2017 ANNUAL REPORT
About II-VI
Financial Summary
II-VI Incorporated, a global leader in engineered materials and optoelectronic
For the year ended or as of June 30
2017
2016
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. Headquartered in Saxonburg, Pennsylvania, the Company has 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.
2017 ANNUAL REPORT
($000 except per share data)
Bookings
Revenues
Net earnings
Diluted earnings per share
As of June 30
Total assets
Total shareholders’ equity
Working capital
15% CAGR
741.9
683.2
551.0
972.0
827.2
1000
800
600
400
200
1,072,200
972,046
95,274
1.48
1,477,297
900,563
517,344
$
$
$
$
$
$
$
875,295
827,216
65,486
1.04
1,211,981
782,338
411,721
2% CAGR
129.4
123.0
118.6
107.6
95.5
$
$
$
$
$
$
$
120
100
80
60
40
20
The photo on the cover is of wafers
of edge- and surface-emitting GaAs
semiconductor lasers. This technology
platform is at the core of a strategy
that is enabling us to rapidly grow our
business in communications and materials
processing. It will soon allow us to serve
high growth markets such as 3D sensing,
gesture recognition and LiDAR.
0
13
15
Net Revenues ($ in millions)
14
14% CAGR
1,070.8
1,057.3
863.3
1600
1400
1200
1000
800
600
400
200
0
13
15
Total Assets ($ in millions)
14
16
17
1477.3
1,212.0
16
17
0
17
Cash Flow from Operations ($ in millions)
14
16
15
13
1000
800
600
400
200
0
9% CAGR
636.1
675.0
900.6
782.3
729.1
13
14
15
16
17
Total Shareholders’ Equity ($ in millions)
CAGR – Compound Annual Growth Rate
MATERIALS THAT MATTER 1
Shareholder Letter
During Fiscal Year 2017, we received a number of quality
and customer service awards. We were proud to receive
from Cisco Systems the 2016 Award for Excellence in
Service and Responsiveness. Our highly successful Optical
Time Domain Reflectometer product was also honored as
part of the 2017 Lightwave Innovation Reviews Program.
We launched a series of miniaturized 980 nm pump
laser and micro-optics products increasingly deployed
in datacenter applications, both in intra-datacenter and
in datacenter interconnects. Demand for our world-class
thin film filters for datacom and telecom applications was
so high that we remained in a sold-out position all year,
despite significant increases in capacity and productivity
improvements. We were also thrilled to welcome the team
from Integrated Photonics, a pioneer with a uniquely
differentiated magneto-optic technology platform, which
we acquired during Fiscal Year 2017.
“ II-VI has a proven record in identifying new
market opportunities, broadening the base of
our technology platforms organically and by
acquisition, bringing to market innovative products,
and demonstrating profitable revenue growth.”
At Laser World of Photonics in Munich, we displayed a
fiber laser customers. Finally, the results we achieved and
portfolio of enabling products for all laser technology
capabilities we acquired along with investments in wafer
platforms employed in high power or precision materials
fab process technology and capacity in Fiscal Year 2017
processing. It was our distinct pleasure to welcome the
now position II-VI to ride the growth in 3D sensing for the
team from Direct Photonics, which we acquired in Fiscal
consumer electronics market.
Year 2017 and whose industry-leading Direct Diode Laser
Modules were among the new products on display. From
ultraviolet to far-infrared, II-VI’s market-leading laser
Fiscal Year 2017 marks the year I transitioned
to President and CEO of II-VI, and it was a
phenomenal year. Thanks to strategic investments,
During the year, we increased our production capacity
optics were on display, along with new products for fiber
of SiC substrates to satisfy the growth in demand for
lasers and some of the most advanced laser heads and
SiC-based RF power amplifiers used in 4G wireless
beam delivery solutions on the market. In a live robotic
transmission. We believe that this is only the beginning
demonstration, we showed a new seam tracking feature
of a long growth trajectory for our industry-leading low
built into our remote laser welding head. Throughout the
dislocation density SiC substrates as wireless networks
year, we launched a series of novel semiconductor laser
migrate to 5G wireless and as SiC substrates for power
products with special geometries or in novel packaged
differentiated technology platforms and product
electronics begin to enable new device technology
configurations to increase the optical pumping efficiency
portfolio, a strong market, great customers, a
remarkable global team, and a great sense of
urgency, we achieved record results. We had over
$1 billion in bookings, $972 million in revenues, an
increase of 18% over Fiscal Year 2016, and a record
number of new product announcements. I believe
that II-VI is very well positioned for future growth.
required by multiple high growth markets, including those
in fiber lasers, solid-state lasers and direct diode lasers.
driven by the electrification of the car and efforts to
increase the fuel efficiency of hybrid electric vehicles.
