithography tools. The industrial market uses a variety of ceramic materials for
applications requiring chemical inertness or high temperature tolerance such as in flat panel display capital equipment,
and refractory components. The defense market uses MMCs for protective body armor as well as protection for ground,
air and naval resources. We believe that the current addressable markets serviced by our II-VI M Cubed operations are
approximately $400 million.
II-VI Advanced Materials operation:
Design, manufacture and marketing of single crystal SiC substrates and polycrystalline CVD diamond materials for use in the
mobile communications, renewable energy, industrial, defense, semiconductor equipment and thermal management markets.
SiC is a wide bandgap semiconductor material that offers high-temperature, high-power and high-frequency capabilities
as a substrate for applications at the high-performance end of the defense, telecommunication and industrial markets. SiC
has a high number of intrinsic physical and electronic advantages over competing semiconductor materials such as
silicon and gallium arsenide. For example, the high thermal conductivity of SiC enables SiC-based devices to operate at
high-power levels and still dissipate the excess heat generated. II-VI Advanced Materials supplies the base SiC
substrates into this market. SiC based structures are being developed and deployed for the manufacture of a wide variety
of microwave and power switching devices. High-power, high-frequency SiC-based microwave devices are used in next
generation wireless switching telecommunication applications and in both commercial and military radar applications.
SiC-based, high-power, high-speed devices improve the performance, efficiency and reliability of electrical power
transmission and distribution systems (“smart grid”). They also provide power conditioning and switching in power
supplies and motor controls in a wide variety of applications including aircraft, hybrid vehicles, industrial,
communications and green energy applications. Both SiC and CVD Diamond are being utilized in optical and electronic
applications requiring high thermal conductivity for advanced thermal management. CVD Diamond also has applications
in the semiconductor equipment (EUV Lithography), windows, tooling, microwave and radiation detection markets. We
believe that the current addressable markets serviced by our II-VI Advanced Materials operations are approximately
$125 million.
Our Strategy
Our strategy is to build businesses with core world-class engineered materials capabilities to penetrate new markets through
innovative technologies and platforms, new product introductions and performance improvements. Our materials capabilities include:
II-VI Infrared Optics: Zinc Selenide (ZnSe), Zinc Sulfide (ZnS), Zinc Sulfide Multi Spectral (ZnS-MS), and CVD
Diamond
II-VI Laser Enterprise: Epitaxial growth of Aluminum Indium Gallium Arsenide (AlInGaAs) based semiconductor laser
materials
II-VI Photonics: Yttrium Aluminum Garnet (YAG), Yttrium Lithium Fluoride (YLF), Calcium Fluoride (CaF2), Yttrium
Vanadate (YVO4), Potassium Titanyl Phosphate (KTP), Barium Borate Oxide (BBO), Terbium Gallium Garnet (TGG)
and Amorphous Silicon (a-Si)
II-VI Optical Systems: Germanium (Ge), Silicon (Si), Sapphire (Al2O3), Yttrium Aluminum Garnet (YAG), Yttrium
Lithium Fluoride (YLF), and Calcium Fluoride (CaF2)
II-VI Performance Metals: Processing and Refinement: Selenium (Se) for internal consumption and a Rare Earth Element
II-VI Marlow: Bismuth Telluride (Bi2Te3)
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II-VI M Cubed: Metal Matrix Composites (“MMC”), Reaction Bonded Ceramic (RB SiC and RB B4C) and Aluminum
Silicon Carbide (Al-SiC)
II-VI Advanced Materials: SiC Substrates, CVD Diamond
A substantial portion of our business is based on sales orders with market leaders, which enable 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 additional growth initiatives in the areas
of:
Identify New Products and Markets. We intend to identify new technologies, products and markets to meet evolving
customer requirements for high performance engineered materials through our dedicated corporate research and
development program to increase new product revenue and maximize return on investment.
Balanced Approach to Research and Development. Our research and development program includes both internally and
externally funded research and development expenditures, targeting an overall investment of between 7 and 9 percent of
revenues. 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. By combining the capabilities of our various business segments and operating units, we
have created opportunities for our businesses to address manufacturing opportunities across multiple disciplines and
markets and to reduce cost and lead time, thus enhancing competiveness, time to market and profitability. Where
appropriate, we develop and/or acquire technological capabilities in areas such as material refinement, crystal growth,
fabrication, diamond-turning, thin-film coating, metrology and assembly.
Investment in Low Cost Manufacturing. We strategically invest in our manufacturing operations worldwide, including
Asia, to increase production capacity, capabilities and cost effectiveness. The majority of our capital expenditures are used
in our manufacturing operations.
Enhance Our Performance and Reputation as a Quality and Customer Service Leader. We have established ourselves as
a consistent, high-quality supplier of components into our customers’ products and are committed to continuous
improvement. In many cases, we deliver on a just-in-time basis. We are implementing a global quality transformation
process eliminating costs of non-conforming materials and processes.
Identify and Complete Strategic Acquisitions and Alliances. From time to time we carefully evaluate strategic acquisitions
and alliances with companies whose products or technologies may complement our current products, expand our market
opportunities or create synergies with our current capabilities. We seek to 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.
Research, Development and Engineering
During the current fiscal year ended June 30, 2015, the Company launched a new initiative to identify, invest in and focus our research
and development on new products across the Company in an effort to accelerate our organic growth. This initiative 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 9 percent 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.
We devote significant resources to research, development and engineering programs directed at the continuous improvement of our
existing products and processes and to the timely development of new technologies, materials and products. We believe that our
research, development and engineering activities are essential to establish and maintain a leadership position in each of the markets we
serve. As of June 30, 2015, we employed 1,010 people in research, development and engineering functions, 645 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.
12
During the fiscal year ended June 30, 2015, we focused our research and development investments in the following areas:
Silicon Carbide Technology: SiC substrate technology development efforts continued to move forward, with emphasis in
the areas of defect density reduction, substrate fabrication, surface polishing, diameter expansion and cost reduction.
Through these efforts, we have become one of the leading suppliers of high quality 150mm SiC material and have
emerged as the first supplier of 200mm SiC material. Our research and development efforts have been both internally and
externally funded.
CVD Diamond Technology: The Company continued to develop CVD synthetic diamond materials for various optical
applications, including EUV lithography. The Company’s efforts are focused on improving performance and quality,
reducing cost and broadening our product portfolio beyond infrared window applications. Our research and development
efforts in this area have been internally funded.
Photonics Design: We have ongoing efforts to design, refine and improve our photonic crystal materials, precision optical
and micro-optical parts, passive and active optical components and modules, components for fiber lasers and laser devices
for instrumentation and display. Our research and development efforts in this area have been internally funded.
Micro-Optics Manufacturing: Systems are driving towards smaller, more compact platforms and packages which are also
reducing the size of the optical components that support these systems. The Company invests in equipment to manufacture
substrates using high-volume, computer-controlled manufacturing processes. Our research and development efforts in this
area have been both internally and externally funded.
Thermoelectric Materials and Devices: We continued to develop the industry-leading Bi2Te3 for thermoelectric cooling
and heating applications. Our research and development has focused on achieving levels of miniaturization and watt
density beyond materials produced by standard crystal growth techniques. In addition, we are developing capabilities in
thermoelectric power generation materials that, combined with our intellectual property position, will allow us to bring to
market new thermoelectric products. Our research and development efforts in this area have been both internally and
externally funded.
Metal Matrix Composites and Reaction Bonded Ceramics: We continued to support OEMs in connection with new
product development relating to process, inspection and test measurement tools in both the front and back ends of the
semiconductor fabrication. Our research and development efforts in this area have been both internally and externally
funded.
High-power Laser Diodes and High Volume Components: Our engineering efforts focus on increasing the fiber coupled
optical output power of our multi-emitter modules. The Company is focusing on the development of high-power VCSELs
for applications in consumer devices as well as on the development of next generation high speed VCSELs for datacom
applications. Our research and development efforts in this area have been internally funded.
Pump Lasers: We continued our investment in next generation GaAs pump chip and module for both terrestrial high-
power and undersea improved reliability and performance. We are developing an indium phosphide growth and
processing capability in order to address the market with performance competitive design elements brought across from
the high volume 980nm pump capability. Our research and development efforts in this area have been internally funded.
Optical Amplifiers: We continued to invest in broadening the range of semi-custom and custom amplifiers to service our
tier 1 customers. Our research and development efforts in this area have been internally funded.
Optical Monitoring: We continued our investment in optical channel monitors. We also started efforts on developing
Optical Time Domain Reflectometer (“OTDR”) monitors for measuring the health of the outside fiber plant and
connections within central offices. Our research and development efforts in this area have been internally funded.
Transceivers: We continued our investment in developing 40G and 100G transceivers for use within data centers. Our
research and development activities in this area have been internally funded.
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. When faced with potential infringement of our proprietary
information, we have in the past and will continue to assert and vigorously protect our intellectual property rights.
Internally funded research and development expenditures were $51.3 million, $42.5 million and $22.7 million for the fiscal years
ended June 30, 2015, 2014 and 2013, respectively. For these same periods, externally funded research and development expenditures
were $9.5 million, $3.5 million and $4.5 million, respectively.
13
Marketing and Sales
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 produced and sold to our new and established customers in all markets.
Each of our subsidiaries is responsible for its own worldwide marketing and sales functions, although certain subsidiaries sell more
than one product line. However, there is significant cooperation and coordination among our subsidiaries to utilize the most efficient
and appropriate marketing channel when addressing diverse applications within markets.
Our sales forces develop effective communications with our OEM and end-user customers worldwide. Products are actively marketed
through targeted mailings, telemarketing, select advertising and attendance at trade shows and customer partnerships. Our sales force
includes a highly-trained team of application engineers to assist customers in designing, testing and qualifying our parts as key
components of our customers’ systems. As of June 30, 2015, we employed 293 individuals in sales, marketing and support.
We do business with a number of customers in the defense industry, who in turn generally contract with a governmental entity,
typically a U.S. governmental 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 of this Annual Report on Form 10-K.
Manufacturing Technology and Processes
As noted in the “Our Strategy” section, many of the products we produce depend on our ability to manufacture and refine technically
challenging materials and components. The ability to produce, process and refine these difficult materials and to control their quality
and yields is an expertise of the Company that is critical to the performance of our customers’ instruments and systems. In the markets
we serve, there are a limited number of 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
advantages and proximity to our customers. We employ numerous advanced manufacturing technologies and systems at our
manufacturing facilities. These include automated CNC (Computer Numeric Control) optical fabrication, high throughput thin-film
coaters, micro-precision metrology and custom-engineered automated furnace controls for the crystal growth processes.
Manufacturing products for use across the electro-magnetic spectrum requires the capability to repeatedly produce products with high
yields to atomic tolerances. We embody a technology and quality mindset that gives our customers the confidence to utilize our
products on a just-in-time basis straight into the heart of their production lines.
Export and Import Compliance
We are required to comply with various export/import control and economic sanction laws, including:
The International Traffic in Arms Regulations (“ITAR”) administered by the U.S. Department of State, Directorate of
Defense Trade Controls, which, among other things, imposes license requirements on the export from the U.S. of defense
articles and defense services, which are items specifically designed or adapted for a military application and/or listed on
the U.S. Munitions List;
The Export Administration Regulations (“EAR”) administered by the U.S. Department of Commerce, Bureau of Industry
and Security, which, among other things, imposes licensing requirements on the export or re-export of certain dual-use
goods, technology and software, which are items that potentially have both commercial and military applications;
The regulations administered by the U.S. Department of Treasury, Office of Foreign Assets Control, which implement
economic sanctions imposed against designated countries, governments and persons based on U.S. foreign policy and
national security considerations; and
The import regulatory activities of the U.S. Customs and Border Protection.
Foreign governments have also implemented similar export and import control regulations, which may affect our operations or
transactions subject to their jurisdiction. For additional discussions regarding our import and export compliance, see the discussion set
forth in Item 1A of this Annual Report Form on Form 10-K.
14
Sources of Supply
The major raw materials we use include zinc, selenium, zinc selenide, zinc sulfide, hydrogen selenide, hydrogen sulfide, tellurium,
yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, gallium arsenide, copper,
germanium, molybdenum, quartz, optical glass, diamond, and other materials. Excluding our own production, there are more than two
external suppliers for all of the above materials except for zinc sulfide, hydrogen selenide and thorium fluoride, for which there is only
one proven source of supply outside of the Company’s capabilities, and zinc selenide, for which there are no other proven external
sources of supply. For many materials, we have entered into purchase arrangements which provide discounts for annual volume
purchases in excess of specified amounts.
The continued high-quality of and access to these materials is critical to the stability and predictability of our manufacturing yields.
We test materials at the onset of the production process. Additional research and capital investment may be needed to better define
future starting material specifications. We have not experienced significant production delays due to shortages of materials. However,
we do occasionally experience problems associated with vendor-supplied materials not meeting contract specifications for quality or
purity. As discussed in greater detail in Item 1A, of this Annual Report on Form 10-K, significant failure of our suppliers to deliver
sufficient quantities of necessary high-quality materials on a timely basis could have a materially adverse effect on our results of our
operations.
15
Customers
The main groups of customers by segments are as follows:
Segment:
II-VI Laser
Solutions
Group/Division:
II-VI Infrared
Optics Group
Our Customers Are:
OEM and system integrators of industrial,
medical and military laser systems.
II-VI HIGHYAG
Division
II-VI Laser
Enterprise
Division
II-VI Photop
Group
and
II-VI Optical
Communications
Group
II-VI
Photonics
II-VI
Performance
Products
II-VI Optical
Systems
II-VI Marlow
II-VI M Cubed
II-VI Advanced
Materials
Laser end users who require replacement
optics for their existing laser systems.
Military, aerospace and commercial
customers requiring products for use in
advanced targeting, navigation and
surveillance.
Automotive manufacturers, laser
manufacturers and system integrators.
Manufacturers of industrial laser
components and optical communication
equipment.
Worldwide network system and sub-
system providers of telecommunications,
data communications and cable TV.
Global manufacturers of commercial and
consumer products used in a wide array of
instruments, fiber lasers, display and
projection devices.
Manufacturers of equipment and devices
for aerospace, defense, life science and
commercial markets.
Manufacturers and developers of
equipment and devices for defense, space,
telecommunications, medical, industrial,
automotive, personal comfort and
commercial markets.
Manufacturers and developers of
integrated circuit capital equipment for
the semiconductor industry.
Manufacturers and developers of products
and components for various defense and
industrial markets.
Manufacturers and developers of
equipment and devices for high-power RF
electronics and high-power and voltage
switching and power conversion systems
for both commercial and military
applications.
Manufacturers of high-power optical and
electronic devices requiring advanced
thermal management solutions.
16
Trumpf, Inc.
Bystronic, Inc.
Rofin-Sinar Technologies, Inc.
Caterpillar, Inc.
Representative Customers:
Honda of America Mfg., Inc.
Northrop Grumman
Lockheed Martin Corporation
Corporation.
Volkswagen AG
Laserline GmbH.
Laserline GmbH
Huawei Technologies, Co.,
Ltd.
Cisco Systems, Inc.
Huawei Technologies, Co.,
Ltd.
Cisco Systems, Inc.
Corning Incorporated
Google, Inc.
Lockheed Martin Corporation
Raytheon Company
BAE Systems
Boeing Corporation
Northrup Grumman
Corporation
Bio-Rad Laboratories, Inc.
Raytheon Company
Flextronics International Ltd.
ASML Holding NV
Nikon Corporation
KLA-Tencor
BAE Systems
Corning Incorporated.
IQE plc
Infineon Technologies
Competition
We believe we are a global leader in many of our product families. We compete on the basis of the highly engineered nature of our
products, quality, 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 main groups of our competitors are as
follows:
Segment:
II-VI Laser Solutions
Areas of Competition:
Infrared laser optics
Automated equipment and laser
material processing tools to deliver
high-power one-micron laser systems
Semiconductor laser diodes for the
industrial and consumer markets
II-VI Photonics
Optical component and optics products
Optical amplifier modules
II-VI Performance
Products
Infrared optics for military applications
Sumitomo Electric Industries, Ltd.
Competitors:
Newport Corporation
Optoskand AB
Precitec, Inc
Sumitomo Electric Industries, Ltd.
JDSU Uniphase Corporation
Finisar Corporation
Avago Technologies
Koninklijke Philips N.V
Jenoptik AG
Osram Licht AG
O-Net Communications Group Ltd.
OPLINK Communication, LLC
Axsun
Accelink
O-Net Communications Group, Ltd.
DRS Technologies, Inc.
UTC Aerospace Systems (formerly Goodrich
JDSU Uniphase Corporation
Finisar Corporation
TEMs
MMCs and reaction bonded ceramics
products
Single crystal SiC substrates
Corporation)
In-house fabrication and thin-film coating
capabilities of major military customers
Komatsu, Ltd.
Laird plc
Ferrotec Corporation
Berliner Glas
CoorsTek, Inc.
Cree, Inc.
Dow Corning Corporation
Nippon Steel & Sumitomo Metal
SiCrystal AG
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.
17
Bookings and Backlog
We define our bookings as customer orders received that are expected to be converted to revenues over the next twelve months. For
long-term customer orders, to address the inherent uncertainty of orders that extend far into the future, the Company records only
those orders which are expected to be converted into revenues within twelve months from the end of the reporting period. Bookings
are adjusted if changes in customer demands or production schedules move a delivery beyond twelve months. For the year ended June
30, 2015, our bookings were approximately $762 million compared to bookings of approximately $691 million for the year ended
June 30, 2014.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2015,
our backlog was approximately $242 million, compared to approximately $220 million at June 30, 2014.
Employees
As of June 30, 2015, we employed 8,490 persons worldwide. Of these employees, 1,010 were engaged in research, development and
engineering, 6,516 in direct production (of which 1,114 are employees of Photop in China who work under contract manufacturing
arrangements for customers of the Company) and the remaining balance of the Company’s employees work in sales and marketing,
administration, finance and support services. Our production staff includes highly skilled optical craftsmen. We have a long-standing
practice of encouraging active employee participation in areas of operations management. We believe our relations with our
employees are good. We reward our employees with incentive compensation based on achievement of performance goals. There are
131 employees located in the United States and the Philippines who are covered under collective bargaining agreements. The
Company’s collective bargaining agreement in the Philippines will expire in June 2016. The collective bargaining agreement covering
certain U.S. based employees expired August 5, 2015. The Company is currently in negotiations to extend the collective bargaining
agreement that expired in the U.S.
Trade Secrets, Patents and Trademarks
We rely on a combination of trade secrets, proprietary know-how, invention disclosures, patents and contractual provisions to 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. We have entered into selective intellectual property licensing
agreements. When faced with potential infringement of our proprietary information, we have in the past and will continue to assert
and vigorously protect our intellectual property rights. We have confidentiality and noncompetition agreements with certain personnel.
We require that all U.S. employees sign a confidentiality and noncompetition agreement upon their commencement of employment
with us.
The processes and specialized equipment utilized in crystal growth, infrared materials fabrication and infrared optical coatings as
developed by us are 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 infrared optical 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.
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Item 1A. RISK FACTORS
The Company cautions investors that its performance and, therefore, any forward-looking statement, is subject to risks and
uncertainties. The following material risk factors may cause the Company’s future results to differ materially from those projected in
any forward-looking statement. 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.