II-VI has a proven record in identifying new market
opportunities, broadening the base of our technology
Our business in the industrial materials processing end-
platforms organically and by acquisition, bringing to
market also had a banner year. The demand for CO2
market innovative products, and demonstrating profitable
laser optics remains strong given its cost effectiveness
revenue growth. A series of strategic acquisitions from
for micromachining, particularly for the production of
2010 to 2013 was the cornerstone of a strategy that to a
consumer electronics and to process organic based
large degree positioned us to deliver our growth in Fiscal
Our results were attributed primarily to the demand for
materials such as textiles, leather, wood and polymers.
Year 2017 and we expect will enable our prospects for
our products for the communications market, which was
We increased our service to the optics aftermarket
future growth. During those three years, we more than
driven by the Broadband China initiative, accelerated
for high power CO2 lasers. This year we also launched
doubled the number of employees, entered the optical
deployments of 100, 200 and 400G in global metro
our diamond thin film coating that minimizes tradeoffs
communications market with additional offerings in
networks, large-scale datacenter buildouts and sustained
between optical performance and durability in harsh
pump lasers and optical amplifiers, further diversified
investments in CATV and submarine networks. II-VI
processing environments. Our sales also got a strong
our portfolio of products for industrial lasers, and gained
managed this growth with prudent investments in scalable
boost from the increase in EUV lithography system builds,
greater access to many high growth markets, including
capacity throughout the year, along with related longer-
for which we supply a broad range of products from laser
those in China. Consequently, we also gained many new
term supply agreements with key customers.
optics and modulators to structural ceramic subsystems.
and sophisticated optical networking equipment and
Among these acquisitions was our GaAs semiconductor
laser technology platform in 2013, which strengthened our
business in both communications and materials processing.
Combined with several of our recent acquisitions, including
multi-purposed 6-inch wafer fabs with both epitaxy
and device fabrication capabilities for GaAs, SiC and InP
compound semiconductors, we have laid the foundation
of our strategy to ramp-up production of semiconductor
lasers in Fiscal Year 2018 and fuel our growth in 3D sensing,
5G wireless, the electrification of the car, and datacenter
communications for years to come.
This coming fiscal year we will be celebrating our 30th
anniversary since our IPO and hope you can join us on
November 8, 2017, at NASDAQ in Times Square for our
Investor Day meeting. II-VI has experienced significant
growth during these 30 years. Today, with more technology
platform synergies across our end markets and more value
created by our vertical integration than ever before, we are
well positioned to surpass $1 billion in revenue next year
and to continue to grow at a rapid pace.
Dr. Vincent D. (Chuck) Mattera, Jr.
President and Chief Executive Officer
2 II-VI INCORPORATED 2017 ANNUAL REPORT
MATERIALS THAT MATTER 3
30 Years as a Public Company
$1B
$900M
$800M
$700M
$600M
$500M
$400M
$300M
$200M
$100M
Fiscal Year Revenue (Millions)
Projected: > $1B
$316
$292
$333
$255
$224
$187
$28
$38
$53
$61
$62
$74
Acquisition History
$123
$114
$128
$143
$742
$683
$516
$551
$487
$972
$827
II-VI To Date:
10,000+
Worldwide
Employees
14
Countries
44
Worldwide
Locations
Optical
Channel
Monitors
Aegis Lightwave
Optical Amplifiers
Oclaro Optical Amplifier
Micro-optics
Photop Technologies
Metal Matrix
Composits
M Cubed Technologies
Epiwafer
Foundry
EpiWorks
Compound
Semi. Wafer
Fab
Kaiam Laser
Limited (U.K. Fab)
Micro-optics
Lightning Optical
Silicon Carbide
Litton SiC Group
Thermo-
electric
Coolers
Marlow
Industries
Laser Processing
Heads
HighYag
Conformal
Patterning
Max Levy Autograph
Micro-optics
Virgo Optics
IIVI
ZnSe Growth
Laser Power Corp.
UV Filters
Coherent UV Filter
Materials
Selenium
Refinery
Pacific Rare Metals
Semiconductor Lasers
Oclaro Semiconductor Laser
Faraday Rotator
Integrated Photonics
Military & Space
Optical Systems
LightWorks Optics
Direct Diode High
Power Lasers
Direct Photonics
Advanced Coatings
Oclaro Optical Coatings
GaAs Wafer Fab
Anadigics
IPO: 1987
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
4 II-VI INCORPORATED 2017 ANNUAL REPORT
MATERIALS THAT MATTER 5
A Broad Portfolio of Engineered Materials
II-VI continues to be first and foremost a materials company with a broad portfolio
of bulk materials grown and fabricated in-house which are differentiated by
one or a combination of unique optical, electrical, thermal and mechanical
properties. Diamond, Silicon Carbide and Bismuth Garnet are highlighted here
for their significance in emerging and fast growing markets.
Automotive
Reaction Bonded
Boron Carbide
Si/B4C
Lead Magnesium
Niobate - Lead
Titanate
(PMN-PT)
Pb(Mg1/3Nb2/3)O3-
PbTiO3
Life
Sciences
Bismuth Telluride
Bi2Te3
Silicon Carbide
SiC
Potassium Niobate
KNbO3
Potassium Nickel
Sulfate Hexahydrate
(KNSH)
K2Ni (SO4)2·6H2O
Calcium Fluoride
CaF2
Aluminum Oxide/
Sapphire
Al2O3
Yttrium Vanadate
YVO4
Bismuth-doped Iron
Garnet (BIG)
Bi3Fe5O12
Military
Germanuim
Ge
Reaction Bonded
Silicon Carbide
Si/SiC
Yttrium Aluminum
Garnet (YAG)
Y3Al5O12
Yttrium Lithium
Fluoride (YLF)
YLiF4
Communications
Boron Carbide
Reinforced Aluminum
Al/B4C
Silicon Carbide
Reinforced Aluminum
Al/SiC
Carbon Fiber
Reinforced Silicon
Carbide
Cf/SiC
Zinc Sulfide
ZnS
Zinc Selenide
ZnSe
Terbium Gallium
Garnet (TGG)
Tb3Ga5O12
Reaction Bonded
Silicon Carbide &
Diamond
Si/SiC/C
Diamond
C
Beta Barium Borate
(BBO)
BaB2O4
Materials
Processing
Lithium Triborate
(LBO)
LiB3O5
Semiconductor
Equipment
Silicon Carbide (SiC)
II-VI’s SiC substrates are used in power amplifier devices that are embedded
in 4G wireless remote radio heads. These devices are expected to be
embedded in even greater numbers in active antennas for 5G wireless.
SiC has a high number of intrinsic physical and electronic advantages over
competing semiconductor materials, such as the ability to operate at high
power levels and still dissipate the excess heat generated.
Power conversion electronics for high efficiency electric vehicles need a
combination of high power density, high efficiency and high temperature
operation that is only afforded by advanced material systems based on
SiC substrates. Our market-leading SiC substrates have best-in-class
quality and low dislocation density, and we have demonstrated perhaps
the industry’s first wafer as large as 200 mm in diameter.
Bismuth Garnet (BIG)
With the acquisition of Integrated Photonics in FY17, II-VI extends its
broad portfolio of materials with Bismuth Garnet (BIG) and Terbium
Gallium Garnet (TGG). Integrated Photonics is a leader in engineered
magneto-optic materials that enable high performance directional
components such as optical isolators for the optical communications
market. Optical isolators based on magneto-optic materials are
embedded in transceivers with edge-emitting lasers and in optical
amplifiers. They are widely deployed in datacenters and the global
optical network infrastructure at a pace that is accelerated by the rapidly
growing bandwidth demand for enterprise and consumer applications,
including cloud computing and emerging 5G wireless services.