Our Future Success Depends on International Sales and Successful Management of Global Operations
Sales to customers in countries other than the U.S. accounted for approximately 63%, 65% and 56% of revenues during the years
ended June 30, 2015, 2014 and 2013, respectively. We anticipate that international sales will continue to account for a significant
portion of our revenues for the foreseeable future. In addition, we manufacture products in China, Singapore, Vietnam, the Philippines,
Germany, and Switzerland, and through contract manufacturers in Thailand and China, and maintain direct sales offices in Hong Kong,
Japan, Germany, Switzerland, the U.K., Belgium, China, Singapore, Italy and South Korea. Sales and operations outside of the U.S.
are subject to certain inherent risks, including fluctuations in the value of the U.S. dollar relative to foreign currencies, global
economic uncertainties, tariffs, quotas, taxes and other market barriers, political and economic instability, restrictions on the export or
import of technology, potentially limited intellectual property protection, difficulties in staffing and managing international operations
and potentially adverse tax consequences, and required compliance with U.S.- and non-U.S. laws and regulations. More specifically,
we are subject to laws and regulations worldwide affecting our operations outside the U.S. in areas including, but not limited to, IP
ownership and infringement, tax, customs, import and export requirements, anti-corruption and anti-bribery, foreign exchange controls
and cash repatriation restrictions, foreign investment, data privacy requirements, anti-competition, pensions and social insurance,
employment, and environment, health, and safety. Compliance with these laws and regulations may be onerous and expensive and
requirements may differ among jurisdictions. Further, the promulgation of new laws, changing in existing laws and abrogation of
local regulations by national laws may have a negative impact on our business and prospects. In addition, certain laws and regulations
are relatively new and their interpretation and enforcement involve significant uncertainties. There can be no assurance that any of
these factors will not have a material adverse effect on our business, results of operations or financial condition.
Our Continued Success Depends on Our Ability to Develop New Products and Processes
In order to meet our strategic objectives, we must continue to develop, manufacture and market new products, develop new processes
and improve existing processes. As a result, we expect to continue to make significant investments in research and development and to
continue to consider from time to time the strategic acquisition of businesses, products or technologies complementary to our business.
Our success in developing, introducing and selling new and enhanced products depends upon a variety of factors including product
selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing
and assembly processes, effective sales and marketing and product performance in the field. 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.
Keeping Pace with Key Industry Developments is Essential
The introduction of products or processes utilizing new developments could render existing products or processes obsolete or
unmarketable. Our continued success will depend upon our ability to develop and introduce, in a timely and cost-effective manner,
new products, processes and applications that keep pace with developments and address increasingly sophisticated customer
requirements. There can be no assurance that we will be successful in identifying, developing and marketing new products,
applications and processes and that we will not experience difficulties that could delay or prevent the successful development,
introduction and marketing of product or process enhancements or new products, applications or processes, or that our products,
applications or processes will adequately meet the requirements of the marketplace and achieve market acceptance. Our business,
results of operations and financial condition could be materially and adversely affected if we were to incur delays in developing new
products, applications or processes or if they do not achieve market acceptance.
We May Expand Product Lines and Markets by Acquiring Other Businesses, Which May Adversely Affect our Results and
Affect the Value of our Stock Following Such Acquisitions
Our business strategy includes expanding our product lines and markets through both internal product development and acquisitions.
We have completed various acquisitions in recent years and the success of these acquisitions will depend, in part, on our ability to
realize the anticipated benefits from integrating and successfully running the businesses acquired. The strategic acquisition of
businesses, products or technologies complementary to our business involves numerous potential risks, including difficulties in the
assimilation of the acquired business and products, uncertainties associated with operating in new markets, working with new
customers and the potential loss of the acquired company’s key personnel. In addition, acquired businesses may experience operating
19
losses as of, and subsequent to, the acquisition date. Further, we significantly increased our long-term debt to finance these
acquisitions, the costs of which (in terms of interest expense and similar debt service costs), must be weighed against the potential
benefits of such acquisitions. The anticipated benefits and cost savings of an acquisition may not be realized fully, or at all, or may
take longer to realize than expected, and as a result our results of operations, financial position, and cash flow may be adversely
affected.
Further, any future business acquisitions completed by us may result in potentially dilutive issuances of our equity securities, the
incurrence of debt, contingent liabilities and amortization expense related to intangible assets acquired, any of which could have a
material adverse effect on our business, results of operations or financial condition.
Declines in the Operating Performance of One of Our Business Segments Could Result in an Impairment of the Segment’s
Goodwill and Indefinite-Lived Intangible Assets
As of June 30, 2015, we had goodwill and indefinite-lived intangible assets of approximately $195.9 million and $14.4 million,
respectively, on our Consolidated Balance Sheet. In accordance with applicable accounting guidance, we test our goodwill and
indefinite-lived intangible assets for impairment on an annual basis or when an indication of possible impairment exists, to determine
whether the carrying value of our assets is still supported by the fair value of the underlying business. To the extent that it is not, we
are required to record an impairment charge to reduce the asset to fair value. A decline in the operating performance of any of our
business segments could result in an impairment charge which could have a material adverse effect on our results of operations or
financial condition.
General Global Economic Conditions 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 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. Because all components of our forecasting are dependent upon estimates
of growth or contraction in the markets we serve and demand for our products, the prevailing global economic uncertainties render
estimates of future income and expenditures very difficult to make. In addition, changes in general economic conditions may affect
industries in which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’
products due to economic downturn, and 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 disruptions to the credit and financial markets in the U.S., Europe and elsewhere;
adverse effects of ongoing stagnation in the European economy; slowdown in the Chinese economy; contractions or limited growth in
consumer spending or consumer credit; and adverse economic conditions that may be specific to the Internet, e-commerce and
payments industries. These changes may negatively affect sales of products, increase exposure to losses from bad debt and commodity
prices, increase the cost and availability of financing and increase 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.
There Are Limitations on the Protection of Our Intellectual Property
We rely on a combination of trade secret, patent, copyright and trademark laws combined with employee noncompetition and
nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps taken by us will be
adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance that third-
parties will not assert infringement claims against us in the future. Asserting our intellectual property rights or defending against third-
party claims could involve substantial expense, thus materially and adversely affecting our business, results of operations or financial
condition. In the event a third-party were successful in a claim that one of our processes infringed its proprietary rights, we could be
required to pay substantial damages or royalties, or expend substantial amounts in order to obtain a license or modify processes so that
they no longer infringe such proprietary rights, any of which could have a material adverse effect on our business, results of operations
or financial condition.
We Are Subject to Governmental Regulation
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 various import laws and export control and economic sanctions laws, which may affect
our transactions with certain customers, business partners and other persons, including in certain cases dealings with or
20
between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may
prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain
an export license before exporting the controlled item. Compliance with the various 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 technology necessary to develop and manufacture certain Company products are subject to U.S. export control
laws and similar laws of other jurisdictions, and the Company 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 U.S.
Our agreements relating to the sale of products to government entities may be subject to termination, reduction or
modification in the event of changes in government requirements, reductions in federal spending and other factors. We are
also subject to investigation and audit for compliance with the requirements of government contracts, including
requirements related to procurement integrity, export control, employment practices, the accuracy of records and the
recording of costs. A failure to comply with these requirements might result in suspension of these contracts and
suspension or debarment from government contracting or subcontracting.
In addition, 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.
We Are Subject to Stringent Environmental Regulation
We use or generate certain hazardous substances in our research and manufacturing facilities. 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 protective equipment, process controls and specialized training to minimize risks
to employees, surrounding communities and the environment resulting 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. We do not carry environmental impairment insurance.
We have in place an emergency response plan with respect to our generation and use of the hazardous substance Hydrogen Selenide.
Special attention has been given to all procedures pertaining to this gaseous material to minimize the chances of its accidental release
into the atmosphere.
With respect to the manufacturing, use, storage and disposal of the low-level radioactive material Thorium Fluoride, our facilities and
procedures have been inspected and licensed by the Nuclear Regulatory Commission. Thorium-bearing by-products are collected and
shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah.
The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy
metals or airborne particulates, are believed by us to be in material compliance with regulations. We believe that we have obtained all
of the permits and licenses required for operation of our business.
Although we do not know of any material environmental, safety or health problems in our properties or processes, there can be no
assurance that problems will not develop in the future which could have a material adverse effect on our business, results of operations
or financial condition.
We May Be Adversely Affected by Climate Change Regulation
In many of the countries in which we operate, government bodies are increasingly enacting or contemplating enacting legislation and
regulations in response to potential impacts of climate change. These laws and regulations may be mandatory or voluntary, and have
the potential to impact our operations directly or indirectly through implications on 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, costs to purchase or profits from sales of, allowances or credits under a “cap and trade”
system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in
competitive position relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods
produced by us and indirectly, from changes in costs of goods sold.
21
Regulations Related to Conflict Minerals Could Adversely Impact Our Business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contain provisions to improve transparency and accountability
concerning the supply of gold, columbite-tantalite (coltan), cassiterite and wolframite, including their derivatives, which are limited to
tantalum, tin and tungsten, known as “conflict minerals,” originating from the Democratic Republic of Congo (DRC) and adjoining
countries (collectively known as the "covered countries"). Pursuant to these rules, the SEC has adopted certain annual disclosure and
reporting requirements for those companies that use conflict minerals in their products, regardless of whether such minerals were
mined from the covered countries, compliance with which began in 2014. We could incur significant costs associated with complying
with these disclosure requirements, including costs related to our due diligence efforts to determine the sources of any conflict
minerals used in our products. These rules could adversely affect the sourcing, supply and pricing of materials we use in our products,
particularly if it turns out that there are only a limited number of suppliers offering conflict minerals that are not from recycled or
scrap sources, can be traced to a country of origin other than the covered countries, or can be traced to a source within the covered
countries that definitely does not finance or benefit armed groups in those countries. We cannot be sure that we will be able to obtain
products from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we
determine that certain of our products contain conflict minerals originating from the covered countries and we cannot definitively
determine whether the conflict minerals financed or otherwise benefited armed groups, or if we are unable to sufficiently verify the
origins of all of the conflict minerals used in our products through the due diligence procedures we implement.
Data Breach Incidents and Breakdown of Information and Communication Technologies Could Disrupt our Operations and
Impact Our Financial Results
In the course of our business, we collect and store sensitive data, including intellectual property [both proprietary and of our
customers], as well as proprietary business information. We could be subject to service outages or breaches of security systems which
may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or
data including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can
create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an
incident, if we are unable to prevent such security or privacy breaches, our operations could be disrupted or we may suffer legal claims,
loss of reputation, financial loss, property damage, or regulatory penalties because of lost or misappropriated information.
We Depend on Highly Complex Manufacturing Processes That Require Products from Limited Sources of Supply
We utilize high-quality, optical grade zinc selenide (ZnSe) in the production of many of our infrared optical products. We are the
leading producer of ZnSe for our internal use and for external sale. The production of ZnSe is a complex process requiring a highly
controlled environment. A number of factors, including defective or contaminated materials, could adversely affect our ability to
achieve acceptable manufacturing yields of high quality ZnSe. No proven external sources of ZnSe are currently available. Lack of
adequate availability of high quality ZnSe could have a material adverse effect upon us. There can be no assurance that we will not
experience manufacturing yield inefficiencies which could have a material adverse effect on our business, results of operations or
financial condition.
We produce Hydrogen Selenide gas which is used in our production of ZnSe. There are risks inherent in the production and handling
of such material. Our lack of proper handling of Hydrogen Selenide could require us to curtail our production of Hydrogen Selenide.
Hydrogen Selenide is available from only one outside source whose quantities and quality may be limited. The cost of purchasing
such material is greater than the cost of internal production. As a result, the purchase of a substantial portion of such material from the
outside source would increase our ZnSe production costs. Therefore, our 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 utilize other high purity and relatively uncommon materials and compounds to manufacture our products
including, but not limited to, Zinc Sulfide (ZnS), Yttrium Aluminum Garnet (YAG), Yttrium Lithium Fluoride (YLF), Calcium
Fluoride (CaF2), Germanium (Ge), Selenium (Se), Telluride (Te), Bismuth Telluride (Bi2Te3) and Silicon Carbide (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.
Some Systems That Utilize 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 utilize 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, and these third-party products 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
22
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.
Continued U.S. Budget Deficits Could Result in Significant Defense Spending Cuts and/or Reductions in Defense Programs,
which Could Adversely Impact the Company
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 12% of revenues for the fiscal year ended June 30, 2015. These customers in turn 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, such as the ongoing sequestration of the defense budget, which 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 U.S. 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. 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.
We May Encounter Substantial Competition
We may encounter substantial competition from other companies in the same market, including established companies with significant
resources. Some of our competitors may have financial, technical, marketing or other capabilities that are more extensive than ours
and 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, and such competition could have a material adverse effect
on our business, results of operations or financial condition.
Our Success Depends on Our Ability to Retain Key Personnel
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, and 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.
Natural Disasters or Other Global or Regional Catastrophic Events Could Disrupt Our Operations and Adversely Affect
Results
We may be exposed to business interruptions due to catastrophe, 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. A Significant Portion of Our Business is
Dependent on Cyclical Industries
Our business is significantly dependent on the demand for products produced by end-users of industrial lasers and optical
communication products. 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. This cyclical demand could have a
material adverse effect on our business, results of operations or financial condition.
23
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 changes 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. As a result, the
negative impact from changes in commodity prices may not be recovered through our product sales, and as such could have a material
adverse effect on our net earnings and financial condition.
The Market Price of Our Common Stock Can Be Highly Volatile
Factors that could cause fluctuation in our stock 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.
Many of these factors are beyond our control. These factors could cause the market price of our Common Stock to decline, regardless
of our actual operating performance.
Provisions in Our Articles of Incorporation and By-Laws May Limit the Price that Investors May be Willing to Pay in the
Future for Shares of Our Common Stock
Our Articles of Incorporation and By-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 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 ability of the board of directors to issue additional shares of
Common Stock or preferred stock without shareholder approval; and 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 contains provisions that may have the effect of delaying or preventing a change in control of the Company.
All of these provisions may limit the price that investors may be willing to pay for shares of our Common Stock.
Because We Do Not Currently Intend to Pay Dividends, Shareholders Will Benefit From an Investment in our Common Stock
Only if it Appreciates in Value
We have never declared or paid any dividends on our Common Stock, and do not expect to pay cash dividends in the foreseeable
future, as we currently anticipate that we will retain any future earnings to support operations and to finance the development of our
business. As a result, the success of an investment in our Common Stock will depend entirely upon any future appreciation in its value.
There is no guarantee that our Common Stock will maintain its value or appreciate in value.
24
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In July 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“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 are 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 these changes is not expected to have a material impact to the Company’s Consolidated Financial
Statements.
In April 2015, the FASB issued as final, 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 update is effective for annual reporting periods, including interim periods
within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The update allows for the use of either a
prospective or retrospective adoption approach. Management is currently evaluating the available transition methods and the potential
impact of adoption on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
This ASU requires entities 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. The guidance does not address situations in which debt issuance costs do
not have an associated debt liability or exceed the carrying amount of the associated debt liability. This ASU will be effective
beginning in fiscal year 2017. Management is currently evaluating the potential impact of adoption on the Company's Consolidated
Financial Statements.
In February 2015, the FASB issued as final, ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis,
which affects reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The update is
effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. The update allows for the use of either a full retrospective or a modified retrospective
adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoption on the
Company’s Consolidated Financial Statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items. This ASU eliminates the
requirement to separately present and disclose extraordinary and unusual items in the financial statements. This ASU will be effective
beginning in 2016. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
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 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (the first quarter of our
fiscal year 2019). We have not yet selected a transition method and are currently evaluating the impact of this guidance on our
Consolidated Financial Statements.
In April 2014, the FASB issued ASU 2014-08: Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related
disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of
components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an
entity's operations and financial results. The new standard will be effective for annual periods beginning on or after December 15,
2014, with early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal year 2016. The
adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
In July 2013, the FASB issued ASU 2013-11: Presentation of an Unrecognized Tax benefit when a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit carryforward Exists. The ASU changes how certain unrecognized tax benefits are to be presented
on the consolidated balance sheet. This ASU clarified existing guidance to require that an unrecognized tax benefit, or a portion
thereof, be presented in the consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss (“NOL”)
carryforward, similar tax loss, or a tax credit carryforward, except when an NOL carryforward, similar tax loss, or tax credit
carryforward is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result
from the disallowance of a tax position. In such a case, the unrecognized tax benefit would be presented in the consolidated balance
sheet as a liability. This update was effective for fiscal years beginning after December 15, 2013 and was effective for the Company
25
Owned
and
Leased
Owned
67,000
48,000
Leased
for the fiscal quarter ended September 30, 2014. The adoption of this standard did not have a significant impact on the Company’s
Consolidated Financial Statements.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Information regarding our principal U.S. properties at June 30, 2015 is set forth below:
Location
Saxonburg, PA......................................... Manufacturing, Corporate
Primary Use(s)
Headquarters and Research and
Development
Primary Business Segment(s)
II-VI Laser Solutions and II-VI
Performance Products
Square
Footage
252,000
Newark, DE ............................................. Manufacturing and
II-VI Performance Products
90,000
Research and Development
Ownership
Owned
and
Leased
Leased
Temecula, CA.......................................... Manufacturing and
II-VI Performance Products
87,000
Leased
Dallas, TX................................................ Manufacturing and
II-VI Performance Products
68,000
Research and Development
Research and Development
New Port Richey and Port Richey, FL .... Manufacturing and
Research and Development
Monroe, CT ............................................. Manufacturing and
II-VI Photonics and II-VI
Performance Products
II-VI Performance Products
Research and Development
Tustin, CA ............................................... Manufacturing and
II-VI Performance Products
37,000
Leased
Research and Development
Santa Rosa, CA........................................ Manufacturing and
II-VI Photonics
33,000
Leased
Research and Development
Philadelphia, PA ...................................... Manufacturing and
II-VI Performance Products
30,000
Leased
Research and Development
Pine Brook, NJ......................................... Manufacturing and
II-VI Performance Products
26,000
Leased
Research and Development
Newtown, CT .......................................... Manufacturing and
II-VI Performance Products
19,000
Leased
Research and Development
Woburn, MA............................................ Manufacturing and
II-VI Photonics
17,000
Leased
Research and Development
Horseheads, NY....................................... Research and Development
Vista, CA ................................................. Manufacturing and
Research and Development
Starkville, MS.......................................... Manufacturing
Flemington, NJ ........................................ Manufacturing and
Research and Development
San Jose, CA............................................ Research and Development
Sunnyvale, CA......................................... Distribution
II-VI Photonics
II-VI Performance Products
15,000 Leased
Leased
10,000
II-VI Performance Products
II-VI Photonics
10,000 Leased
Leased
5,000
II-VI Photonics
II-VI Photonics
5,000
2,300
Leased
Leased
26
Information regarding our principal foreign properties at June 30, 2015 is set forth below:
Location
China.......................................................
Primary Use(s)
Manufacturing, Research and
Development, and Distribution
Philippines .............................................. Manufacturing
Manufacturing
Vietnam ..................................................
Switzerland .............................................
Germany .................................................
Manufacturing, Research and
Development, and Distribution
Manufacturing and Distribution
Singapore ................................................ Manufacturing
Japan .......................................................
Distribution
Belgium .................................................. Distribution
Distribution
Italy .........................................................
South Korea ............................................ Distribution
Distribution
United Kingdom .....................................
Primary Business Segment(s)
II-VI Laser Solutions, II-VI
Photonics and II-VI
Performance Products
II-VI Performance Products
II-VI Photonics and II-VI
Performance Products
II-VI Laser Solutions
II-VI Laser Solutions, II-VI
Photonics and II-VI
Performance Products
II-VI Laser Solutions
II-VI Laser Solutions, II-VI
Photonics and II-VI
Performance Products
II-VI Laser Solutions
II-VI Laser Solutions and II-VI
Photonics
II-VI Laser Solutions
II-VI Laser Solutions and II-VI
Photonics
Square
Footage
1,125,000
Ownership
Leased
249,000
207,000
Leased
Leased
134,000
Leased
78,000
35,000
4,000
Owned
and
Leased
Leased
Leased
3,000
2,000
2,000
1,500
Leased
Leased
Leased
Leased
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.
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.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and positions are set forth below. Each executive officer listed has
been appointed by the Board of Directors to serve until removed or until such person’s successor is appointed and qualified.