CVD Diamond
The emergence of extreme ultraviolet (EUV) lithography to fabricate
next-generation semiconductor chips for consumer electronics has been
a major driver of our CVD diamond business in FY17. EUV lithography
is expected to be the leading technology to produce what is known in
the semiconductor industry as the 7 nm node, with volume production
beginning possibly as early as 2018. CVD diamond windows withstand
powerful CO2 laser beams aimed at tin droplets to generate EUV
radiation. In addition, our CO2 laser optics based on ZnSe and CdTe, as
well as our structural subsystems–based reaction bonded silicon carbide,
complete our unique portfolio of solutions for EUV lithography.
6 II-VI INCORPORATED 2017 ANNUAL REPORT
MATERIALS THAT MATTER 7
9 Global Precision Optics Centers
II-VI’s optics are shaped by atomic precision and nanotechnology
surfacing techniques. They are then coated to improve their ability
to withstand high energy lasers or to achieve the desired spectral
characteristics across the electromagnetic spectrum from the ultraviolet
to the far infrared. II-VI leverages these core capabilities across all
our end markets to deliver miniature to large-scale precision optical
assemblies, including in combination with thermal management,
integrated electronics and software.
Suzhou, China
High volume CO2 laser
optics
High power fused silica
1 um optics
High volume thin film
coatings
Santa Rosa, CA
Coatings for telecom &
life sciences
Automated filter testing
High reliability coatings for
undersea communications
networks
Fuzhou, China
UV to NIR coatings
High power industrial Laser optics
Optics for consumer electronics
Wafer Scale Optics
Optical communications and data
communications optics and thin
film filters
Guangzhou, China
High volume coatings
(>100M units/year)
Filters for fiber-to-the-home
Micro-optics for datacenters
Ho Chi Minh City, Vietnam
High volume telecom micro optics
High volume debris shields for
industrial lasers
Precision double-sided polishing
Singapore
High volume diamond turning
High volume thin film coatings
Asian engineering development hub
Murrieta, CA
Intelligence, surveillance
and reconnaissance
optical systems
UV–LWIR materials,
design & fab
Very large sapphire optics
Saxonburg, PA
Precision diamond turning
CVD diamond, ZnSe, ZnS
materials
Specialty thin film coatings
EUV lithography optics
and light modulators
Philadelphia, PA
Patterned Optics, 1 mm to 3 meter
High temp patterned ceramics
Flexible meta material films
Denotes II-VI Locations on the Map
8 II-VI INCORPORATED 2017 ANNUAL REPORT
MATERIALS THAT MATTER 9
Semiconductor Lasers for Fast Growing Markets
II-VI offers a broad portfolio of semiconductor lasers that are used in a variety
of applications in most of our end markets. They enable several types of high
power lasers for materials processing, optical signal amplification in terrestrial
and submarine communications networks, high bit rate server connectivity
within datacenters, and 3D sensing in consumer electronics.
Epitaxial Wafers
Device Fabrication
6-inch wafer fabrication facilities
Lasers for Materials Processing
High Power Lasers that Enable:
Fiber Lasers
Direct Diode Lasers
Solid-state Lasers
Lasers for Communications
Pump Lasers for Optical
Amplification
VCSELs for Datacenter
Connectivity
Lasers for Consumer Electronics
VCSELs for the
Computer Mouse
VCSELs for 3D Sensing
VCSEL: Vertical Cavity Surface
Emitting Laser
10 II-VI INCORPORATED 2017 ANNUAL REPORT
10 II-VI INCORPORATED 2017 ANNUAL REPORT
MATERIALS THAT MATTER 11
Enabling the
world to be safer,
healthier, closer
and more efficient.
12 II-VI INCORPORATED 2017 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, 2017
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 such shorter period
that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at December 30, 2016, was
approximately $1,763,329,797 based on the closing sale price reported on the Nasdaq Global Select Market. For purposes of this calculation
only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant.
Number of outstanding shares of Common Stock, no par value, at August 14, 2017, was 63,279,520.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2017 Annual Meeting of
Shareholders of II-VI Incorporated, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K (including certain information incorporated herein by reference) contains forward-looking
statements made pursuant to Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements in this Annual Report on Form 10-K that are
not purely historical are forward-looking statements, including, without limitation, statements regarding our expectations, beliefs,
intentions or strategies regarding the future. In some cases, these forward-looking statements can be identified by terminology such as,
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “projects,” “potential,” or
“continue” or the negative of these terms or other comparable terminology. Forward-looking statements address, among other things,
our 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, our ability to integrate acquired businesses 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.