Name
Francis J. Kramer ........................................................................................ 66 Chairman, Chief Executive Officer and Director
Vincent D. Mattera, Jr. ................................................................................ 59 President and Chief Operating Officer and Director
Mary Jane Raymond ................................................................................... 55 Chief Financial Officer and Treasurer
Giovanni Barbarossa ................................................................................... 53 Vice President II-VI Laser Solutions and Chief
Position
Age
David G. Wagner ........................................................................................ 52 Vice President, Human Resources
Technology Officer
Francis J. Kramer has been employed by the Company since 1983, has been its Chairman since 2014, and has been its Chief
Executive Officer since July 2007. Mr. Kramer has served as a Director of the Company since 1989. Previously, Mr. Kramer served as
the Company’s Chief Operating Officer from 1985 through June 2007. Mr. Kramer joined the Company as Vice President and
General Manager of Manufacturing and was named Executive Vice President and General Manager of Manufacturing in 1984. Prior
to his employment by the Company, Mr. Kramer was the Director of Operations for the Utility Communications Systems Group of
Rockwell International Corp. Mr. Kramer graduated from the University of Pittsburgh with a B.S. degree in Industrial Engineering
27
and from Purdue University with a M.S. degree in Industrial Administration. Mr. Kramer has served as Director of Barnes Group Inc.,
a publicly traded aerospace and industrial manufacturing company (NYSE: B), since 2012.
Vincent D. Mattera, Jr. has been employed by the Company since 2004 and has been its President and Chief Operating Officer since
2013. Dr. Mattera has served as a Director of the Company since 2012. Previously, Dr. Mattera served as Executive Vice President
from 2010 to 2013 and was Vice President of the Advanced Products Group from 2004 to 2010. Dr. Mattera served as Vice President,
Undersea Optical Transport, Agere Systems (formerly Lucent Technologies, Microelectronics and Communications Technologies
Group) from 2001 to 2004. Previously, Dr. Mattera served as Optoelectronic Device Manufacturing and Process Development Vice
President with Lucent Technologies, Microelectronics and Communications Technologies Group from 2000 until 2001. He was
Director of Optoelectronic Device Manufacturing and Development at Lucent Technologies, Microelectronics Group from 1997 to
2000. From 1995 to 1997 he served as Director, Indium Phosphide Semiconductor Laser Chip Design and Process Development with
Lucent Technologies, Microelectronics Group. From 1984 to 1995 he held management positions with AT&T Bell Laboratories.
Dr. Mattera holds B.S. and Ph.D. degrees in Chemistry from the University of Rhode Island and Brown University, respectively.
Mary Jane Raymond has been employed by the Company as its Chief Financial Officer and Treasurer since March 2014. Previously,
Ms. Raymond was the Chief Financial Officer of Hudson Global, Inc. 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.
Giovanni Barbarossa has been employed by the Company since 2012 and has been Vice President, II-VI Laser Solutions segment
since 2014 and Chief Technology Officer since 2012. Dr. Barbarossa was employed at Avanex Corporation from 2000-2009, serving
in various executive positions in product development and general management, ultimately becoming its Chief Executive Officer.
When Avanex merged with Bookham Technology plc, forming Oclaro Inc., Dr. Barbarossa became a member of the Board of
Directors of Oclaro and served as such from 2009 to 2011. Dr. Barbarossa graduated from the University of Bari, Italy with a B.S. in
Electrical Engineering and 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 1985-2008, serving in
various human resource management positions, ultimately becoming the Vice President, Human Resources for Owens Corning’s
global sales forces. Mr. Wagner graduated with a B.S. degree in Human Resources Management from Juniata College in 1985.
28
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “IIVI.” The
following table sets forth the range of high and low closing sale prices per share of the Company’s Common Stock for the fiscal
periods indicated, as reported by NASDAQ.
Fiscal 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
High
14.71
14.44
18.70
19.53
20.76
19.16
17.47
15.62
$
$
$
$
$
$
$
$
Low
11.77
10.95
12.67
17.68
16.51
15.25
14.72
12.79
$
$
$
$
$
$
$
$
On August 20, 2015, the last reported sale price for the Company’s Common Stock was $17.82 per share. As of such date, there were
approximately 785 holders of record of our Common Stock. The Company historically has not paid cash dividends and does not
presently anticipate paying cash dividends in the future.
ISSUER PURCHASES OF EQUITY SECURITIES
In August 2014, the Board of Directors authorized the Company to purchase up to $50.0 million of its Common Stock. The repurchase
program calls for shares to be purchased in the open market or in private transactions from time to time. Shares purchased by the
Company are retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30, 2015 the
Company purchased 936,049 shares of its Common Stock pursuant to the repurchase program for approximately $12.7 million.
The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended
June 30, 2015.
Period
April 1, 2015 to April 30, 2015
May 1, 2015 to May 31, 2015
June 1, 2015 to June 30, 2015
Total Number of
Shares Purchased
Average Price Paid
- $
432 (a)$
- $
Per Share
-
18.66
-
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs (a)
Dollar Value of
Shares That May
Yet be Purchased
Under the Plan or
Program
-
-
-
$
$
$
37,255,646
37,255,646
37,255,646
(a)
Includes 432 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 2015 Proxy Statement under the
heading “Equity Compensation Plan Information” is hereby also incorporated by reference into this Item 5.
29
PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on the Company’s Common Stock with the cumulative total
shareholder return of the Nasdaq Composite Index and with a peer group of companies constructed by the Company for the period
from June 30, 2010, through June 30, 2015. The Company’s peer group includes Cabot Microelectronics Corporation, Franklin
Electric Co., Inc., MKS Instruments, Inc., Rofin-Sinar Technologies, Inc. and Silicon Laboratories.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among II-VI Incorporated, the NASDAQ Composite Index,
and a Peer Group
$300
$250
$200
$150
$100
$50
$0
6/10
6/11
6/12
6/13
6/14
6/15
II-VI Incorporated
NASDAQ Composite
Peer Group
*$100 invested on 6/30/10 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
30
Item 6.
SELECTED FINANCIAL DATA
Five-Year Financial Summary
The following selected financial data for the five fiscal years presented are derived from II-VI’s audited Consolidated Financial
Statements as adjusted to reflect the Company’s II-VI Performance Metals tellurium product line as a discontinued operation. 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,
($000 except per share data)
Statement of Earnings
Net revenues from continuing operations
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings attributable to redeemable noncontrolling
interest
Net earnings attributable to II-VI Incorporated
Basic earnings (loss) per shares:
Continuing operations
Discontinued operation
Consolidated
Diluted earnings (loss) per shares:
Continuing operations
Discontinued operation
Consolidated
Diluted weighted average shares outstanding
Year Ended June 30,
($000)
Balance Sheet
Working capital
Total assets
Long-term debt
Total debt
Retained earnings
Shareholders' equity
2015
2014
2013
2012
2011
$ 741,961 $ 683,261 $ 551,075 $ 516,403 $ 486,638
79,676
3,342
38,316
133
65,975
-
58,720
(6,789)
70,718
(9,443)
-
65,975
-
38,449
1,118
50,813
969
60,306
336
82,682
1.08
-
1.08
1.05
-
1.05
62,586
0.62
-
0.62
0.60
-
0.60
63,686
0.92
(0.11)
0.81
0.90
(0.11)
0.80
63,884
1.10
(0.15)
0.96
1.08
(0.15)
0.94
64,385
1.28
0.05
1.33
1.25
0.05
1.30
63,612
2015
2014
2013
2012
2011
$ 373,812 $ 370,666 $ 366,710 $ 326,645 $ 304,573
647,202
15,000
18,729
377,264
521,273
1,071,926
221,960
241,960
521,327
675,043
1,058,164
155,957
175,957
587,302
729,081
706,486
12,769
12,769
434,940
586,226
863,802
114,036
114,036
482,878
636,108
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 are
forward-looking statements. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “believes,”
“intends,” “plans,” “projects” or similar expressions. Actual results could differ materially from those anticipated in these forward-
looking statements for many reasons, including those potential risks set forth in Item 1A, of this Annual Report on Form 10-K, which
are incorporated herein by reference.
Overview
The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing engineered materials and
opto-electronic components for precision use in industrial, optical communications, military, semiconductor, medical and life science,
and consumer applications. We also generate revenue, earnings and cash flows from government funded research and development
contracts relating to the development and manufacture of new technologies, materials and products.
31
Our customer base includes OEMs, laser end users, system integrators of high-power lasers, manufacturers of equipment and devices
for the industrial, optical communications, military, semiconductor, medical and life science markets, U.S. government prime
contractors, various U.S. Government agencies and thermoelectric integrators.
Critical Accounting 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 1 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 these critical accounting estimates with the Audit Committee of the
Board of Directors and the Audit Committee has reviewed the foregoing disclosure. In addition, there are other items within our
financial statements that require estimation, but are not deemed critical as described above. Changes in estimates used in these and
other items could have a material impact on the financial statements.
The Company recognizes revenues in accordance with U.S. GAAP. 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 (“SAB”) 104 and that we have adequately considered the requirements of
Accounting Standards Codification (“ASC”) 605 Revenue Recognition. Revenues generated from transactions other than product
shipments are contract-related and have historically accounted for less than 2% of the Company’s consolidated revenues.
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, 2015, 2014 and 2013. 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 balance at
June 30, 2015 was approximately $1.0 million. The Company’s allowance for doubtful accounts reserve estimates have historically
been proven to be materially correct based upon actual charges incurred.
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
balance at June 30, 2015 was approximately $3.3 million. The Company’s warranty reserve estimates have historically been proven to
be materially correct based upon actual charges incurred.
The Company records an inventory reserve as a charge against earnings for all products on hand for more than twelve to eighteen
months, depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative
32
customers. An additional reserve is 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 accounts for business acquisitions by establishing the acquisition-date fair value as the measurement for all assets
acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the determination of acquisition-
date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction
and acquisition-related restructuring costs from acquisition accounting.
The Company tests goodwill and indefinite-lived intangible assets on an annual basis for impairment or 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 are impaired requires us to make judgments based upon 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. The fair values of the reporting units are determined
using a discounted cash flow analysis based on historical and projected financial information as well as market analysis. The carrying
value of goodwill at June 30, 2015, 2014 and 2013 was $195.9 million, $196.1 million and $123.4 million, respectively. 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.
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 July 1, 2014 segment realignment, the Company reviewed the recoverability of the carrying value of goodwill at its
reporting units. The Company had the option to perform a qualitative assessment of goodwill prior to completing the quantitative test
to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount, including
goodwill and other intangible assets. Due to the short duration of time since the Company’s most recent annual quantitative goodwill
impairment test, which was completed on April 1, 2014, the Company elected to perform a qualitative test on its reporting units as part
of the segment realignment. The Company did not record any impairment of goodwill as a result of the segment realignment, as the
qualitative assessment did not indicate deterioration in the fair value of its reporting units since the most recent annual impairment
test.
As a result of the purchase price allocations from our prior 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. 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 from 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 more of our reporting units, our determination of future fair value may not support the carrying amount of one or
more of our reporting units, and the related goodwill would need to be impaired.
Based upon our annual quantitative goodwill impairment test, the Company did not record any impairments of goodwill for the fiscal
years ended June 30, 2015, 2014 or 2013.
As the estimated fair value of the II-VI Photonics reporting unit was approximately 5% greater than its carrying value, the Company
has concluded that this reporting unit is at risk of not passing step one of future goodwill impairment tests. In the event of unfavorable
changes to the existing assumptions used in the impairment test, such as the weighted average cost of capital (discount rate), growth
rates and market multiples as well as changes in our internal structure, the carrying value of the Company’s goodwill could be
impaired. Although the Company believes that the current assumptions and estimates are reasonable, supportable and appropriate, the
II-VI Photonics reporting unit competes in a challenging environment with significant pricing pressure and rapidly changing
technology and there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment test will
prove to be accurate predictions of future performance.
During the year ended June 30, 2015, the Company recognized an impairment charge on two of its indefinite lived trademarks in the
II-VI Photonics reporting unit, as these trademarks were abandoned as a result of the Company’s re-branding efforts. Total impairment
recorded during the year ended June 30, 2015 was $2.0 million, which represented the entire carrying value of these two trademarks
and was recorded in Other expense (income), net in the Consolidated Statements of Earnings.
33
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 fiscal year end. Other bonuses are paid annually.
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.
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. 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-forwards 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.
In accordance with U.S. GAAP, the Company recognizes share-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting period. The Company utilized the Black-Scholes valuation model for
estimating the fair value of stock option expense using assumptions such as the risk-free interest rate, expected stock price volatility,
expected stock option life and expected dividend yield. 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. 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 dividends in the future.
Fiscal Year 2015 Compared to Fiscal Year 2014
Effective July 1, 2014, the Company realigned its organizational structure into the following three reporting segments for the purpose
of making operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI
Performance Products. The Company is reporting financial information (revenue through operating income) for these new reporting
segments in this Annual Report on Form 10-K, which management believes provides enhanced visibility and transparency into the
operations, business drivers and the value of the enterprise.
34
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30,
2015 and June 30, 2014 ($ in millions except per share information):
Bookings
Total Revenues
Cost of goods sold
Gross margin
Operating expenses:
Internal research and development
Selling, general and administrative
Interest and other, net
Earnings before income tax
Income taxes
Earnings from Continuing Operations
Earnings from Discontinued Operation, net of income tax
Net Earnings
Diluted earnings per share:
Executive Summary
Year Ended
June 30, 2015
761.7
Year Ended
June 30, 2014
$
691.3
% of
Revenues
% of
Revenues
742.0
470.4
271.6
51.3
143.5
(2.3)
79.1
13.1
66.0
-
66.0
100.0% $
63.4
36.6
683.3
456.5
226.7
6.9
19.3
(0.3)
10.7
1.8
8.9
-
8.9% $
42.5
137.7
0.8
45.6
7.3
38.3
0.1
38.4
1.05
$
0.60
100.0%
66.8
33.2
6.2
20.2
0.1
6.7
1.1
5.6
-
5.6%
$
$
$
$
Net earnings for fiscal year 2015 were $66.0 million ($1.05 per-share diluted), compared to $38.4 million ($0.60 per-share diluted) for
the same period last fiscal year. During fiscal year 2015, the Company began to realize synergies from prior year acquisitions,
resulting in increased market share and revenues as well as operational efficiencies that are reflected in the Company’s 340 basis point
increase in gross margin percentage compared to fiscal year 2014. During the current fiscal year, the Company continued its
restructuring program within the II-VI Photonics and II-VI Performance Products segments to right-size its business operations. Total
after-tax restructuring charges recorded in fiscal year 2015 were $4.1 million compared to $3.4 million in fiscal year 2014. Net
earnings were also favorably impacted in the current fiscal year as a result of a one-time settlement relating to certain payment
obligations from prior year acquisitions in the amount of $7.1 million (after-tax) or $0.11 per share-diluted. Financial results for fiscal
year 2014 were negatively impacted by one-time transaction and purchase accounting expenses of approximately $8.0 million.
Consolidated
Bookings. Bookings are defined as customer orders received that are expected to be converted to revenues over the next twelve
months. For long-term customer orders, the Company does not include in bookings the portion of the customer order that is beyond
twelve months, due to the inherent uncertainty of such an order that far out in the future. Bookings for the year ended June 30, 2015
increased 10% to $761.7 million, compared to $691.3 million for the same period last fiscal year. The increase in bookings was
mostly attributable to a full year of bookings from the prior year acquisitions of II-VI Laser Enterprise and II-VI Network
Solutions. In addition, the II-VI HIGHYAG business within the II-VI Laser Solutions segment recorded increased bookings for fiber
beam delivery systems and laser processing heads used in automotive manufacturing.
Revenues. Revenues for the year ended June 30, 2015 increased 9% to $742.0 million, compared to $683.3 million for the prior fiscal
year. The increase in revenues was mostly attributable to a full year of revenues from the prior year acquisitions of II-VI Laser
Enterprise and II-VI Network Solutions. In addition, increased revenues at II-VI HIGHYAG from the automotive markets as well as
higher revenues at II-VI Photonics driven by increased demand across a variety of products, such as optical components and modules
required by global cable television operators for their broadband initiatives and ongoing investments drove this increase. Somewhat
offsetting these higher revenue levels was a decrease in shipment volumes at the Company’s military related businesses, driven
primarily by reduced U.S. defense spending.
Gross margin. Gross margin for the year ended June 30, 2015 was $271.6 million, or 36.6%, of total revenues, compared to $226.7
million, or 33.2%, of total revenues for the same period last fiscal year. The increase in gross margin during the current fiscal year
was primarily the result of the incremental margin realized on the 9% revenue increase during this period and the elimination of
unprofitable product lines. In addition, as noted above, the Company has begun to realize synergies and operational improvements in
connection with its fiscal year 2014 acquisitions, which resulted in higher margin levels. Gross margin for fiscal year 2014 was
35
negatively impacted by a one-time purchase accounting fair market inventory adjustment of $4.1 million relating to the fiscal year
2014 acquisitions as well as product lines with lower margins.
Internal research and development. Company-funded internal research and development expenses for the fiscal year ended June 30,
2015 were $51.3 million, or 6.9% of revenues, compared to $42.5 million, or 6.2% of revenues, last fiscal year. The increase in
research and development expense as a percentage of revenues in the current year was due to a full year of internal research and
development from businesses acquired in prior fiscal years, which invest in higher levels of research and development activity to
support their ongoing product development of fiber and direct diode laser components, fiber optical amplifiers and micro-optics.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2015 were
$143.5 million, or 19.3% of revenues, compared to $137.7 million, or 20.2% of revenues, last fiscal year. In relative dollar amounts,
the increase in SG&A expenses was the result of increased expenses incurred to support an overall revenue base increase from the
prior fiscal year. The Company experienced leverage improvement with respect to SG&A expenses as a percentage of revenues
through synergies, cost savings and restructuring programs undertaken during the current fiscal year.
Interest and other, net. Interest and other, net for the year ended June 30, 2015 was income of $2.3 million compared to expense of
$0.8 million last fiscal year. Other income of $2.3 million for the current fiscal year was primarily the result of a one-time settlement
income of $7.7 million (pre-tax, $7.1 million after tax) related to certain payment obligations from the prior fiscal year acquisitions
offset by foreign currency losses of $2.2 million due to weakened foreign currencies against the U.S. dollar and a $2.0 million
impairment recorded during the current year for the write-off of certain tradenames in the II-VI Photonics segment. Included in
interest and other, net for the year ended June 30, 2015 were earnings from the Company’s equity investment in Guangdong Fuxin
Electronic Technology (“Fuxin”), interest expense on borrowings, interest income on excess cash reserves, unrealized gains on the
Company sponsored deferred compensation plan, foreign currency gains and losses.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2015 was 16.6%, compared to an effective tax rate of
16.0% last fiscal year. The variation between the Company’s effective tax rate from continuing operations 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 year-
to-date effective tax rate between the two fiscal years was consistent.
Discontinued operation. During December 2013, the Company completed the discontinuation of its tellurium product line by
exiting all business activities associated with this product. This product line was previously serviced by II-VI Performance Metals,
which is part of the II-VI Performance Products segment. Financial information included in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K has been adjusted to
properly reflect the tellurium product line as a discontinued operation for all periods presented. The revenues and earnings (losses) of
the tellurium product line reflected as a discontinued operation for the periods presented are as follows (in millions):
June 30,
Revenues
Earnings (loss) from discontinued operation before
income taxes
Income tax benefit (expense)
Earnings (loss) from discontinued operation, net of
taxes
2015
2014
2013
$
$
-
-
-
-
$
1.8
$
7.3
0.1
-
(6.8)
-
$
0.1
$
(6.8)
Segment Reporting
Bookings, 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. Segment and Geographic Reporting,” to the Consolidated Financial Statements included in 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.
36
II-VI Laser Solutions ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
Increase
2015
2014
$
$
$
284.8 $
287.9 $
55.0 $
262.8
254.4
24.5
8%
13%
124%
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 Suwtech and II-VI LaserTech.
Bookings for the fiscal year ended June 30, 2015 for II-VI Laser Solutions increased 8% to $284.8 million, compared to $262.8
million last fiscal year. The increase in bookings was due in part to higher order levels at II-VI HIGHYAG, which continues to grow
its product offerings into the one-micron fiber laser market, for fiber beam delivery systems and for laser processing heads used in
automotive manufacturing. In addition, the II-VI Laser Solutions segment recorded a full year of bookings from the prior fiscal year
acquisition of II-VI Laser Enterprise, which has experienced increased demand for products in the direct diode and fiber laser
components markets.
Revenues for the fiscal year ended June 30, 2015 for II-VI Laser Solutions increased 13% to $287.9 million, compared to revenues of
$254.4 million last fiscal year. The increase in revenues was the result of increased shipment volumes of the segment’s fiber beam
delivery systems and laser process heads from II-VI HIGHYAG as well as a full year of revenues from the prior fiscal year acquisition
of II-VI Laser Enterprise.
Operating income for the fiscal year ended June 30, 2015 for II-VI Laser Solutions increased 124% to $55.0 million, compared to
$24.5 million last fiscal year. The increase in segment earnings was the result of higher revenues as well as gross margin
improvements from II-VI Laser Enterprise, as this business unit has begun to realize certain operational efficiencies and acquisition
related synergies. Operating income for fiscal year 2014 was negatively impacted by transaction expenses of $3.9 million, $2.5
million of purchase accounting relating to the fair market inventory adjustment and $2.0 million of restructuring efforts at II-VI Laser
Enterprise.
II-VI Photonics ($ in millions)
Bookings
Revenues
Operating income (loss)
Year Ended
June 30,
%
Increase
2015
2014
$
$
$
282.9 $
260.8 $
7.2 $
220.2
216.5
(0.1)
28%
20%
7300%
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, 2015 for II-VI Photonics increased 28% to $282.9 million, compared to $220.2 million for last
fiscal year. The increase in bookings was due to increased demand for a variety of the segment’s products, such as optical components
and modules driven by broadband initiatives, development of next generation wireless networks and increasing bandwidth trends in
the datacenter and cloud applications. In addition, the segment recorded a full year of bookings from the prior fiscal year acquisition
of II-VI Network Solutions.
Revenues for the year ended June 30, 2015 for II-VI Photonics increased 20% to $260.8 million, compared to $216.5 million for last
fiscal year. The increase in revenues was due to increased customer demand for optical filters, optical components and assemblies,
pump lasers and fiber amplifier modules that serve multiple markets. In addition, the segment recorded a full year of revenues from
the prior year acquisition of II-VI Network Solutions.
Operating income for the year ended June 30, 2015 for II-VI Photonics increased 7300% to $7.2 million, compared to an operating
loss of $(0.1) million last fiscal year. The improvement in operating income was attributed primarily to incremental margin realized on
increased revenues, and favorable product mix towards higher margin products, operational efficiencies and the absence of certain
one-time purchase accounting fair market inventory adjustments that occurred in fiscal 2014, offset by $4.5 million of restructuring
expenses to “right-size” its business in fiscal 2015. During fiscal year 2014, one-time fair market inventory purchase accounting
adjustments totaled $1.6 million.
37
II-VI Performance Products ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
(Decrease)
2015
2014
$
$
$
194.0 $
193.3 $
14.6 $
208.3
212.4
22.1
(7%)
(9%)
(34%)
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, 2015 for II-VI Performance Products decreased 7% to $194.0 million, compared to $208.3
million for last fiscal year. The decrease in bookings related to lower order volumes of military-related products as a result of the
decline in overall defense spending and funding constraints specific to certain U.S. military programs, as well as softness in the
semiconductor capital equipment market. The decrease in bookings was somewhat offset by increased demand for SiC substrates
addressing high-power high-frequency semiconductor devices.
Revenues for the year ended June 30, 2015 for II-VI Performance Products decreased 9% to $193.3 million, compared to $212.4
million for last fiscal year. The decrease in revenues was due to lower shipment volumes of military related products from lower
overall defense spending as well as lower shipments to customers in the semiconductor capital equipment markets. The decrease in
revenues was somewhat offset by higher revenues from the segment’s SiC substrates.
Operating income for the year ended June 30, 2015 for II-VI Performance Products decreased 34% to $14.6 million, compared to
$22.1 million for last fiscal year. The decrease in operating income was a result of lower revenues during the current fiscal year as
well as restructuring charges of $1.1 million relating to the consolidation of the Company’s military-related businesses.
Fiscal Year 2014 Compared to Fiscal Year 2013
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30,
2014 and 2013. ($ millions, except per share information):
Bookings
Total Revenues
Cost of goods sold
Gross margin
Operating expenses:
Internal research and development
Selling, general and administrative
Interest and other, net
Earnings before income tax
Income taxes
Earnings from Continuing Operations
Earnings (loss) from Discontinued Operation, net of income tax
Net Earnings
Net earnings attributable to noncontrolling interest
Diluted earnings per shares:
Consolidated
Year Ended
June 30, 2014
Year Ended
June 30, 2013
$
691.3
$
521.1
% of
Revenues
% of
Revenues
$
$
$
683.3
456.5
226.7
42.5
137.7
0.8
45.6
7.3
38.3
0.1
38.4
-
38.4
100.0% $
66.8
33.2
551.1
347.6
203.5
6.2
20.2
0.1
6.7
1.1
5.6
-
5.6
-
5.6% $
22.7
109.3
(6.0)
77.5
18.8
58.7
(6.8)
51.9
1.1
50.8
0.60
$
0.90
100.0%
63.1
36.9
4.1
19.8
(1.1)
14.1
3.4
10.7
(1.2)
9.4
0.2
9.2%
Bookings. Bookings for the year ended June 30, 2014 increased 33% to $691.3 million, compared to $521.1 million for the 2013
fiscal year. The increase in bookings was mostly attributable to the acquisitions of II-VI Laser Enterprise and II-VI Network Solutions
in fiscal year 2014 as well as the incremental bookings from the 2013 fiscal year acquisitions. In addition, the Company’s II-VI Laser
38
Solutions segment recorded increased bookings at its legacy business for both diamond window optics used in EUV photolithography
systems and at II-VI HIGHYAG for fiber beam delivery systems and laser processing heads used in automotive manufacturing.
Revenues. Revenues for the year ended June 30, 2014 increased 24% to $683.3 million, compared to $551.1 million for fiscal year
June 30, 2013. The increase in revenues was mostly attributable to the acquisitions of II-VI Laser Enterprise and II-VI Network
Solutions in fiscal year 2014, incremental revenues from fiscal year 2013 acquisitions and higher revenues associated with shipments
of diamond windows at II-VI Laser Solutions and SiC wafers at II-VI Advanced Materials. Somewhat offsetting these higher revenue
levels was a decrease in shipment volumes of passive optical components sold by II-VI Photonics segment as well as lower shipments
at the Company’s military-related businesses, driven primarily by reduced U.S. defense spending.
Gross margin. Gross margin as a percentage of revenues for the year ended June 30, 2014 was 33.2%, compared to 36.9% for fiscal
year June 30, 2013. The decrease in gross margin was the result of purchase accounting fair market value inventory adjustments
related to the acquisitions of II-VI Laser Enterprise and II-VI Network Solutions of $4.1 million as well as restructuring charges of
$2.2 million (pre-tax) related to inventory write-offs at II-VI Performance Products and severance costs at II-VI Laser Enterprise and
II-VI Network Solutions. Exclusive of the restructuring charges, the operating gross margin profile of these two acquisitions put
downward pressure on gross margin during fiscal year 2014 as the Company continued to align the operating costs of the new
businesses with their existing and prospective revenue profile. In addition, gross margin decreased at II-VI Laser Solutions’ legacy
business due to pricing pressure and increased raw material costs and gross margin at II-VI Photonics segment was negatively
impacted by both lower revenue volume and pricing pressure on legacy passive optical component products from increased
competition in China.
Internal research and development. Company-funded internal research and development expenses for the year ended June 30, 2014
were $42.5 million, or 6.2% of revenues, compared to $22.7 million, or 4.1% of revenues, for fiscal year June 30, 2013. The increase
in research and development expense as a percentage of revenues is due to increased research and development efforts within the II-VI
Photonics segment, which continued to invest in the development of component parts that support higher speed optical communication
and data networks around the world. In addition, the acquisitions of II-VI Laser Enterprise and II-VI Network Solutions increased
levels of research and development activity to support ongoing product development of high-power laser components, micro-optics
and amplifiers.
Selling, general and administrative. SG&A expenses for the fiscal year ended June 30, 2014 were $137.7 million, or 20.2% of
revenues, compared to $109.3 million, or 19.8% of revenues, for fiscal year June 30, 2013. As a percentage of revenues, SG&A
expenses were consistent with the prior fiscal year.
Interest and other, net. Interest and other, net for the year ended June 30, 2014 and 2013 was expense of $0.8 million compared to
income of $6.0 million prior fiscal year. Included in interest and other, net for the year ended June 30, 2014 were earnings from the
Company’s equity investment in Fuxin, interest expense on borrowings, interest income on excess cash reserves, unrealized gains on
the Company-sponsored deferred compensation plan and foreign currency gains and losses. The majority of the income included in
the 2013 fiscal year was the result of a $5.3 million contractual settlement with a contract manufacturer related to the October 2011
Thailand flood.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2014 was 16.0%, compared to an effective tax rate of
24.2% for the prior fiscal year. The variations between the Company’s effective tax rates and the U.S. statutory rate of 35% were
primarily due to the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The lower year-to-date
effective tax rate was primarily the result of improved profitability in lower taxing jurisdictions such as the Philippines. In addition,
the Company recorded $0.8 million of tax benefits during the year ended June 30, 2014 as a result of the expiration of the statute of
limitation on previously filed income tax returns.
II-VI Laser Solutions ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
Increase
(Decrease)
2014
2013
$
$
$
262.8 $
254.4 $
24.5 $
212.3
217.6
54.0
24%
17%
(55%)
Bookings for the year ended June 30, 2014 for II-VI Laser Solutions increased 24% to $262.8 million, compared to $212.3 million for
fiscal year June 30, 2013. The increase in bookings was due to higher order levels from European customers specific to diamond
windows and other products used in EUV lithography systems. The acquisition of II-VI Laser Enterprise in September 2013
39
contributed approximately $33.0 million of bookings in fiscal year 2014. At II-VI HIGHYAG, continued growth in the one-micron
laser market resulted in higher bookings for fiber beam delivery systems, and laser processing heads used in the automotive
manufacturing industry.
Revenues for the year ended June 30, 2014 for II-VI Laser Solutions increased 17% to $254.4 million, compared to $217.6 million for
fiscal year June 30, 2013. The increase in revenues was the result of increased shipment volumes in Europe of replacement optics for
CO2 laser systems as well as diamond windows and other component parts used in EUV lithography systems. In addition, the
acquisition of II-VI Laser Enterprise contributed approximately $35.0 million of revenues in fiscal year 2014.
Operating income for the year ended June 30, 2014 for II-VI Laser Solutions decreased 55% to $24.5 million, compared to $54.0
million for fiscal year June 30, 2013. The decrease in operating income was the result of the acquisition of II-VI Laser Enterprise in
fiscal year 2014. The segment recorded $2.5 million of purchase accounting adjustments relating to the fair value of inventory, $3.9
million of transaction expenses and $2.0 million of severance costs associated with restructuring of the acquired business. In addition,
lower gross margin at II-VI Laser Enterprise caused by higher material cost, unfavorable absorption of manufacturing overhead costs,
and production inefficiencies all negatively impacted operating income in fiscal year 2014.
II-VI Photonics ($ in millions)
Bookings
Revenues
Operating (loss) income
Year Ended
June 30,
%
Increase
(Decrease)
2014
2013
$
$
$
220.2 $
216.5 $
(0.1) $
134.9
141.3
15.0
63%
53%
(101%)
Bookings for the year ended June 30, 2014 for II-VI Photonics increased 63% to $220.2 million, compared to $134.9 million for fiscal
year June 30, 2013.The increase in bookings was due to the acquisition of II-VI Network Solutions in November 2014, which
contributed approximately $84.0 million of bookings in fiscal year 2014. Absent that acquisition, bookings were consistent between
the two fiscal years.
Revenues for the year ended June 30, 2014 for II-VI Photonics increased 53% to $216.5 million, compared to $141.3 million for fiscal
year June 30, 2013. The increase in revenues was due to the acquisition of II-VI Network Solutions, which contributed approximately
$80.0 million of revenues in fiscal year 2014. Revenues decreased from the segment’s legacy businesses due to price erosion for
products serving 10G and 40G applications in the optical communications market.
Operating (loss) income for the year ended June 30, 2014 for II-VI Photonics decreased 101% to an operating loss of $(0.1) million,
compared to operating income of $15.0 million for fiscal year June 30, 2013. The decrease in operating income was the result of the
acquisition of II-VI Network Solutions in fiscal year 2014. The segment recorded $1.6 million of purchase accounting adjustments
relating to the fair value of inventory as well as lower gross margin at II-VI Network Solutions caused by higher material cost and
production inefficiencies, all of which negatively impacted operating income in fiscal year 2014. In addition, the legacy businesses
experienced a downward shift in gross margin as the technology shifted to higher speed networks in the optical communications
industry resulting in price erosion on shipments of the segment’s legacy products. In addition, operating expenses increased when
compared to the prior fiscal year, primarily due to increased compensation costs in China as well as higher levels of investment
regarding internal research and development of next generation products aimed at serving higher speed networks and data centers.
II-VI Performance Products ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
Increase
2014
2013
$
$
$
208.3 $
212.4 $
22.1 $
174.0
192.2
2.5
20%
11%
784%
Bookings for the year ended June 30, 2014 for II-VI Performance Products increased 20% to $208.3 million, compared to $174.0
million for fiscal year June 30, 2013. The increase in bookings was attributable to strong order placement from Japanese OEMs
specific to II-VI Advanced Materials 100mm and 150mm SiC wafers used in commercial applications in the wireless infrastructure
and power device markets. II-VI Advanced Materials also received a $4.0 million research and development contract from the
40
Department of Defense for ongoing development of 150mm SiC wafers. In addition, incremental bookings from the November 2012
acquisition of II-VI M Cubed helped contribute to the increase.
Revenues for the year ended June 30, 2014 for II-VI Performance Products increased 11% to $212.4 million, compared to $192.2
million for fiscal year June 30, 2013. The increase in revenues was primarily due to the acquisition of II-VI M Cubed as well as strong
product sales at II-VI Advanced Materials specific to 100mm and 150mm semi-insulating SiC wafers used by Japanese OEMs to
support the continued growth of 4G wireless stations in Asia. Somewhat offsetting these increases were reduced shipments at II-VI
Marlow for products servicing the personal comfort market.
Operating income for the year ended June 30, 2014 for II-VI Performance Products was $22.1 million, compared to $2.5 million for
fiscal year June 30, 2013. The increase in segment earnings was a result of the restructured business model at II-VI Performance
Metals, which eliminated the exposure to volatility in the minor metals market for selenium. In addition, operating income was
favorably impacted in fiscal year 2014 from increased revenues and profit contribution from II-VI M Cubed as well as increased
revenues at II-VI Advanced Materials.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of cash have been provided through operations and long-term borrowings. Other sources of cash
include proceeds received from the exercise of stock options and sales of equity investments. Our historical uses of cash have been for
capital expenditures, investments in research and development, business acquisitions, payments of principal and interest on
outstanding debt obligations and purchases of treasury stock. Supplemental information pertaining to our sources and uses of cash is
presented as follows:
Sources (uses) of Cash (millions):
Year Ended June 30,
2014
2013
2015
$
Net cash provided by operating activities
Additions to property, plant and equipment
Net (payments) proceeds on long-term borrowings
Purchases of treasury shares
Proceeds from exercises of stock options
Purchases of businesses, net of cash acquired
Payments of redeemable noncontrolling interest
Payments on holdback arrangements
Proceeds received from contractual settlement from Thailand
flooding
Proceeds from sale of equity method investment
Other
129.4 $
(52.3)
(65.5)
(12.7)
5.2
-
-
(2.4)
-
-
(2.7)
95.5 $
(29.2)
128.0
(20.0)
4.4
(177.7)
(8.8)
(3.0)
-
-
-
107.6
(25.3)
102.0
(20.0)
4.1
(126.2)
-
-
4.8
2.1
1.5
Net cash provided by operating activities:
Net cash provided by operating activities was $129.4 million and $95.5 million for the fiscal years ended June 30, 2015 and 2014,
respectively. The increase in cash flows from operating activities in fiscal year 2015 compared to fiscal year 2014 was the result of an
increase in the Company’s net earnings by $27.5 million, or 72%, compared to fiscal year 2014.
Net cash provided by operating activities was $95.5 million and $107.6 million for the fiscal years ended June 30, 2014 and 2013,
respectively. The decrease in cash flows from operating activities in fiscal year 2014 compared to fiscal year 2013 was mostly due to
lower earnings levels, offset somewhat by favorable overall working capital changes, specifically in the areas of inventory and
accounts payable. In addition, the higher non-cash charges for depreciation, amortization and share-based compensation expense that
impacted net earnings did not affect operating cash flow.
Net cash used in investing activities:
Net cash used in investing activities was $52.2 million and $206.8 million for the fiscal years ended June 30, 2015 and 2014,
respectively. Net cash used in investing activities during the year ended June 30, 2015 consisted of $52.3 million paid for capital
expenditures of which $13.4 million represented the purchase of the II-VI HIGHYAG manufacturing facility in Berlin, Germany
41
which was previously accounted for as a capital lease. The majority of net cash used in investing activities for fiscal year 2014
consisted of $93.1 million for the acquisition of II-VI Laser Enterprise and $84.6 million net cash for the acquisition of II-VI Network
Solutions. In addition, the Company paid $29.2 million for capital expenditures in fiscal year 2014.
Net cash used in investing activities was $206.8 million and $144.5 million for the fiscal years ended June 30, 2014 and 2013,
respectively. The majority of net cash used in investing activities during the year ended June 30, 2014 consisted of $93.1 million net
cash for the acquisition of Laser Enterprise and $84.6 million net cash paid for the acquisition of Network Solutions. This compares
to $126.2 million of net cash during the year ended June 30, 2013 for the acquisitions of M Cubed, the thin-film filter business and
interleaver product lines of Oclaro and LightWorks. In addition, during the year ended June 30, 2014, the Company paid $29.2
million for capital expenditures, increasing its investment from fiscal year 2013 in an effort to support revenue growth and capacity
expansion.
Net cash provided by (used in) financing activities:
Net cash (used in) provided by financing activities was $(76.1) million for the year ended June 30, 2015 compared to $99.1 million for
the year ended June 30, 2014. During fiscal year 2015, the Company repaid $65.5 million on its outstanding long-term borrowings,
repurchased $12.7 million of treasury shares under a current share repurchase plan and paid $2.4 million pursuant to a holdback
arrangement from our fiscal year 2014 acquisitions. Net cash paid was somewhat offset by cash received from exercises of stock
options.
Net cash provided by financing activities was $99.1 million for the year ended June 30, 2014 compared to net cash provided by
financing activities of $85.8 million for the fiscal year ended June 30, 2013. The change in net cash provided by financing activities
was primarily due to additional borrowings used to finance the Company’s acquisitions of Laser Enterprise and Network Solutions,
offset somewhat by a $3.0 million earnout payment to the former owners of LightWorks and an $8.8 million payment made to acquire
the remaining ownership interest in II-VI HIGHYAG.
Company Credit Facility
The Company’s Amended and Restated Credit Agreement (the “Credit Facility”) provides for a revolving credit facility of $225
million, as well as a $100 million term loan (“the Term Loan”). As of June 30, 2015, the Company had $108.5 million and $65.0
million outstanding under the line of credit and term loan, respectively. The Term Loan is being re-paid in consecutive quarterly
principal payments on the first business day of each January, April, July and October, with the first payment having commenced on
October 1, 2013, as follows: (i) twenty consecutive quarterly installments of $5.0 million and (ii) a final installment of all remaining
principal due and payable on the maturity date. The Credit Facility is unsecured, but is guaranteed by each existing and subsequently
acquired or organized wholly-owned domestic subsidiary of the Company. The Company has the option to request an increase to the
size of the Credit Facility in an aggregate additional amount not to exceed $100 million. The Credit Facility has a five-year term
through September 2018 and has an interest rate of LIBOR, as defined in the agreement governing the Credit Facility, plus 0.75% to
1.75% based on the Company’s ratio of consolidated indebtedness to consolidated EBITDA. Additionally, the facility is subject to
certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2015, the
Company was in compliance with all financial covenants under the Credit Facility.