We believe that all forward-looking statements made by us have a reasonable basis, but there can be no assurance that these
expectations, beliefs or projections will actually occur or prove to be correct. Actual results could materially differ from such
statements. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA for our forward-
looking 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 2018 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:
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Investments in future markets of potential significant growth may not result in expected returns.
Our competitive position depends on our ability to develop new products and processes.
Our competitive position may require significant investments in strategic acquisitions, with associated integration risks,
which may not be successful.
Our future success depends on continued international sales.
Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign
exchange losses.
Our inability to access financial markets from time to time to raise capital, finance working capital requirements or our
acquisition strategies, or otherwise to support our liquidity needs could negatively impact our ability to finance our
operations, meet certain obligations or implement our growth strategy.
We may fail to accurately estimate our customers’ demands.
We may encounter substantial competition.
There are limitations on the protection of our intellectual property.
A significant portion of our business depends on cyclical industries.
Data breach incidents and breakdown of information and communication technologies could disrupt our operations and
impact our financial results.
Global economic downturns may adversely affect our business, operating results and financial condition.
We are subject to governmental import and export regulations.
Our global operations are complex to manage.
We have entered into supply agreements which commit us to supply products on specified terms.
We depend on highly complex manufacturing processes that require products from limited sources of supply.
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Our global operations are subject to complex legal and regulatory requirements.
We use and generate hazardous substances that are subject to stringent environmental regulations.
We may be adversely affected by climate change regulations.
Some systems that use our products are complex in design, and our products may contain defects that are not detected
until deployed which could increase our costs and reduce our revenues.
Significant defense spending cuts and/or reductions in defense programs could adversely impact our business.
Change in tax rates, tax liabilities or tax accounting rules could affect future results.
Increases in commodity prices may adversely affect our results of operations and financial condition.
Natural disasters or other global or regional catastrophic events could disrupt our operations and adversely affect our
results.
Our success depends on our ability to retain key personnel.
We have agreements with government entities that are subject to significant compliance requirements and changes in
government spending.
Our stock price has been highly volatile in the past and may be extremely volatile in the future.
Some anti-takeover provisions contained in our articles of incorporation and by-laws, as well as provisions of
Pennsylvania law, could impair a takeover attempt, which could also reduce the market price of our common stock.
Because we do not currently intend to pay dividends, holders of our common stock will benefit from an investment in our
common stock only if it appreciates in value.
The foregoing and additional risk factors are described in more detail herein under Item 1A. “Risk Factors”. All such factors, as well
as factors described or referred to in other filings we make with the Securities and Exchange Commission (the “SEC”) from time to
time, should be considered in evaluating our business and prospectus. Many of these factors are beyond our control. 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 II-VI Incorporated does communicate with securities analysts, from time to time, those
communications are conducted in accordance with applicable securities laws. Investors should not assume that II-VI Incorporated
agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
3
Item 1.
BUSINESS
Definitions
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 name II-VI refers
to Groups II and VI on the Periodic Table of Elements (Zn and Se) from which II-VI originally designed and produced infrared optics
for high-power CO2 lasers used in materials processing. The majority of our revenues are attributable to the sale of engineered
materials and optoelectronic components and devices for industrial laser applications, optical communications products, compound
semiconductor substrate-based products and consumer products. Reference to “fiscal” or “fiscal year” means our fiscal year ended
June 30 for the year referenced.
The following acronyms are defined for reference: 3 dimensional (“3D”); 4th generation (“4G”) wireless; 5th generation (“5G”)
wireless; carbon monoxide (“CO”); carbon dioxide (“CO2”); chemical vapor deposited (“CVD”) diamond; dense wavelength division
multiplexing (“DWDM”); extreme ultraviolet (“EUV”) lithography; gallium arsenide (“GaAs”); gigabit per second (“Gb/s”); infrared
(“IR”); light detection and ranging (“LiDAR”); near infrared (“NIR”); nanometers (“nm”); optical time domain reflectometer
(“OTDR”); research, development and engineering (“RD&E”); radio frequency (“RF”); reconfigurable add/drop multiplexer
(“ROADM”); silicon carbide (“SiC”); ultraviolet (“UV”); vertical cavity surface emitting laser (“VCSEL”); wavelength division
multiplexing (“WDM”); zinc selenide (“ZnSe”); and zinc sulfide (“ZnS”).