In conjunction with entering into the Credit Facility, the Company incurred approximately $1.0 million of deferred financing costs
which are being amortized over the term of the agreement. As a result of the overall increase in borrowing capacity, existing deferred
financing costs at the time of the amendment of $0.5 million are also being amortized over the term of the Credit Facility.
The Company’s yen denominated line of credit is a 500 million Yen ($4.1 million) facility that has a five-year term through June 2016
and has an interest rate equal to LIBOR, as defined in the loan agreement governing the yen facility, plus 0.625% to 1.50%. At
June 30, 2015 and 2014, the Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to
certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2015, the
Company had $2.5 million outstanding and was in compliance with all financial covenants under its Yen facility. On August 21, 2015,
the Company received and accepted a commitment from its lender to extend the maturity date of the Yen facility to August 2020 on
substantially the same terms of the current facility. The lender’s commitment to provide the extension is subject to the satisfaction of
certain customary conditions.
The Company had aggregate availability of $116.6 million and $71.0 million under its lines of credit as of June 30, 2015 and June 30,
2014, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of
June 30, 2015 total outstanding letters of credit supported by the Credit Facility were $1.5 million. The weighted average interest rate
of total borrowings was 1.8% for each of the years ended June 30, 2015 and 2014.
42
In August 2014, the Board of Directors authorized the Company to purchase up to $50.0 million of its Common Stock. The repurchase
program has no expiration date and provides for shares to be purchased in the open market or in private transactions from time to time.
Shares purchased by the Company are retained as treasury stock and are available for general corporate purposes. During the fiscal
year ended June 30, 2015, the Company purchased 936,049 shares of its Common Stock for $12.7 million under this repurchase
program.
In August 2014, the Company exited its capital lease obligation related to the existing manufacturing facility in Berlin, Germany
utilized by the Company’s II-VI HIGHYAG business. The total cash paid for this purchase was approximately $13.4 million and was
financed through existing cash balances.
Our cash position, borrowing capacity and debt obligations are as follows (in millions):
Cash and cash equivalents
Available borrowing capacity
Total debt obligation
June 30,
2015
June 30,
2014
$
173.6 $
116.6
176.0
174.7
71.0
242.0
The Company believes cash flow from operations, existing cash reserves and available borrowing capacity will be sufficient to fund
its working capital needs, capital expenditures and internal and external growth for fiscal year 2016. The Company’s cash and cash
equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the U.S. As of
June 30, 2015, the Company held approximately $145 million of cash and cash equivalents outside of the U.S. Cash balances held
outside the United States could be repatriated to the U.S., but, under current law, would potentially be subject to U.S. 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 U.S., as the majority of the earnings of the Company’s foreign subsidiaries are indefinitely
reinvested.
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. The Company enters into these off-balance sheet arrangements to
acquire goods and services used in its business.
Tabular Disclosure of Contractual Obligations
Contractual Obligations
($000)
Long-term debt obligations
Interest payments(1)
Capital lease obligations
Operating lease obligations(2)
Purchase obligations(3)
Other long-term liabilities reflected on the balance sheet under
GAAP
Total
Payments Due By Period
Less Than
1
1-3
3-5
Total
Year
Years
Years
More
Than 5
Years
$
175,957 $
9,288
-
51,813
18,136
20,000 $
2,965
-
12,875
13,062
40,000 $
4,806
-
15,775
5,074
1,510
-
113,500 $ 2,457
7
-
6,514 16,649
-
-
-
255,194 $
$
-
48,902 $
-
65,655 $
-
-
121,524 $ 19,113
(1) Variable rate interest obligations are based on the interest rate in place at June 30, 2015 and relate to the Credit Facility.
(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 2056, respectively.
(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.
43
Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $2.0
million in 2016. 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 14 to the Company’s Consolidated Financial Statements.
The gross unrecognized income tax benefits at June 30, 2015, which are excluded from the above table, were $4.0 million. The
Company is not 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.
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 certain techniques and a derivative financial instrument as part of its overall risk
management strategy, primarily focused on its exposure to the Japanese Yen. The Company also has transactions denominated in
euros, pounds sterling, renminbi and swiss francs. No significant changes have occurred in the techniques and instruments used other
than those described below.
Foreign Exchange Risks
In the normal course of business, the Company enters into foreign currency forward exchange contracts with its financial institutions.
The purpose of these contracts is to hedge ordinary business risks regarding foreign currencies on product sales. Foreign currency
exchange contracts are used to limit transactional exposure to changes in currency rates. The Company enters into foreign currency
forward contracts that permit it to sell specified amounts of foreign currencies expected to be received from its export sales for pre-
established U.S. dollar amounts at specified dates. The forward contracts are denominated in the same foreign currencies in which
export sales are denominated. These contracts provide the Company with an economic hedge in which settlement will occur in future
periods, thereby limiting the Company’s exposure. These contracts had a total notional amount of $10.8 million and $7.4 million at
June 30, 2015 and June 30, 2014, respectively. The Company continually 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.
A 10% change in the yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of approximately
$4.8 million to an increase of approximately $5.9 million for the year ended June 30, 2015.
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 $1.3 million to an increase
of $1.6 million for the year ended June 30, 2015.
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.
Interest Rate Risks
As of June 30, 2015, the Company’s total borrowings of $176.0 million were from a line of credit borrowing of $108.5 million
denominated in U.S. dollars, a term loan denominated in U.S. dollars of $65.0 million and a line of credit borrowing of $2.5 million
denominated in Japanese yen. As such, the Company is exposed to changes in interest rates. A change in the interest rate of 100 basis
points on these borrowings would have changed net earnings by $1.4 million, or $0.02 per-share diluted, for the fiscal year ended
June 30, 2015.
Discount Rate Risks
As of June 30, 2015, 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.
44
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 statements included in this Annual Report on Form 10-K. The 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.
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, 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,
2015. 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. Based on the
evaluation, management concluded that as of June 30, 2015, the Company’s internal controls over financial reporting were effective
and provide reasonable assurance that the accompanying financial statements do not contain any material misstatement.
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, 2015. Its report is included herein.
45
The Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
Report of Independent Registered Public Accounting Firm
We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2015, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). II-VI Incorporated and Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 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.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, II-VI Incorporated and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2015, 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, 2015 and 2014, 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, 2015 of II-VI Incorporated and Subsidiaries and our report dated August 28, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 2015
46
The Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 2015 and 2014,
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, 2015. 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, 2015 and 2014, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2015, 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, 2015, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated August 28, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 28, 2015
47
2015
2014
$
173,634 $
174,660
140,772
164,388
13,260
6,881
14,033
512,968
203,812
195,894
122,462
11,914
2,210
8,904
1,058,164 $
20,000 $
45,275
39,310
9,310
685
24,576
139,156
155,957
7,105
26,865
329,083
136,723
165,873
11,118
4,440
12,917
505,731
208,939
196,145
136,404
11,589
4,038
9,080
1,071,926
20,000
45,767
32,461
4,584
732
31,521
135,065
221,960
7,440
32,418
396,883
-
-
226,609
8,665
587,302
822,576
(93,495)
729,081
1,058,164 $
213,573
19,406
521,327
754,306
(79,263)
675,043
1,071,926
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30,
Assets
Current Assets
Cash and cash equivalents
Accounts receivable - less allowance for doubtful accounts of $1,048 at June 30, 2015 and
$1,852 at June 30, 2014
Inventories
Deferred income taxes
Prepaid and refundable income taxes
Prepaid and other current assets
Total Current Assets
Property, plant & equipment, net
Goodwill
Other intangible assets, net
Investment
Deferred income taxes
Other assets
Total Assets
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued compensation and benefits
Accrued income taxes payable
Deferred income taxes
Other accrued liabilities
Total Current Liabilities
$
$
Long-term debt
Deferred income taxes
Other liabilities
Total Liabilities
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 - 71,779,704 shares at June
30, 2015; 70,935,098 shares at June 30, 2014
Accumulated other comprehensive income
Retained earnings
Treasury stock, at cost - 10,565,209 shares at June 30, 2015 and 9,481,963 shares at June 30, 2014
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
See Notes to Consolidated Financial Statements.
$
48
II-VI Incorporated and Subsidiaries
Consolidated Statements of Earnings
Year Ended June 30,
($000, except per share data)
Revenues
Domestic
International
Total Revenues
Costs, Expenses and Other Expense (Income)
Cost of goods sold
Internal research and development
Selling, general and administrative
Interest expense
Other expense (income), net
Total Costs, Expenses and Other Expense (Income)
2015
2014
2013
$
274,142 $
467,819
741,961
240,534 $
442,727
683,261
470,363
51,260
143,539
3,863
(6,176)
662,849
456,545
42,523
137,707
4,479
(3,634)
637,620
241,045
310,030
551,075
347,558
22,689
109,337
1,160
(7,155)
473,589
Earnings from Continuing Operations Before Income Taxes
79,112
45,641
77,486
Income Taxes
13,137
7,325
18,766
Earnings from Continuing Operations
65,975
38,316
58,720
Earnings (loss) from Discontinued Operation, net of income tax
-
133
(6,789)
Net Earnings
Less: Earnings Attributable to Redeemable Noncontrolling Interest
Net Earnings Attributable to II-VI Incorporated
Basic Earnings (loss) Attributable to II-VI Incorporated Per Share:
Continuing Operations
Discontinued Operation
Consolidated
Diluted Earnings (loss) Attributable to II-VI Incorporated Per Share:
Continuing Operations
Discontinued Operation
Consolidated
See Notes to Consolidated Financial Statements.
65,975
-
65,975 $
38,449
-
38,449 $
51,931
1,118
50,813
1.08 $
- $
1.08 $
1.05 $
- $
1.05 $
0.62 $
- $
0.62 $
0.60 $
- $
0.60 $
0.92
(0.11)
0.81
0.90
(0.11)
0.80
$
$
$
$
$
$
$
49
II-VI Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
Year Ended June 30,
($000)
Net earnings
Other comprehensive income (loss):
Foreign currency translation adjustments
Pension adjustment, net of taxes of ($602) for the year ended June 30, 2015 and $387 for the
year ended June 30, 2014, respectively
Comprehensive income
Net earnings attributable to redeemable noncontrolling interest
Other comprehensive income (loss) attributable to redeemable noncontrolling interest:
Foreign currency translation adjustments attributable to redeemable noncontrolling interest
Comprehensive income attributable to redeemable noncontrolling interest
Comprehensive income attributable to II-VI Incorporated
See Notes to Consolidated Financial Statements.
2015
2014
2013
$
65,975 $
38,449 $
51,931
(8,497)
2,363
5,362
(2,244)
55,234 $
1,443
42,255 $
-
57,293
- $
- $
1,118
- $
- $
55,234 $
- $
- $
42,255 $
(295)
823
56,470
$
$
$
$
$
50
II-VI Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(000)
Balance - June 30, 2012
Shares issued under share-based compensation plans
Net earnings
Purchases of treasury stock
Treasury stock under deferred compensation arrangements
Minimum tax withholding requirements
Foreign currency translation adjustments
Share-based compensation expense
Excess tax benefits from share-based compensation expense
Adjustment to redeemable noncontrolling interest
Balance - June 30, 2013
Shares issued under share-based compensation plans
Net earnings
Purchases of treasury stock
Treasury stock under deferred compensation arrangements
Foreign currency translation adjustments
Share-based compensation expense
Pension adjustment, net of taxes of $387
Excess tax benefits from share-based compensation expense
Balance - June 30, 2014
Shares issued under share-based compensation plans
Net earnings
Purchases of treasury stock
Treasury stock under deferred compensation arrangements
Foreign currency translation adjustments
Share-based compensation expense
Pension adjustment, net of taxes of ($602)
APIC pool reclassification
Tax deficiency from share-based compensation expense
Balance - June 30, 2015
See Notes to Consolidated Financial Statements.
Accumulated
Other
Common Stock Comprehensive Retained Treasury Stock
Shares Amount
Earnings Shares Amount Total
Income
(827)
-
-
(44)
-
(70)
(7)
-
-
-
-
-
-
- 50,813
-
-
-
5,362
-
-
-
10,238 $ 434,940 (6,794) $(35,247) $586,226
-
4,104
- 50,813
- (1,141) (19,978) (19,978)
-
-
(1,291)
(138)
-
(138)
-
-
5,362
- 11,959
-
635
-
-
(2,875)
-
(2,875)
15,600 $ 482,878 (8,012) $(56,654) $636,108
3,655
- 38,449
- (1,333) (19,973) (19,973)
-
-
(1,809)
-
-
2,363
- 12,347
-
1,443
-
-
651
-
-
19,406 $ 521,327 (9,482) $(79,263) $675,043
4,111
- 65,975
(936) (12,729) (12,729)
(418)
(72)
-
-
-
(8,497)
- 11,340
-
(2,244)
-
-
(3,812)
-
-
(106)
-
-
8,665 $ 587,302 (10,565) $(93,495) $729,081
-
-
- 65,975
-
-
-
-
-
(8,497)
-
-
-
(2,244)
-
-
-
-
-
-
- 38,449
-
-
2,363
-
1,443
-
(93)
-
-
-
-
(75)
-
(1,085)
596
-
-
-
-
-
-
-
-
69,627 $176,295 $
4,104
-
-
1,291
-
-
11,959
635
-
70,223 $194,284 $
4,482
-
-
1,809
-
12,347
-
651
70,935 $213,573 $
5,196
-
-
418
-
11,340
-
(3,812)
(106)
71,780 $226,609 $
773
-
-
72
-
-
-
-
-
712
-
-
-
-
-
-
-
51
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
($000)
Cash Flows from Operating Activities
2015
2014
2013
Net earnings
$
Adjustments to reconcile net earnings to net cash provided by operating activities:
65,975 $
38,449 $
51,931
(Earnings) loss from discontinued operation, net of tax
Depreciation
Amortization
Share-based compensation expense
Impairment of intangible assets
Losses on foreign currency remeasurements and transactions
Earnings from equity investment
Deferred income taxes
Excess tax benefits from share-based compensation expense
Impairment on property, plant, and equipment
Increase (decrease) in cash from changes in:
Accounts receivable
Inventories
Accounts payable
Income taxes
Other operating net assets
Net cash provided by operating activities:
Continuing Operations
Discontinued Operation
Net cash provided by operating activities
Cash Flows from Investing Activities
Additions to property, plant & equipment
Purchases of businesses, net of cash acquired
Proceeds received from contractual settlement from Thailand flooding
Proceeds received from sale of equity method investment
Other investing activities
Net cash used in investing activities
Continuing Operations
Discontinued Operation
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from borrowings
Payments on borrowings
Purchases of treasury stock
Payments of redeemable noncontrolling interest
Payments on holdback arrangements
Proceeds from exercises of stock options
Other financing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
Non cash transactions:
Purchases of businesses - holdback amount recorded in Other accrued liabilities
Capital lease obligation incurred on facility lease
Purchase of business utilizing earnout consideration recorded in other current
liabilities
See Notes to Consolidated Financial Statements.
$
$
$
$
52
-
41,114
11,969
11,340
1,964
2,178
(948)
(3,781)
(335)
-
(10,742)
(4,207)
61
7,589
7,189
129,366
-
129,366
(52,313)
-
-
-
67
(52,246)
-
(52,246)
3,000
(68,500)
(12,729)
-
(2,350)
5,196
(681)
(76,064)
(2,082)
(1,026)
174,660
173,634 $
(133)
41,805
11,293
12,347
-
700
(698)
(4,435)
(651)
-
(28,486)
12,794
19,813
(6,282)
(2,251)
94,265
1,197
95,462
(29,220)
(177,676)
-
-
79
(206,817)
-
(206,817)
183,000
(55,000)
(19,973)
(8,789)
(3,000)
4,358
(1,514)
99,082
1,500
(10,773)
185,433
174,660 $
6,789
34,135
6,657
11,959
-
1,244
(1,048)
1,962
(635)
900
5,441
1,969
(9,376)
4,351
(5,807)
110,472
(2,865)
107,607
(25,205)
(126,193)
4,797
2,138
-
(144,463)
(68)
(144,531)
113,000
(11,000)
(19,978)
-
-
4,104
(347)
85,779
1,634
50,489
134,944
185,433
- $
- $
- $
10,000 $
11,636 $
-
-
- $
3,300
II-VI Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
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 opto-electronic components, is a vertically-integrated manufacturing company that develops innovative products for
diversified applications in the industrial, optical communications, military, life sciences, semiconductor equipment and consumer
markets. 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.
Effective July 1, 2014, the Company realigned its organizational structure into three reporting segments for the purpose of making
operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance
Products. The Company is reporting financial information (revenue through operating income) for these new reporting segments
which management believes will provide enhanced visibility and transparency into the operations, business drivers and the value of
the enterprise.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company. All intercompany
transactions and balances have been eliminated.
Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation. For II-VI Singapore Pte., Ltd. and its subsidiaries, II-VI Suisse S.a.r.l. and 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 the functional currency is 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, 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 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, Australia, the United Kingdom (“U.K.”)
and South Korea.
Accounts Receivable. The Company establishes an allowance for doubtful accounts based on historical experience and believes the
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, 2015 and
2014. Factoring is done with high credit quality financial institutions in Japan. During the years ended June 30, 2015 and 2014, $17.8
million and $12.7 million, respectively, of accounts receivable had been factored. As of June 30, 2015 and 2014, the amount included
in other accrued liabilities representing the Company’s obligation to the bank for these receivables factored with recourse was
immaterial.
Inventories. Inventories are valued at the lower of cost or market (“LCM”), with cost determined on the first-in, first-out basis.
Inventory costs include material, labor and manufacturing overhead. Market cannot exceed 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, management also
53
considers, if applicable, other factors as well, including known trends, market conditions, currency exchange rates and other such
issues. The Company records an inventory reserve as a charge against earnings for all products on hand more than twelve to eighteen
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 is 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 $22.3 million and $12.0 million at June 30, 2015 and 2014,
respectively. The increase in reserves for fiscal year 2015 was primarily due to excess inventory on hand at II-VI Laser Enterprise.
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 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 3 to 20 years for machinery
and equipment.
Business Combinations. The Company accounts for business acquisitions 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.
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 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 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.
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 5 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. The Company has an equity investment in Guangdong Fuxin Electronic Technology (“Fuxin”) based in
Guangdong Province, China of 20.2%, which is accounted for under the equity method of accounting. The total carrying value of the
investment recorded at June 30, 2015 and June 30, 2014 was $11.9 million and $11.6 million, respectively. During the years ended
June 30, 2015, 2014 and 2013, the Company’s pro-rata share of earnings from this investment was $0.9 million, $0.7 million and $1.0
million, respectively, and was recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years
ended June 30, 2015, 2014 and 2013 the Company recorded dividends from this equity investment of $0.6 million, $0.3 million and
$0.5 million, respectively.
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. The Company had no loss contingency liabilities at
June 30, 2015 related to commitments and contingencies.
Accrued Bonus and Profit Sharing Contribution. 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
54
unusual conditions that come to the Company’s attention. Our warranty reserve balance at June 30, 2015 was approximately $3.3
million.
Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the consolidated financial
statement 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 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. The Company recognizes revenues for product shipments when persuasive evidence of a sales arrangement
exists, the product has been shipped or delivered, the sale 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 these customers, title does not pass and revenue is not recognized until the customer has received the product at its physical
location.
We establish an allowance for doubtful accounts based on historical experience and believe the collection of revenues, net of this
reserve, is reasonably assured. Our allowance for doubtful accounts balance at June 30, 2015 was approximately $1.0 million. Our
reserve estimate has historically been proven to be materially correct based upon actual charges incurred.
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, which comprise less than 10% 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 2% 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 by the Company are included in selling, general and administrative expenses in the accompanying Consolidated Statements
of Earnings. Total shipping and handling revenue and costs included in revenues and in selling, general and administrative expenses
were not significant for the fiscal years ended June 30, 2015, 2014 and 2013.
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. The Company follows U.S. GAAP in accounting for share-based compensation arrangements, which
requires the recognition of the grant-date fair value of stock 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.
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. Accumulated other comprehensive income is a measure of all changes in
shareholders’ equity that result from transactions and other economic events in the period other than transactions with owners.
Accumulated other comprehensive income is a component of shareholders’ equity and consists of accumulated foreign currency
translation adjustments of $9.5 million and $18.0 million as of June 30, 2015 and 2014, respectively, and pension adjustments of ($0.8)
million and $1.4 million as of June 30, 2015 and 2014, respectively.
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. 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
55
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.
Leases. The Company classifies leases as operating 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 of 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.
Reclassifications. The Company corrected an immaterial error related to its long term deferred tax asset for share based compensation
in the Consolidated Balance Sheet as of June 30, 2015. The recorded reclassification of $3.8 million reduced both the long term
deferred tax asset and additional paid in capital (“APIC”) associated with the Company’s APIC tax pool. This reclassification had no
impact on previously reported revenues, income tax expense and net earnings in any annual or interim periods.
Recently Issued Financial Accounting Standards
In July 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“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 are 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 these changes is not expected to have a material impact to the Company’s Consolidated Financial
Statements.
In April 2015, the FASB issued as final, 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 update is effective for annual reporting periods, including interim periods
within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The update allows for the use of either a
prospective or retrospective adoption approach. Management is currently evaluating the available transition methods and the potential
impact of adoption on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
This ASU requires entities 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. The guidance does not address situations in which debt issuance costs do
not have an associated debt liability or exceed the carrying amount of the associated debt liability. This ASU will be effective
beginning in fiscal year 2017. Management is currently evaluating the potential impact of adoption on the Company's Consolidated
Financial Statements.
In February 2015, the FASB issued as final, ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis,
which affects reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The update is
effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. The update allows for the use of either a full retrospective or a modified retrospective
adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoption on the
Company’s Consolidated Financial Statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items. This ASU eliminates the
requirement to separately present and disclose extraordinary and unusual items in the financial statements. This ASU will be effective
beginning in 2016. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
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 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (the first quarter of our
fiscal year 2019). We have not yet selected a transition method and are currently evaluating the impact of this guidance on our
Consolidated Financial Statements.
56
In April 2014, the FASB issued ASU 2014-08: Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related
disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of
components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an
entity's operations and financial results. The new standard will be effective for annual periods beginning on or after December 15,
2014, with early adoption permitted and will be effective for the Company beginning in the first quarter of fiscal year 2016. The
adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
In July 2013, the FASB issued ASU 2013-11: Presentation of an Unrecognized Tax benefit when a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit carryforward Exists. The ASU changes how certain unrecognized tax benefits are to be presented
on the consolidated balance sheet. This ASU clarified existing guidance to require that an unrecognized tax benefit, or a portion
thereof, be presented in the consolidated balance sheet as a reduction to a deferred tax asset for a net operating loss ("NOL")
carryforward, similar tax loss, or a tax credit carryforward, except when an NOL carryforward, similar tax loss, or tax credit
carryforward is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result
from the disallowance of a tax position. In such a case, the unrecognized tax benefit would be presented in the consolidated balance
sheet as a liability. This update was effective for fiscal years beginning after December 15, 2013 and was effective for the Company
for the fiscal quarter ended September 30, 2014. The adoption of this standard did not have a significant impact on the Company’s
Consolidated Financial Statements.
Note 2.
Discontinued Operation
During December 2013, the Company completed the discontinuance of its tellurium product line by exiting all business activities
associated with this product. This product line was previously serviced by II-VI Performance Metals and was included as part of the
II-VI Performance Products segment. Prior periods have been restated to present this product line on a discontinued operation basis.
The revenues and earnings (losses) of the tellurium product line have been reflected as a discontinued operation for the periods
presented as follows ($000):
June 30,
($000)
Revenues
Earnings (loss) from discontinued operation before income
taxes
Income tax benefit (expense)
Earnings (loss) from discontinued operation, net of taxes
2015
2014
2013
$
$
-
-
-
-
$
1,849
$
7,321
133
-
133
$
(6,789)
-
(6,789)
$
Note 3.
Inventories
The components of inventories, net of reserves, were as follows:
June 30,
($000)
Raw materials
Work in progress
Finished goods
2015
2014
$
$
71,210
52,726
40,452
164,388
$
$
71,949
44,739
49,185
165,873
57
Note 4.
Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
($000)
Land and land improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation
2015
2014
$
$
4,566
91,171
366,560
17,749
480,046
(276,234)
203,812
$
$
2,381
96,551
335,408
16,990
451,330
(242,391)
208,939
During the quarter ended March 31, 2015, as part of the Company’s ongoing restructuring of its military related businesses in the II-
VI Performance Products segment, the Company implemented a plan to sell one of its manufacturing facilities located in New Port
Richey, Florida. The Company anticipates completing the sale within the next twelve months, and has reclassified the carrying value
of the land and building of approximately $1.2 million as assets held for sale and has included the carrying value in Prepaid and other
current assets in the Consolidated Balance Sheets at June 30, 2015.
Depreciation expense was $41.1 million, $41.8 million and $34.1 million for the fiscal years ended June 30, 2015, 2014 and 2013,
respectively.
Included in the cost and accumulated depreciation of property, plant and equipment is the effect of foreign currency translation on the
portion relating to the Company’s foreign subsidiaries.
Note 5.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable
intangible assets acquired in business combinations are recorded based upon fair market value at the date of acquisition.
Changes in the carrying amount of goodwill were as follows ($000):
Balance-beginning of period
Foreign currency translation
Balance-end of period
Balance-beginning of period
Goodwill acquired
Goodwill adjustment
Foreign currency translation
Balance-end of period
II-VI Laser
Solutions
Year Ended June 30, 2015
II-VI
Photonics
II- VI Performance
Products
44,041 $
(463)
43,578 $
99,214 $
212
99,426 $
52,890 $
-
52,890 $
Total
196,145
(251)
195,894
II-VI Laser
Solutions
Year Ended June 30, 2014
II-VI
Photonics
II- VI Performance
Products
Total
13,233 $
30,718
-
90
44,041 $
56,713 $
42,375
-
126
99,214 $
53,406 $
-
(516)
-
52,890 $
123,352
73,093
(516)
216
196,145
$
$
$
$
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 used a discounted cash flow (DCF) model and a market analysis to
determine the current fair value of all 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 2015 and 2014, the Company completed its annual impairment tests of its
58
reporting units. Based on the results of these analyses, the Company’s goodwill of $195.9 million as of June 30, 2015 and $196.1
million as of June 30, 2014 was not impaired.
As the estimated fair value of the II-VI Photonics reporting unit was approximately 5% greater than its carrying value, the Company
has concluded that this reporting unit is at risk of not passing step one of future goodwill impairment tests. In the event of unfavorable
changes to the existing assumptions used in the impairment test such as the weighted average cost of capital (discount rate), growth
rates and market multiples as well as changes in our internal structure, the carrying value of the Company’s goodwill could be
impaired. Although the Company believes that the current assumptions and estimates are reasonable, supportable and appropriate, the
II-VI Photonics reporting unit competes in a challenging environment with significant pricing pressure and rapidly changing
technology and there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment test will
prove to be accurate predictions of future performance.
As a result of the July 1, 2014 segment realignment, the Company reassigned the existing goodwill balances at July 1, 2014 to the new
reporting units utilizing a relative fair value allocation approach in accordance with authoritative accounting guidance. The Company
also reviewed the recoverability of the carrying value of goodwill at its reporting units. The Company performed a qualitative
assessment of goodwill prior to completing the quantitative test to determine whether it is more likely than not that the fair value of a
reporting unit was less than its carrying amount, including goodwill and other intangible assets due to the short duration of time since
the Company’s annual quantitative goodwill impairment test for fiscal year 2014, which was completed on April 1, 2014. The
Company did not record any impairment of goodwill or long-lived assets as the qualitative assessment did not indicate deterioration in
the fair value of its reporting units since the most recent annual impairment test.
During the year ended June 30, 2014, the Company recorded an adjustment to goodwill of $0.5 million associated with the November
2012 acquisition of M Cubed Technologies, Inc. (“M Cubed”). This adjustment related to a change in deferred income tax assets and
was recorded in conjunction with the finalization and filing of the M Cubed final income tax return.
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2015
and 2014 were as follows ($000):
Gross
Carrying
Amount
June 30, 2015
Accumulated
Amortization
Net
Book
Value
Gross
Carrying
Amount
June 30, 2014
Accumulated
Amortization
Net
Book
Value
Technology and Patents
Trade names
Customer Lists
Other
Total
$
$
50,520 $
15,869
102,489
1,572
170,450 $
(18,838) $
(1,111)
(26,583)
(1,456)
(47,988) $
31,682 $
14,758
75,906
116
122,462 $
50,505 $
17,870
102,839
1,586
172,800 $
(14,474) $
(1,037)
(19,448)
(1,437)
(36,396) $
36,031
16,833
83,391
149
136,404
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2015, 2014 and 2013 was $12.0 million,
$11.3 million, and $6.7 million, respectively. The technology and patents are being amortized over a range of 60 to 240 months with a
weighted-average remaining life of approximately 114 months. The customer lists are being amortized over 60 to 192 months with a
weighted-average remaining life of approximately 146 months.
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 trademarks 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 trademarks
and was recorded in other expense (income), net in the Consolidated Statements of Earnings.
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade
names of $14.4 million as of June 30, 2015 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 2015 and 2014. Based on the results of
these tests, the trade names were not impaired at June 30, 2015 or 2014.
59
Included in the gross carrying amount and accumulated amortization of the Company’s 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. The estimated amortization expense for existing intangible assets for each of the five succeeding years is as
follows ($000):
Year Ending June 30,
2016
2017
2018
2019
2020
$
11,619
11,607
11,139
10,706
10,593
Note 6.
Debt
The components of debt were as follows ($000):
June 30,
Line of credit, interest at LIBOR, as defined, plus 1.5% and
1.75%, respectively
Term loan, interest at LIBOR, as defined, plus 1.25%
Yen denominated line of credit, interest at LIBOR, as defined,
plus 0.625%
Total debt
Current portion of long-term debt
Long-term debt, less current portion
2015
2014
$
$
108,500 $
65,000
154,000
85,000
2,457
175,957
(20,000)
155,957 $
2,960
241,960
(20,000)
221,960
The Company’s First Amended and Restated Credit Agreement (the “Credit Facility”) provides for a revolving credit facility of $225
million, as well as a $100 million Term Loan. The Term Loan is being repaid in consecutive quarterly principal payments on the first
business day of each January, April, July and October, with the first payment having commenced on October 1, 2013, as follows:
(i) twenty consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the
maturity date. The Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-
owned domestic subsidiaries of the Company. The Company has the option to request an increase to the size of the Amended Credit
Facility in an aggregate additional amount not to exceed $100 million. The Credit Facility has a five-year term through September
2018 and has an interest rate of LIBOR, as defined in the agreement, plus 0.75% to 1.75% based on the Company’s ratio of
consolidated indebtedness to consolidated EBITDA. Additionally, the facility is subject to certain covenants, including those relating
to minimum interest coverage and maximum leverage ratios. As of June 30, 2015, the Company was in compliance with all financial
covenants under its Credit Facility.
The Company’s Yen denominated line of credit is a 500 million Yen ($4.1 million) facility that has a five-year term through June
2016 and has an interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.50%. Additionally, the facility is
subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2015,
the Company was in compliance with all covenants under the Yen facility. On August 21, 2015, the Company received and accepted a
commitment from its lender to extend the maturity date of the Yen facility to August 2020 on substantially the same terms of the
current facility. The lender’s commitment to provide the extension is subject to the satisfaction of certain customary conditions.
The Company had aggregate availability of $116.6 million and $71.0 million under its lines of credit as of June 30, 2015 and 2014,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30,
2015 and 2014, total outstanding letters of credit supported by the credit facilities were $1.5 million.
The weighted-average interest rate of total borrowings for each of the years ended June 30, 2015 and 2014 was 1.8%. The weighted-
average of total borrowings for the fiscal years ended June 30, 2015 and 2014 was $210.0 million and $222.6 million, respectively.
The Company has a line of credit facility with a Singapore bank which permits maximum borrowings in the local currency of
approximately $0.3 million for the fiscal years ended June 30, 2015 and 2014. 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, 2015 and June 30,
2014. At June 30, 2015 and 2014, there were no outstanding borrowings under this facility.
60
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, 2015, 2014 and 2013 were $4.0 million and $4.2
million and $1.1 million, respectively.
Remaining annual principal payments under the Company’s existing credit facilities as of June 30, 2015 were as follows ($000):
Term
Loan
Yen Line
of Credit
U.S.
Dollar
Line of
Credit
20,000 $
20,000
20,000
5,000
-
-
65,000 $
- $
-
-
-
-
2,457
2,457 $
- $
-
-
108,500
-
-
108,500 $
Total
20,000
20,000
20,000
113,500
-
2,457
175,957
Period
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total
$
$
Note 7.
Income Taxes
The components of income (loss) before income taxes were as follows:
Year Ended June 30,
($000)
U.S. income (loss)
Non-U.S. income
Total Earnings Before Tax
2015
2014
2013
$
$
$
(5,326)
84,438
79,112 $
$
(2,863)
48,504
45,641 $
19,253
58,233
77,486
The components of income tax expense (benefit) from continuing operations were as follows:
Year Ended June 30,
($000)
Current:
Federal
State
Foreign
Total Current
Deferred:
Federal
State
Foreign
Total Deferred
Total Income Tax Expense
2015
2014
2013
$
$
$
$
$
(146) $
86
16,978
16,918 $
$
(1,067)
152
12,675
11,760 $
2,759
68
13,977
16,804
(2,762) $
(251)
(768)
(3,781) $
13,137 $
$
(16)
148
(4,567)
(4,435) $
7,325 $
1,721
113
128
1,962
18,766
61
Principal items comprising deferred income taxes were as follows:
June 30,
($000)
Deferred income tax assets
Inventory capitalization
Non-deductible accruals
Accrued employee benefits
Net-operating loss and credit carryforwards
Share-based compensation expense
Other
Valuation allowances
Total deferred income tax assets
Deferred income tax liabilities
Tax over book accumulated depreciation
Intangible assets
Tax on unremitted earnings
Other
Total deferred income tax liabilities
Net deferred income taxes
2015
2014
$
$
$
$
$
6,614 $
1,902
10,297
22,232
13,222
1,468
(2,713)
53,022 $
(15,937) $
(25,132)
(1,753)
(2,520)
(45,342) $
7,680 $
5,402
1,926
9,226
21,976
16,005
577
(2,212)
52,900
(17,625)
(25,505)
(714)
(2,072)
(45,916)
6,984
The reconciliation of income tax expense at the statutory federal rate to the reported income tax expense is as follows:
Year Ended June 30,
($000)
Taxes at statutory rate
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit
Taxes on non U.S. earnings
Settlement of unrecognized tax benefits
Research and manufacturing incentive deductions
Other
2015
%
2014
%
2013
%
$ 27,689
35 $ 15,974
35
$27,120
(196)
(11,687)
-
(2,573)
(96)
$ 13,137
-
(15)
-
(3)
-
254
(6,672)
-
(2,190)
(41)
17 $ 7,325
1
(15)
-
(5)
-
16
168
(6,991)
-
(1,458)
(73)
$18,766
35
-
(9)
-
(2)
-
24
During the fiscal years ended June 30, 2015, 2014, and 2013, net cash paid by the Company for income taxes was $13.0 million, $17.2
million, and $11.9 million, respectively.
Our foreign subsidiaries in the Philippines 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
0.22%, 0.12% and 0.07% for the fiscal years ended June 30, 2015, 2014 and 2013 respectively.
The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was
approximately $419 million at June 30, 2015. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an
additional deferred tax liability of approximately $83 million would have been required as of June 30, 2015. 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.
62
The sources of differences resulting in deferred income tax expense (benefit) from continuing operations and the related tax effect of
each were as follows:
Year Ended June 30,
($000)
Depreciation and amortization
Inventory capitalization
Net operating loss and credit carryforwards net of valuation
allowances
Share-based compensation expense
Other
2015
2014
2013
$
(1,844) $
(1,273)
(3,581)
646
$
(2,825)
84
418
(1,029)
(53)
(3,781)
$
533
(984)
(1,049)
(4,435)
$
4,786
(3,487)
3,404
1,962
$
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2015:
Type
($000)
Tax credit carryforwards:
Federal research and development credits
Foreign tax credits
State tax credits
Operating loss carryforwards:
Loss carryforwards – federal
Loss carryforwards – state
Loss carryforwards – foreign
Amount
Expiration Date
$
$
6,179
2,396
2,918
24,766
22,554
9,146
June 2019-June 2035
June 2024-June 2025
June 2016-June 2034
June 2027-June 2029
June 2017-June 2035
June 2016-June 2024
The Company has recorded a valuation allowance against the majority of the foreign loss carryforwards and select state tax credit
carryforwards. The Company’s federal loss carryforwards, federal research and development credit carryforwards, and certain state
tax credits resulted from the Company’s acquisitions of Photop Aegis and M Cubed and are subject to various annual limitations under
Section 382 of the Internal Revenue Code.
Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2015, 2014 and 2013 were as follows:
($000)
Balance at Beginning of Year
Increases in current year tax positions
Increases in prior year tax positions
Decreases in prior year tax positions
Settlements
Expiration of statute of limitations
Balance at End of Year
2015
2014
2013
$
$
2,775 $
2,450
203
-
-
(1,406)
4,022
$
3,181
298
2
-
-
(706)
2,775
$
$
2,850
338
-
(7)
-
-
3,181
The Company classifies all estimated and actual interest and penalties as income tax expense. During the fiscal year 2015, there was a
benefit of $0.1 million of interest and penalties within tax expense. There was no interest and penalties within income tax expense for
fiscal year 2014. During the fiscal years ended June 30, 2013, the Company recognized $0.1 million of expense for interest and
penalties within income tax expense. The Company had $0.1 million, $0.2 million, and $0.2 million of interest and penalties accrued
at June 30, 2015, 2014, and 2013, respectively. The increase in the Company’s current year tax positions are the result of certain
unrecognized tax benefits associated with transfer pricing. The Company has classified the uncertain tax positions as non-current
income tax liabilities as the amounts are not expected to be paid within one year. Including tax positions for which the Company
determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities
based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our
effective tax rate was approximately $3.6 million and $2.8 million at June 30, 2015 and 2014, respectively. The Company expects a
decrease of $0.7 million of unrecognized tax benefits during the next twelve months due to the expiration of statutes of limitation.
Fiscal years 2012 to 2015 remain open to examination by the Internal Revenue Service, fiscal years 2011 to 2015 remain open to
examination by certain state jurisdictions, and fiscal years 2008 to 2015 remain open to examination by certain foreign taxing
jurisdictions. The Company’s fiscal years 2011 and 2012 California state income tax returns are currently under examination by the
63
State of California’s Franchise Tax Board. The Company’s fiscal years 2012 and 2013 German income tax returns are currently under
examination.
Note 8.
Earnings Per Share
The following table sets forth the computation of earnings per share for the periods indicated. Weighted-average shares issuable upon
the exercise of stock options that were not included in the calculation were 576,000, 507,000 and 470,000 for the fiscal years ended
June 30, 2015, 2014 and 2013, respectively, because they were anti-dilutive.