General Description of Business
We develop, manufacture and market engineered materials, optoelectronic components and devices for precision use in industrial
materials processing, optical communications, military, consumer electronics, semiconductor equipment, life science and automotive
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 optoelectronic devices and modules. Our products are
deployed in applications that we believe reduce costs and improve performance and reliability in a variety of applications, including (i)
laser cutting, welding and marking operations; (ii) 3D sensing consumer applications; (iii) optical communication products; (iv)
intelligence, surveillance and reconnaissance; (v) semiconductor processing and tooling; and (vi) thermoelectric cooling and power
generation solutions.
Through RD&E and acquisitions, II-VI has expanded its portfolio of materials grown and fabricated in-house. We believe that the
materials that we grow and fabricate are differentiated by one or a combination of unique optical, electrical, thermal and mechanical
properties. II-VI’s optics are shaped by precision surfacing techniques to meet the most stringent requirements for flat or curved
geometries, with smooth or structured surfaces, or with patterned metallization. Proprietary processes developed at our global optical
coating centers enhance our products’ durability to high energy lasers and harsh environments. Optical coatings also provide the
desired spectral characteristics ranging from the ultraviolet to the far-infrared. II-VI leverages these capabilities to deliver miniature-
to large-scale precision optical assemblies, including in combination with thermal management components, integrated electronics,
and/or software.
Since 2013, II-VI also has offered a broad portfolio of compound semiconductor lasers that are used in a variety of applications in
most of our end markets. These compound semiconductor lasers enable several types of high power lasers for materials processing,
optical signal amplification in terrestrial and submarine communications networks, high bit rate server connectivity within datacenters
and 3D sensing in consumer electronics.
II-VI continues to work to perfect its operational capabilities, develop next generation products, and invest in new technology
platforms. With a strategic focus on fast growing markets, II-VI pursues its vision of enabling the world to be safer, healthier, closer
and more efficient.
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, 2017 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.
4
Bookings and Backlog
We define our bookings as customer orders received that are expected to be converted to revenues over the next 12 months. For long-
term customer orders, to address the inherent uncertainty of orders that extend far into the future, the Company records only those
orders which are expected to be converted into revenues within 12 months from the end of the reporting period. Bookings are adjusted
if changes in customer demands or production schedules cause the expected time of a delivery to extend beyond 12 months. For the
year ended June 30, 2017, our bookings were approximately $1.1 billion compared to bookings of approximately $875 million for the
year ended June 30, 2016.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2017,
our backlog was approximately $400 million, compared to approximately $290 million as of June 30, 2016.
Global Operations
II-VI is headquartered in Saxonburg, PA, with RD&E, manufacturing and sales facilities worldwide. Our U.S. production and research
and development operations are located in Pennsylvania, California, New Jersey, Texas, Mississippi, Massachusetts, Connecticut,
Delaware, New York, Florida and Illinois and our non-U.S. production operations are based in China, Singapore, Vietnam, the
Philippines, Germany and Switzerland. We also utilize a contract manufacturer in Thailand. 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, Italy, South Korea, and Taiwan. Approximately 69% of our revenues for the fiscal year ended June 30, 2017 were
generated from sales to customers outside of the United States.
Employees
The table below summarizes the number of our employees as of June 30, 2017. 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 approximately 136 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 expires in June 2019. The collective bargaining agreement covering certain U.S. based
employees expires in January 2021. There are 849 employees of Photop in China who work under contract manufacturing
arrangements for customers of the Company.
Direct production
Research, development & engineering
Sales, marketing, administration, finance and supporting services
Total:
Number of
employees
8,216
1,117
1,016
10,349
Percent of
total
79%
11%
10%
100%
Manufacturing Processes
Our success in developing and manufacturing many of our products depends on our ability to manufacture and refine technically-
challenging materials and components. The ability to produce, process and refine these complex materials and to control their quality
and in-process yields is an expertise of the Company that is critical to the performance of our customers’ 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. We employ numerous advanced manufacturing technologies and systems at our manufacturing facilities. These include
automated Computer Numeric Control optical fabrication, high throughput thin-film coaters, micro-precision metrology and custom-
engineered automated furnace controls for 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. II-VI continuously updates its
comprehensive quality management systems that feature manufacturing quality best practices. II-VI is committed to delivering
products within specification, on time and with high quality, with a goal of fully satisfying customers and continually improving.