Year Ended June 30,
($000 except per share)
Earnings from continuing operations
Earnings (loss) from discontinued operation
Net earnings from continuing operations
Divided by:
Weighted average shares
Basic earnings (loss) per common share:
Continuing operations
Discontinued operation
Consolidated
Earnings from continuing operations
Earnings (loss) from discontinued operation
Net earnings from continuing operations
Divided by:
Weighted average shares
Dilutive effect of common stock equivalents
Diluted weighted average common shares
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operation
Consolidated
2015
2014
2013
65,975 $
-
65,975 $
38,316 $
133
38,449 $
57,602
(6,789)
50,813
61,219
62,248
62,411
1.08 $
- $
1.08 $
0.62 $
- $
0.62 $
65,975 $
-
65,975 $
38,316 $
133
38,449 $
61,219
1,367
62,586
62,248
1,438
63,686
0.92
(0.11)
0.81
57,602
(6,789)
50,813
62,411
1,473
63,884
1.05 $
- $
1.05 $
0.60 $
- $
0.60 $
0.90
(0.11)
0.80
$
$
$
$
$
$
$
$
$
$
Note 9.
Operating Leases
The Company leases certain property under operating leases that expire at various dates. Future rental commitments applicable to the
operating leases at June 30, 2015 are as follows:
Year Ending June 30,
($000)
2016
2017
2018
2019
2020
Thereafter
$
12,875
9,500
6,275
3,449
3,065
16,649
Rent expense was approximately $15.0 million, $13.6 million, and $9.8 million for the fiscal years ended June 30, 2015, 2014 and
2013, respectively.
Note 10.
Share-Based Compensation Plans
The Company’s Board of Directors adopted the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan (the “Plan”)
which was approved by the shareholders at the Annual Meeting in November 2014. The Plan provides for the grant of non-qualified
stock options, stock appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance
share units to employees, officers and directors of the Company. The maximum number of shares of the Company’s Common Stock
authorized for issuance under the Plan is limited to 4,900,000 shares of Common Stock, not including any remaining shares forfeited
64
under the predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or
disability of the grantee. As of June 30, 2015, there were approximately 3,502,571 shares available to be issued under the Plan,
including forfeited shares from predecessor plans.
The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, 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, 2015, 2014 and 2013 is as follows ($000):
Year Ended June 30,
Stock Options and Cash-Based Stock Appreciation
Rights
Restricted Share Awards and Cash-Based Restricted
Share Unit Awards
Performance Share Awards and Cash-Based
Performance Share Unit Awards
2015
2014
2013
$
5,158
$
5,818
$
5,046
5,182
4,868
4,411
2,649
12,989
$
$
2,311
12,997
$
3,200
12,657
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 $1.6 million in fiscal year 2015 and $0.7 million in fiscal years 2014 and
2013, 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, 2015, 2014 and 2013, the weighted-average fair value of options granted under the stock option plan was $5.76, $8.21
and $8.37, respectively, per option using the following assumptions:
Year Ended June 30,
Risk-free interest rate
Expected volatility
Expected life of options
Dividend yield
2015
2014
2013
1.71%
41%
5.94 years
None
1.71%
47%
5.56 years
None
0.98%
49%
5.66 years
None
The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect
at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted average rate for
all options granted during the fiscal year. Expected volatility is based on the historical volatility of the Company’s Common Stock
over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to
post-vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no current intention to pay cash dividends in the future. The estimated annualized forfeitures are
based on the Company’s historical experience of option pre-vesting cancellations and are estimated at a rate of 17%. 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.
65
Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2015 was as follows:
Stock Options
Cash-Based Stock
Appreciation Rights
Outstanding - July 1, 2014
Granted
Exercised
Forfeited and Expired
Outstanding - June 30, 2015
Exercisable - June 30, 2015
Number of
Shares
4,704,554 $
648,540 $
(498,250) $
(290,020) $
4,564,824 $
2,899,994 $
Weighted
Average
Exercise Price
16.37
14.03
10.41
18.72
16.54
16.42
Number of
Rights
Weighted
Average
Exercise Price
18.28
14.19
14.03
16.28
16.80
18.50
108,718 $
63,550 $
(136) $
(4,960) $
167,172 $
31,672 $
As of June 30, 2015, 2014 and 2013, the aggregate intrinsic value of stock options and cash-based stock appreciation rights
outstanding and exercisable was $14.3 million, $5.2 million and $9.7 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,
2015, 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, 2015. 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, 2015, 2014, and 2013 was $2.9 million, $3.1 million, and $2.9 million, respectively. As of June 30, 2015, total
unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $7.7 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, 2015 were as follows:
Stock Options and Cash-Based Stock
Appreciation Rights Outstanding
Weighted
Average Remaining
Contractual Term
(Years)
Weighted
Average
Exercise
Price
Number of
Shares or
Rights
933,284
3,211,940
586,772
4,731,996
2.97 $
6.79 $
3.38 $
5.51 $
11.27
16.81
23.51
16.55
Stock Options and Cash-Based Stock
Appreciation Rights Exercisable
Number of
Shares or
Rights
932,670
1,434,334
564,662
2,931,666
Weighted
Average Remaining
Contractual Term
(Years)
Weighted
Average
Exercise
Price
2.97 $
5.17 $
3.27 $
4.07 $
11.27
17.03
23.49
16.44
Range of
Exercise Prices
$8.80 - $13.23
$13.34 - $20.26
$20.47 - $27.18
Restricted Share Awards and Cash-Based Restricted Share Unit Awards:
Restricted share awards 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 and restricted share unit awards have a three year cliff-vesting provision and an estimated
forfeiture rate of 10.3%.
Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2015, was as follows:
Nonvested - June 30, 2014
Granted
Vested
Forfeited
Nonvested - June 30, 2015
Restricted Share Awards
Number of
Shares
784,035
323,365
(273,125)
(43,265)
791,010
Weighted Average
Grant Date Fair Value
17.66
16.28
18.09
17.69
16.94
$
$
$
$
$
Number of
Units
Cash-Based Restricted Share Units
Weighted Average
Grant Date Fair Value
17.72
14.74
18.93
16.13
16.57
64,310
41,585
(415)
(6,485)
98,995
$
$
$
$
$
As of June 30, 2015, total unrecognized compensation cost related to non-vested restricted share and cash-based restricted share unit
awards was $5.8 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The
66
restricted 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 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 and cash-based restricted share unit awards granted
during the years ended June 30, 2015, 2014 and 2013, was $5.9 million, $4.5 million and $7.0 million, respectively. The total fair
value of restricted shares vested was $5.1 million, $3.8 million and $0.7 million during fiscal years 2015, 2014 and 2013, 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, 2015, the Company had outstanding
grants covering performance periods ranging from 24 to 48 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
plan during the year ended June 30, 2015, was as follows:
Performance Share Awards
Number of
Shares
Weighted Average
Grant Date Fair Value
Cash-Based Performance Share Units
Weighted Average
Number of
Grant Date Fair Value
Units
332,180 $
152,226 $
(73,631) $
(103,330) $
18.46
13.99
18.93
18.88
99,144 $
8,709 $
(1,663) $
(4,756) $
307,445 $
15.99
101,434 $
18.94
13.99
18.93
18.93
18.52
Nonvested - June 30,
2014
Granted
Vested
Forfeited
Nonvested - June 30,
2015
As of June 30, 2015, total unrecognized compensation cost related to non-vested performance share and cash-based performance share
unit awards was $2.6 million. This cost is expected to be recognized over a weighted-average period of approximately one year. The
total fair value of the performance share and cash-based performance share unit awards granted during the fiscal years ended June 30,
2015, 2014 and 2013 was $2.3 million, $2.1 million and $5.9 million, respectively. The total fair value of performance shares vested
during the fiscal years ended June 30, 2015, 2014 and 2013 was $1.6 million, $1.3 million and $2.6 million, respectively.
Note 11.
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, 2014, the Company realigned its reportable segments from five to three reporting segments to increase focus on end
markets and customers, better align the Company’s businesses and technical processes, improve the line of sight on profitability and
cash usage and streamline communications. 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, 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 Company has the following
reportable segments at June 30, 2015, which are the Company’s operating segments: (i) II-VI Laser Solutions, which consists of the
Company’s infrared optics and material products businesses, II-VI HIGHYAG, the semiconductor laser portion of the former Active
Optical Products segment, and smaller units of high-power laser technology from the former Near-Infrared Optics segment and certain
remaining corporate activities (primarily corporate assets and capital expenditures); (ii) II-VI Photonics, which consists of the former
Near-Infrared Optics segment and the pump laser and optical amplifier businesses of the former Active Optical Products segment; and
(iii) II-VI Performance Products, which contains the former Military & Materials and Advanced Products Group segments.
67
The II-VI Laser Solutions segment is located in the U.S., Singapore, China, Germany, Switzerland, Japan, Belgium, the U.K., Italy,
South Korea and the Philippines. 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 Solutions designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI
Infrared brand name and used primarily in high-power CO2 lasers. II-VI Laser Solutions also manufactures 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.
The II-VI Photonics segment is located in the U.S., China, Vietnam, Australia, Germany, Japan, the U.K., Italy 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 Photonics manufactures crystal materials, optics, microchip lasers and opto-electronic modules for use in
optical communication networks and other diverse consumer and commercial applications. In addition, the segment also
manufactures pump lasers, 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 U.S., Vietnam, Japan, China, Germany and the Philippines. II-VI
Performance Products is directed by a Corporate Executive Vice President, 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 thermo-electric and silicon carbide applications servicing the semiconductor, military and medical markets.
The Company completed the discontinuance of its tellurium product line by exiting all business activities associated with this product
in December 2013. This product line was previously serviced by II-VI Performance Metals and was included as part of the II-VI
Performance Products segment. Segment information for all periods presented has been adjusted to properly reflect the tellurium
product as a discontinued operation.
The accounting policies of the segments are the same as those of 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-segment sales and transfers have
been eliminated.
The following tables summarize selected financial information of the Company’s operations by segment:
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
($000)
2015
Revenues
Inter-segment revenues
Operating income
Interest expense
Other income, net
Income taxes
Net earnings
Depreciation and amortization
Expenditures for property, plant and equipment
Segment assets
Equity investment
Goodwill
$
$
287,881 $ 260,825 $
21,021
55,039
-
-
-
-
14,127
27,349
330,308
-
43,578
13,210
7,208
-
-
-
-
21,073
11,324
450,763
-
99,426
193,255
9,325
14,552
-
-
-
-
17,883
13,640
277,093
11,914
52,890
68
- $
(43,556)
-
-
-
-
-
-
-
-
-
-
741,961
-
76,799
(3,863)
6,176
(13,137)
65,975
53,083
52,313
1,058,164
11,914
195,894
($000)
2014
Revenues
Inter-segment revenues
Operating income (loss)
Interest expense
Other income, net
Income taxes
Earnings from discontinued operation
Net earnings
Depreciation and amortization
Expenditures for property, plant and equipment
Segment assets
Equity investment
Goodwill
($000)
2013
Revenues
Inter-segment revenues
Operating income
Interest expense
Other income, net
Income taxes
Loss from discontinued operation
Net earnings
Depreciation and amortization
Expenditures for property, plant and equipment
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
$
254,342 $ 216,493 $
9,825
24,457
-
-
-
-
-
15,018
11,797
312,281
-
44,041
9,533
(113)
-
-
-
-
-
20,123
8,359
468,055
-
99,214
$
212,426
12,000
22,142
-
-
-
-
-
17,957
9,064
291,590
11,589
52,890
- $
(31,358)
-
-
-
-
-
-
-
-
-
-
-
683,261
-
46,486
(4,479)
3,634
(7,325)
133
38,449
53,098
29,220
1,071,926
11,589
196,145
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
$
217,604 $ 141,319 $
5,671
53,963
-
-
-
-
-
8,554
6,536
3,950
15,037
-
-
-
-
-
17,181
8,849
192,152
9,458
2,491
-
-
-
-
-
15,057
9,820
$
- $
(19,079)
-
-
-
-
-
-
-
-
551,075
-
71,491
(1,160)
7,155
(18,766)
(6,789)
51,931
40,792
25,205
Geographic information for revenues from the country of origin, 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:
Year-Ended June 30,
($000)
United States
Non-United States
China
Hong Kong
Germany
Switzerland
Japan
Vietnam
Philippines
Italy
United Kingdom
Belgium
Singapore
Australia
Total Non-United States
2015
Revenues
2014
2013
$
241,974
$
263,493
$
251,735
140,586
109,428
77,524
56,940
52,864
24,307
11,334
9,313
7,749
5,731
3,897
314
499,987
741,961
$
114,247
54,602
69,983
70,260
38,110
23,141
14,959
8,897
7,148
6,578
8,273
3,570
419,768
683,261
$
123,306
-
59,628
10,268
29,462
29,425
17,400
7,593
6,865
5,821
6,280
3,292
299,340
551,075
$
69
June 30,
($000)
United States
Non-United States
China
Switzerland
Germany
Vietnam
Philippines
Hong Kong
Other
Total Non-United States
2015
Long-Lived Assets
2014
2013
$
102,171
$
109,138
$
110,337
46,794
26,384
15,790
7,985
6,003
2,476
1,282
106,714
208,885
$
45,667
22,524
16,129
9,107
6,205
5,111
2,218
106,961
216,099
$
43,139
5
2,107
10,081
7,207
-
3,244
65,783
176,120
$
Note 12.
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, 2015, 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. The following tables provide a summary by level of the fair value of financial instruments that are measured on a recurring
basis as of June 30, 2015 and 2014($000):
Fair Value Measurements at June 30, 2015 Using:
Quoted Prices in
Active Markets
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2015
for Identical
Assets
(Level 1)
Assets:
Foreign currency forward contracts
$
130 $
- $
130 $
Fair Value Measurements at June 30, 2014 Using:
Quoted Prices in
Active Markets
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2014
for Identical
Assets
(Level 1)
Liabilities:
Foreign currency forward contracts
$
54 $
- $
54 $
-
-
The Company’s policy is to report transfers into and out of Levels 1 and 2 of the fair value hierarchy at fair values as of the beginning
of the period in which the transfers occur. There were no transfers in and out of Levels 1 and 2 of the fair value hierarchy during fiscal
years 2015 and 2014.
70
There were no Significant Unobservable Inputs (Level 3) during the fiscal year ended June 30, 2015.
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 are considered Level 2 among the fair value hierarchy and
are variable interest rates and accordingly their carrying amounts approximate fair value.
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
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 $10.8 million and $7.4 million at June 30, 2015 and June 30, 2014, respectively. As of June 30, 2015, these
forward contracts had expiration dates ranging from July 2015 through October 2015, with Japanese Yen denominations individually
between 250 million and 350 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. The change in the fair value of these contracts for the fiscal years ended June 30, 2015,
2014 and 2013 was insignificant.
Note 14.
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 $2.8 million, $2.5 million, and $2.2 million for the years ended June 30,
2015, 2014 and 2013, respectively.
The Company has an employee stock purchase plan available for employees who have completed six months of continuous
employment with the Company. The employee may purchase the Company’s Common Stock at 5% below the prevailing market price.
The amount of shares which may be bought by an employee during each fiscal year is limited to 10% of the employee’s base pay. This
plan, as amended, limits the number of shares of Common Stock available for purchase to 1,600,000 shares. There were 514,031 and
543,234 shares of Common Stock available for purchase under the plan at June 30, 2015 and 2014, respectively.
Switzerland Defined Benefit Plan
In conjunction with the acquisition of Oclaro’s Switzerland-Based Semiconductor Laser Business, the Company assumed 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 year ended June 30, 2015 were $1.9 million. Expected employer contributions in fiscal year 2016 are $2.0
million.
71
The funded status of the Swiss Plan in the fiscal years ended June 30, 2015 and 2014 were as follows:
Year ended June 30,
Change in projected benefit obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Plan amendments
Participant contributions
Benefits (paid) received
Actuarial (gain) loss on obligation
Currency translation adjustment
Projected benefit obligation, end of period
Change in plan assets:
Plan assets at fair value, beginning of period
Actual return on plan assets
Employer contributions
Participant contributions
Benefits (paid) received
Currency translation adjustment
Plan assets at fair value, end of period
Amounts recognized in consolidated balance sheets:
Other non-current assets:
Deferred tax asset
Other non-current liabilities:
Underfunded pension liability
Amounts recognized in accumulated other comprehensive
income, net of tax:
Pension adjustment
Accumulated benefit obligation, end of period
2015
2014
39,390
2,791
744
-
965
(1,279)
1,520
(1,556)
42,575
31,965
207
1,914
965
(1,279)
(1,263)
32,509
2,129
10,066
(2,244)
38,734
$
$
$
$
$
$
38,748
3,375
812
(1,661)
1,110
(3,959)
(867)
1,832
39,390
30,167
776
2,253
1,110
(3,959)
1,617
31,965
1,570
7,425
1,443
35,581
$
$
$
$
$
$
Net periodic pension cost associated with the Swiss Plan included the following components:
Year ended June 30,
Service cost
Interest cost
Expected return on plan assets
Net amortization
Net period pension cost
2015
2014
2,791
744
(1,106)
-
2,429
$
3,375
812
(1,338)
-
$
2,849
$
The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 2015 and 2014 using the
following assumptions:
Year ended June 30,
Discount rate
Salary increase rate
Expected return on plan assets
Expected average remaining working life (in years)
2015
2014
1.1%
2.0%
3.5%
13.1
2.0%
2.0%
3.5%
13.1
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.
72
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 Swiss Plan assets are
measured at fair value and are classified within Level 2 of the fair value hierarchy. 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, as are the assets of the plan. As of June 30, 2015, the Swiss Plan’s asset allocation was
as follows:
Year ended June 30,
Fixed income investments
Equity investments
Real estate
Cash
Alternative investments
Estimated future benefit payments under the Swiss Plan are estimated to be as follows:
Year Ending June 30,
($000)
2016
2017
2018
2019
2020
Next five years
2015
2014
22.0%
52.0%
16.0%
8.0%
2.0%
100.0%
22.0%
54.0%
14.0%
8.0%
2.0%
100.0%
$
1,649
2,129
1,250
3,429
1,164
14,259
II-VI Performance Metals Defined Benefit Plan
As a requirement of a collective bargaining agreement, II-VI Performance Metals maintains a defined benefit plan for substantially all
of its employees. The plan provides for retirement benefits based on a certain percentage of the latest monthly salary of an employee
per year of service. The pension liability was $0.6 million at June 30, 2015 and June 30, 2014. The Plan is an unfunded pension plan
under which the Company makes payments directly to employees. As these payments are made directly by the Company, there are no
separate assets utilized to fund this plan.
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 $0.7 million,
$1.9 million, and $1.8 million for the fiscal years ended June 30, 2015, 2014, and 2013, respectively. There were no employer
contributions made to the Compensation Plan for the fiscal years ended June 30, 2015, 2014 and 2013.
73
Note 15. Other Accrued Liabilities
The components of other accrued liabilities were as follows:
Year Ended June 30,
($000)
Deferred revenue
Warranty reserve
Acquisition holdbacks
Other accrued liabilities
2015
2014
8,767
3,251
-
12,558
24,576
$
$
4,318
2,859
10,000
14,344
31,521
$
$
In June 2013, the Company received notice from the noncontrolling interest holder of II-VI HIGHYAG of its intention to exercise a
put option. The value of the put option was calculated using a formulaic model based upon earnings before interest, income taxes,
depreciation and amortization (EBITDA), revenue growth and other variables. The price for the 25.07% noncontrolling interest the
Company did not already own was $7.6 million; in addition, a dividend of $1.0 million also was declared and was paid to the
noncontrolling interest holder in fiscal year 2014. These amounts were paid in August 2013.
Changes in the carrying amount of the Company’s redeemable noncontrolling interest were as follows:
Year Ended June 30,
($000)
Balance at Beginning of Year
Net earnings attributable to redeemable noncontrolling interest
Other changes
Redemption value adjustment to redeemable noncontrolling interest
Reclassification of redeemable noncontrolling interest to Other
accrued liabilities
Balance at End of Year
$
$
2015
2014
2013
- $
-
-
-
-
- $
- $
-
-
-
5,160
1,118
(585)
2,875
-
- $
(8,568)
-
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, 2015.
Year Ended June 30,
($000)
Balance-Beginning of Year
Settlements during the period
Additional warranty liability recorded
Balance-End of Year
2015
$
$
2,859
(4,655)
5,047
3,251
Note 16. 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 penalty provisions for early termination. The
Company does not believe that a significant amount of penalties are reasonably likely to be incurred under these commitments based
upon historical experience and current expectation. Total future commitments are as follows:
Year Ending June 30,
($000)
2016
2017
2018
2019
2020
$
13,062
2,537
2,537
-
-
74
Note 17.