Sources of Supply
The major raw materials we use include zinc, selenium, ZnSe, ZnS, hydrogen selenide, hydrogen sulfide, tellurium, yttrium oxide,
aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, GaAs, copper, germanium, molybdenum,
quartz, optical glass, diamond, and other materials.
5
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 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 – Risk Factors, 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.
Business Units
The Company’s organizational structure is divided 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. These segments,
and the units within the segments, are reflected in the organization chart below:
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, fiber-delivered beam delivery systems and processing tools and
direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names. II-VI Laser Solutions
also manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices, and high-speed
communication systems and manufactures 6-inch gallium arsenide wafers allowing for the production of high performance lasers and
integrated circuits in high volume sold under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brand names.
II-VI Photonics manufactures crystal materials, optics, microchip lasers and optoelectronic modules for use in optical communication
networks and other diverse consumer and commercial applications. In addition, the segment also manufactures pump lasers, optical
isolators, and optical amplifiers and micro-optics for optical amplifiers for both terrestrial and submarine applications within the
optical communications market.
II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for
military, medical and commercial laser imaging applications. In addition, the segment designs, manufactures and markets unique
engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, military and medical markets.
6
During the fiscal year ended June 30, 2017, the Company completed the following acquisitions:
Date:
October 12, 2016
June 19, 2017
Acquired:
DirectPhotonics Industries GmbH (“DPI”)
Integrated Photonics, Inc. (“IPI”)
Amount:
$0.6 million
$41.7 million
DPI joined the II-VI Laser Solutions segment and IPI joined the II-VI Photonics segment. See Note 2 to the Company’s Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding the Company’s
acquisitions, which information is incorporated herein by reference.
7
II-VI’s segments are organized by business unit at the group or division level. Each of these business units develops and markets
products as described below.
Segment:
II-VI Laser Solutions
Group/Division:
II-VI Infrared
II-VI HIGHYAG
II-VI Laser Enterprise
Our Products:
• Laser optics and accessories for CO2 lasers used in
materials processing semiconductor and life sciences
• High power fiber and direct diode laser optics
• Infrared thermal imaging optics and assemblies
• II-VI compound crystalline material production including
ZnSe, ZnS, ZnS multispectral and CVD diamond
• Laser processing heads and beam delivery systems for
laser materials processing with fiber lasers, disk lasers,
and diode lasers
• High-power semiconductor lasers and laser bars enabling
fiber and direct diode lasers for materials processing,
medical, defense, consumer and printing applications
• VCSELs for optical navigation, optical interconnects and
3D sensing
II-VI OptoElectronic Devices
• VCSELs for 3D sensing in consumer electronics and
II-VI EpiWorks
II-VI Suwtech
II-VI Lasertech
II-VI DirectPhotonics
automotive
• RF wafers for optical/telecommunications
• III-V epitaxial wafers to enable higher performance
photonic and RF components for consumer,
communications, network and mobile applications,
including wireless handsets, tablets and the Internet of
things
• Diode pumped solid state lasers, green lasers and Q-
switched lasers
• Laser diode modules for multiple markets and
applications, including aiming, leveling, range finding,
machine vision, bio-medical instrumentation, Raman
spectroscopy, and fluorescence spectroscopy
• Fiber coupled high power diode lasers in the 8xx and 9xx
nm wavelength ranges for fiber laser and solid state laser
pumping, as well as for medical and other applications
• Laser cutting and drilling machines for processing a wide
variety of super hard materials such as CVD diamond,
polycrystalline diamond, polycrystalline cubic boron
nitride, and ceramics among others as well as for high
efficiency laser cutting of non-conductive materials
• High brightness, high power direct diode laser engines
for cutting, welding, and thermal processing applications,
including optimized solutions for aluminum and
aluminum-copper processing applications
8
Segment:
II-VI Photonics
Group/Division:
II-VI Optical Communications
II-VI Photop
II-VI Performance
Products
II-VI Optical Systems
II-VI M Cubed
II-VI Marlow
II-VI Advanced Materials