Share Repurchase Programs
In February 2014 and May 2012, the Board of Directors authorized the Company to purchase up to $20 million and $25 million,
respectively, of its Common Stock. The repurchase programs called for shares to be purchased in the open market or in private
transactions from time to time. Shares purchased by the Company are retained as treasury stock and available for general corporate
purposes. During the fiscal years ended June 30, 2014, 2013 and 2012, the Company purchased 1,333,355 shares, 1,141,022 shares
and 301,716 shares of its Common Stock for $20.0 million, $20.0 million, and $5.0 million, respectively, under the repurchase
programs.
In August 2014, the Board of Directors authorized the Company to purchase up to $50 million of its Common Stock. The repurchase
program has no expiration and calls for shares to be purchased in the open market or in private transactions from time to time. Shares
purchased by the Company will be retained as treasury stock and available for general corporate purposes. During the fiscal year
ended June 30, 2015, the Company purchased 936,049 shares of its Common Stock for $12.7 million under this new repurchase
program.
Note 18. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2015,
2014, and 2013 were as follows ($000):
Foreign
Currency
Translation
Adjustment
Defined
Benefit
Pension Plan
Total
Accumulated Other
Comprehensive
Income
AOCI - June 30, 2012
$
10,238
$
Other comprehensive income before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2013
Other comprehensive income before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2014
Other comprehensive income before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2015
Note 19.
Subsequent Events
$
$
5,362
-
5,362
15,600
2,363
-
2,363
17,963
(8,497)
-
(8,497)
9,466
$
$
-
-
-
-
-
1,443
-
1,443
1,443
(2,244)
-
(2,244)
(801)
$
$
$
10,238
5,362
-
5,362
15,600
3,806
-
3,806
19,406
(10,741)
-
(10,741)
8,665
On August 8, 2014, the Company’s Fuzhou manufacturing facility in the Fujian province of China was impacted by super typhoon
Soudelor, as flood waters infiltrated certain manufacturing areas on the Company’s Fuzhou campus. The Fuzhou manufacturing
facility primarily services II-VI Photop and II-VI Optical Communications in the II-VI Photonics segment. Almost all of the
manufacturing activities have been restored and the Company is assessing damages and working with its insurance providers to
determine the extent of the damages. As of the filing date of this Annual Report on Form 10-K, the Company is not able to estimate
the financial consequences related to the flood.
75
Quarterly Financial Data (unaudited)
Fiscal Year 2015
Quarter Ended
($000)
2015
Net revenues
Cost of goods sold
Internal research and development
Selling, general and administrative
Interest expense
Other expense (income) - net
Earnings before income taxes
Income taxes
Net Earnings
Basic earnings per share:
Diluted earnings per share:
Fiscal Year 2014
September 30, December 31, March 31,
2014
2014
2015
June 30,
2015
$
$
$
$
185,833 $
117,974
12,943
35,520
1,204
1,682
16,510
4,208
12,302 $
176,736 $
113,718
12,845
33,642
1,038
(9,295)
24,788
2,692
22,096 $
182,709 $
116,984
12,874
35,192
844
1,534
15,281
773
14,508 $
0.20 $
0.36 $
0.24 $
0.20 $
0.35 $
0.23 $
196,683
121,687
12,598
39,185
777
(97)
22,533
5,464
17,069
0.28
0.27
September 30,
2013
December 31,
2013
March 31,
2014
June 30,
2014
Quarter Ended
($000)
2014
Net revenues
Cost of goods sold
Internal research and development
Selling, general and administrative
Interest expense
Other expense (income) - net
Earnings from continuing operations before income taxes
Income taxes
Earnings from continuing operations
Earnings (loss) from discontinued operations, net of
income taxes
Net Earnings
Basic earnings per share:
Continuing operations
Discontinued operation
Consolidated
$
$
$
$
$
Diluted earnings per share:
Continuing operations
Discontinued operation
Consolidated
$
$
$
76
150,020 $
93,709
7,747
35,093
483
53
12,935
3,243
9,692
171,765 $
118,371
11,355
32,471
1,169
(1,125)
9,524
2,086
7,438
173,555 $
118,865
12,099
33,848
1,412
(1,694)
9,025
494
8,531
187,921
125,600
11,322
36,295
1,415
(868)
14,157
1,502
12,655
2
9,694 $
131
7,569 $
-
8,531 $
-
12,655
0.16 $
- $
0.16 $
0.15 $
- $
0.15 $
0.12 $
- $
0.12 $
0.12 $
- $
0.12 $
0.14 $
- $
0.14 $
0.13 $
- $
0.13 $
0.21
-
0.21
0.20
-
0.20
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2015, 2014, 2013 AND
(IN THOUSANDS OF DOLLARS)
Additions
Balance at
Beginning
of Year
Charged
to
Expense
Charged
to Other
Accounts
Deduction
from
Reserves
Balance
at End
of Year
$
$
$
$
$
$
1,852
2,859
1,479
1,661
1,536
1,247
$
$
$
$
$
$
(482) $
5,047 $
-
-
993 $
1,868 $
-
1,173 (1)
(92) $
1,851 $
179 (2)
-
$
$
$
$
$
$
(322) (3)
(4,655)
$ 1,048
$ 3,251
(620) (3)
(1,843)
$ 1,852
$ 2,859
(144) (3)
(1,437)
$ 1,479
$ 1,661
YEAR ENDED JUNE 30, 2015:
Allowance for doubtful accounts
Warranty reserves
YEAR ENDED JUNE 30, 2014:
Allowance for doubtful accounts
Warranty reserves
YEAR ENDED JUNE 30, 2013:
Allowance for doubtful accounts
Warranty reserves
Relates to the warranty reserve acquired from the acquisitions.
Primarily relates to allowance for doubtful accounts from the acquisitions.
Primarily relates to write-offs of accounts receivable.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
(1)
(2)
(3)
Item 9.
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of Francis J. Kramer, the Company’s Chairman and Chief Executive
Officer, and Mary Jane Raymond, 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”)) 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, Mr. Kramer and Ms. Raymond concluded that, as of June 30, 2015, the Company’s
disclosure controls and procedures are effective at the reasonable assurance level.
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 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, 2015. In making this
77
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. Based on the evaluation,
management concluded that as of June 30, 2015, the Company’s internal controls over financial reporting were effective and provides
reasonable assurance that the accompanying financial statements do not contain any material misstatement.
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. OTHER INFORMATION
None.
PART III
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 Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
definitive proxy statement for the 2015 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.
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.
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 2015,” “Executive Compensation,” “Compensation Committee Report” and “Compensation and Risk” in
the Company’s Proxy Statement.
78
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. 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.
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.
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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, 2015 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.
79
(3) Exhibits.
Exhibit
No.
Description
Location
2.01
2.02
3.01
Share and Asset Purchase Agreement dated as of September 12,
2013, between II-VI Holdings B.V. and Oclaro Technology Limited
Asset Purchase Agreement dated as of October 10, 2013, between II-
VI Incorporated and Oclaro Technology Limited
Amended and Restated Articles of Incorporation of II-VI
Incorporated
3.02
Amended and Restated By-Laws of II-VI Incorporated
Incorporated herein by reference to Exhibit 2.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 12, 2013.
Incorporated herein by reference to Exhibit 2.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on October 11, 2013.
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.
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.
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 12, 2013.
Filed herewith.
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.
Incorporated herein by reference to Exhibit 10.2 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 24, 2008.
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.
Second Amended and Restated Credit Agreement, dated as of
September 10, 2013, by and among II-VI Incorporated, each of the
Guarantors party thereto, each of the Lenders party thereto, and PNC
Bank, National Association, as administrative agent ($225,000,000
Revolving Credit Facility and $100,000,000 Term Loan Facility)
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)
Amended and Restated Employment Agreement, dated September
19, 2008, by and between II-VI and Francis J. Kramer*
Amended and Restated Employment Agreement, dated September
19, 2008, by and between II-VI and Vincent D. Mattera, Jr.*
Employment Agreement, dated March 6, 2014, by and between II-VI
Incorporated and Mary Jane Raymond*
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
Consulting Agreement, dated June 10, 2015, by and between II-VI
Incorporated and James Martinelli*
Filed herewith.
Employment Agreement, dated October 3, 2012, by and between II-
VI Incorporated and Giovanni Barbarossa*
Filed herewith.
Employment Agreement, dated November 10, 2008, by and between
II-VI Incorporated and David G. Wagner*
Filed herewith.
10.09
Form of Employment Agreement*
10.10
10.11
Form of Representative Agreement between II-VI and its foreign
representatives
II-VI Incorporated Amended and Restated Employees’ Stock
Purchase Plan
80
Incorporated herein by reference to Exhibit 10.16
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
Incorporated herein by reference to Exhibit 10.15
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
Incorporated herein by reference to Exhibit 10.04
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
10.12
10.13
First Amendment to the II-VI Incorporated Amended and Restated
Employees’ Stock Purchase Plan
II-VI Incorporated Amended and Restated Employees’ Profit-
Sharing Plan and Trust Agreement, as amended
10.14
Description of Bonus Incentive Plan*
10.15
Description of Discretionary Incentive Plan (now known as the Goal/
Results Incentive Program)*
10.16
Description of Management-By-Objective 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.
Incorporated herein by reference to Exhibit 10.05
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
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.
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.
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.
10.17
10.18
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods prior to January 1, 2015)*
Filed herewith.
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods after January 1, 2015)*
Filed herewith.
10.19
Trust Under the II-VI Incorporated Deferred Compensation Plan*
10.20
II-VI Incorporated 2009 Omnibus Incentive Plan*
10.21
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.22
Form of Restricted Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.23
Form of Performance Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.24
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.25
Form of Performance Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive 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.
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.
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.
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.
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.
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.
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.
81
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
21.01
23.01
31.01
31.02
10.26
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
II-VI Incorporated Amended and Restated 2012 Omnibus Incentive
Plan*
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Restricted Share Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit 10.32
to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the quarter ended March
31, 2012.
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.
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.
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.
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.
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Performance Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Performance Share Award Agreement (Total Shareholder
Return) under the II-VI Incorporated Amended and Restated 2012
Omnibus Incentive Plan*
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 10.33
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) for the fiscal year ended June 30, 2013.
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.
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.
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.
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.
Form of Performance Share Award Agreement (Cash Flow From
Operations) under the II-VI Incorporated Amended and Restated
2012 Omnibus Incentive Plan*
Form of Performance Unit Award Agreement (Cash Flow From
Operations) under the II-VI Incorporated Amended and Restated
2012 Omnibus Incentive Plan*
List of Subsidiaries of II-VI Incorporated
Consent of Ernst & Young LLP
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
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.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
82
32.01
32.02
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
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.
Furnished herewith.
101
Interactive Data File
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
Filed herewith.
Filed herewith.
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith.
(101.DEF)
XBRL Taxonomy Definition Linkbase
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
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.
83
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.
SIGNATURES
Date: August 28, 2015
II-VI INCORPORATED
By:
/s/ Francis J. Kramer
Francis J. Kramer
Chairman and Chief Executive Officer and
Director
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.
Date: August 28, 2015
Date: August 28, 2015
Date: August 28, 2015
Date: August 28, 2015
Date: August 28, 2015
Date: August 28, 2015
Date: August 28, 2015
Date: August 28, 2015
Date: August 28, 2015
Principal Executive Officer:
By:
/s/ Francis J. Kramer
Francis J. Kramer
Chairman and Chief Executive Officer and
Director
Principal Financial and Accounting Officer:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
/s/ Joseph J. Corasanti
Joseph J. Corasanti
Director
/s/ Wendy F. DiCicco
Wendy F. DiCicco
Director
/s/ Thomas E. Mistler
Thomas E. Mistler
Director
/s/ RADM Marc Y. E. Pelaez (retired)
RADM Marc Y. E. Pelaez (retired)
Director
/s/ Peter W. Sognefest
Peter W. Sognefest
Director
/s/ Howard H. Xia
Howard H. Xia
Director
/s/ Vincent D. Mattera, Jr.
Vincent D. Mattera, Jr.
President and Chief Operating Officer and
Director
84
Date: August 28, 2015
By:
/s/ William Schromm
William Schromm
Director
85
EXHIBIT INDEX
Description
Location
Exhibit
No.
2.01
2.02
3.01
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
Share and Asset Purchase Agreement dated as of September 12,
2013, between II-VI Holdings B.V. and Oclaro Technology Limited
Asset Purchase Agreement dated as of October 10, 2013, between II-
VI Incorporated and Oclaro Technology Limited
Amended and Restated Articles of Incorporation of II-VI
Incorporated
3.02
Amended and Restated By-Laws of II-VI Incorporated
Second Amended and Restated Credit Agreement, dated as of
September 10, 2013, by and among II-VI Incorporated, each of the
Guarantors party thereto, each of the Lenders party thereto, and PNC
Bank, National Association, as administrative agent ($225,000,000
Revolving Credit Facility and $100,000,000 Term Loan Facility)
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)
Amended and Restated Employment Agreement, dated September
19, 2008, by and between II-VI and Francis J. Kramer*
Amended and Restated Employment Agreement, dated September
19, 2008, by and between II-VI and Vincent D. Mattera, Jr.*
Employment Agreement, dated March 6, 2014, by and between II-VI
Incorporated and Mary Jane Raymond*
Incorporated herein by reference to Exhibit 2.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 12, 2013.
Incorporated herein by reference to Exhibit 2.1 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on October 11, 2013.
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.
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.
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 12, 2013.
Filed herewith.
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.
Incorporated herein by reference to Exhibit 10.2 to
II-VI’s Current Report on Form 8-K (File No. 000-
16195) filed on September 24, 2008.
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.
Consulting Agreement, dated June 10, 2015, by and between II-VI
Incorporated and James Martinelli*
Filed herewith.
Employment Agreement, dated October 3, 2012, by and between II-
VI Incorporated and Giovanni Barbarossa*
Filed herewith.
Employment Agreement, dated November 10, 2008, by and between
II-VI Incorporated and David G. Wagner*
Filed herewith.
10.09
Form of Employment Agreement*
10.10
10.11
Form of Representative Agreement between II-VI and its foreign
representatives
II-VI Incorporated Amended and Restated Employees’ Stock
Purchase Plan
86
Incorporated herein by reference to Exhibit 10.16
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
Incorporated herein by reference to Exhibit 10.15
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
Incorporated herein by reference to Exhibit 10.04
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
10.12
10.13
First Amendment to the II-VI Incorporated Amended and Restated
Employees’ Stock Purchase Plan
II-VI Incorporated Amended and Restated Employees’ Profit-
Sharing Plan and Trust Agreement, as amended
10.14
Description of Bonus Incentive Plan*
10.15
Description of Discretionary Incentive Plan (now known as the Goal/
Results Incentive Program)*
10.16
Description of Management-By-Objective 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.
Incorporated herein by reference to Exhibit 10.05
to II-VI’s Registration Statement on Form S-1 (File
No. 33-16389).
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.
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.
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.
10.17
10.18
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods prior to January 1, 2015)*
Filed herewith.
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods after January 1, 2015)*
Filed herewith.
10.19
Trust Under the II-VI Incorporated Deferred Compensation Plan*
10.20
II-VI Incorporated 2009 Omnibus Incentive Plan*
10.21
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.22
Form of Restricted Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.23
Form of Performance Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.24
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.25
Form of Performance Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive 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.
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.
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.
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.
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.
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.
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.
87
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
21.01
23.01
31.01
31.02
10.26
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
II-VI Incorporated Amended and Restated 2012 Omnibus Incentive
Plan*
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Restricted Share Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit 10.32
to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the quarter ended March
31, 2012.
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.
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.
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.
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.
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Performance Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Form of Performance Share Award Agreement (Total Shareholder
Return) under the II-VI Incorporated Amended and Restated 2012
Omnibus Incentive Plan*
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 10.33
to II-VI’s Annual Report on Form 10-K (File No.
000-16195) for the fiscal year ended June 30, 2013.
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.
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.
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.
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.
Form of Performance Share Award Agreement (Cash Flow From
Operations) under the II-VI Incorporated Amended and Restated
2012 Omnibus Incentive Plan*
Form of Performance Unit Award Agreement (Cash Flow From
Operations) under the II-VI Incorporated Amended and Restated
2012 Omnibus Incentive Plan*
List of Subsidiaries of II-VI Incorporated
Consent of Ernst & Young LLP
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
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.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
88
32.01
32.02
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
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.
Furnished herewith.
101
Interactive Data File
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
Filed herewith.
Filed herewith.
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith.
(101.DEF)
XBRL Taxonomy Definition Linkbase
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
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.
89
Exhibit 31.01
I, Francis J. Kramer, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of II-VI Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
c)
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
August 28, 2015
By:
/s/ Francis J. Kramer
Francis J. Kramer
Chairman and Chief Executive Officer and
Director
Exhibit 31.02
I, Mary Jane Raymond, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of II-VI Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
c)
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
August 28, 2015
By:
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.01
In connection with the Annual Report of II-VI Incorporated (the “Corporation”) on Form 10-K for the year ended June 30, 2015
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Corporation
certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Corporation.
Date: August 28, 2015
/s/ Francis J. Kramer
Francis J. Kramer
Chairman and Chief Executive Officer and Director
*
This certification is made solely for purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein,
and not for any other purpose.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.02
In connection with the Annual Report of II-VI Incorporated (the “Corporation”) on Form 10-K for the year ended June 30, 2015
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Corporation
certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Corporation.
Date: August 28, 2015
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
*
This certification is made solely for purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein,
and not for any other purpose.
Corporate Information
Annual Meeting
Friday, November 6, 2015
At 1:30 PM EST
RLA Premier Conference Center
(formerly the Regional Learning Alliance)
850 Cranberry Woods Drive
Cranberry Township, PA 16066
Stock Listing
The common stock of II-VI Incorporated
is traded on Nasdaq under the trading
symbol “IIVI.”
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Ave.
Brooklyn, NY 11219
1.800.937.5449
Independent Registered
Public Accountants
Ernst & Young LLP
2100 One PPG Place
Pittsburgh, PA 15222
Corporate Counsel
Sherrard, German & Kelly, P.C.
535 Smithfield Street, Ste. 300
Pittsburgh, PA 15222
Securities Counsel
Buchanan Ingersoll & Rooney PC
One Oxford Centre
301 Grant Street, 20th Floor
Pittsburgh, PA 15219
Board of Directors
Joseph J. Corasanti
Retired President, CEO and Director
CONMED Corporation
Wendy F. DiCicco
Consultant
Francis J. Kramer
Chairman and Chief Executive Officer
II-VI Incorporated
Vincent D. Mattera, Jr.
President and Chief Operating Officer
II-VI Incorporated
Thomas E. Mistler
Retired Executive
Westinghouse Electric Corporation
Marc Y. E. Pelaez
Rear Admiral
United States Navy (retired)
William A. Schromm
Executive Vice President and Chief Operating Officer
ON Semiconductor Corporation
Peter W. Sognefest
President, Chief Executive Officer and Chairman
Seamoc, Inc.
Howard H. Xia
Consultant
Executive Officers
Francis J. Kramer
Chairman and Chief Executive Officer
Vincent D. Mattera, Jr.
President and Chief Operating Officer
Mary Jane Raymond
Chief Financial Officer
Giovanni Barbarossa
Chief Technology Officer
David G. Wagner
Vice President, Human Resources
II-VI Incorporated is an Equal Opportunity Employer. As such, it is the Company’s policy to promote equal employment opportunities and to prohibit discrimination
on the basis of race, color, religion, sex, age, national origin, disability, status as a veteran or other legally protected class in all aspects of employment, including
recruiting, hiring, training and promoting personnel. In fulfilling this commitment, the Company shall comply with the letter and spirit of all applicable laws, regulations
and Executive Orders governing equal opportunity in employment.
375 Saxonburg Boulevard, Saxonburg, PA 16056
724.352.4455
www.ii-vi.com