II-VI Performance Metals
Our Products:
• Products and solutions that enable high bit rate
interconnects for datacenters and communication service
providers, datacenter inter-connects, ROADM systems
and submarine transmission
• Fiber optics and precision optics used in projection and
displays, crystal materials and components for optical
communications, high power UV, visible and NIR optics
for industrial lasers, filters and assemblies for life
sciences, as well as for sensors, instrumentation and
semiconductor equipment
• Precision optical assemblies, objectives, infrared optics,
thin film coatings and optical materials
• Optical solutions to critical and complex designs,
engineering and production challenges in defense,
aerospace and commercial industries
• Advanced ceramic and metal matrix composite products
for semiconductor equipment, flat panel display
equipment, industrial and optical equipment, as well as
for defense applications
• Thermoelectric components, sub-assemblies and systems
for heating, cooling, temperature tuning, thermal cycling
and power generation in aerospace, defense, medical,
industrial, automotive, consumer, telecommunications
and power generation markets
• SiC and advanced semiconductor materials for high
frequency and high power electronic device applications
in defense, telecommunications, automotive and industrial
markets
• Specialty refining, recycling and materials recovery
services for high purity rare metals such as Selenium and
Tellurium, as well as related chemical products such as
Tellurium Dioxide, for optics, photovoltaics,
semiconductors, thermoelectric coolers, metallurgy,
agriculture and industrial applications.
9
Our Markets
Our market-focused businesses are organized by technology and products. Our businesses are composed of the following primary
markets: Materials Processing, Communications (“Comms”), Military and Semiconductor Equipment (“Semi Cap”). Other markets
(“Other”) include: Life Sciences, Consumer Electronics and Automotive. The table below summarizes our revenue by reported
segments and the distribution of that revenue by end markets.
FY17
Revenue ($M)
Materials Processing
Comms
Military
Semi Cap
Other
339
419
214
972
69%
9%
9%
30%
13%
84%
16%
44%
4%
- %
42%
11%
5%
3%
18%
7%
9%
4%
15%
8%
Reported Segments
II-VI
Laser Solutions
II-VI Photonics
II-VI Performance
Products
Total
Communications Market:
II-VI’s optical communications products and technologies enable the next generation of high-speed optical transmission systems,
networks, and datacenter solutions necessary to meet the accelerating global bandwidth demand. At the core of both terrestrial and
undersea optical networks, our market-leading 980 nm pump lasers boost the power of the optical signal in the fiber optic cable along
the way to enable a larger number of high speed signals to be transmitted over longer distances. Our latest generation of 980 nm pump
lasers along with miniature tunable filters and hybrid passives are part of our ultra-compact family of components critical to a new
generation of small size, long reach DWDM transmission modules operating at 100, 200 and 400 Gb/s.
Customers continue to rely on us for our industry-leading optical amplification and embedded monitoring solutions for their next
generation ROADM systems to compensate for the inherent signal loss and monitor the signal integrity. Our proprietary OTDR
modules allow systems to automatically detect and pinpoint issues along the transmission path in real time. The accelerating adoption
of applications such as cloud computing are driving the rapid growth of datacenter buildouts. Our high-speed 25 Gb/s VCSELs enable
intra-datacenter transceivers to transmit and receive signals. Our miniature WDM thin film filter assemblies are used to increase the
bandwidth within many modern transceiver designs by combining wavelengths at the transmitter end and separating them out at the
receiver end.
In mobile wireless applications, II-VI supplies base SiC substrates to customers who manufacture RF power amplifier devices that are
embedded in remote radio heads in 4G wireless bases stations to boost the power of RF signal before it reaches the antenna. These
devices are also widely expected to be embedded in next generation active antennas for 5G wireless where multiple devices per
antenna will be required to enable higher bandwidth. SiC has a high number of intrinsic physical and electronic advantages such as
high thermal conductivity that enables them to operate at high-power levels and still dissipate the excess heat generated.
Materials Processing Market:
Our industrial laser optics and solutions for the materials processing market remain in strong demand. There continues to be a steady
global demand to support existing installations and new deployments of CO2 and fiber laser systems, especially for our greater than 1
kilowatt high-power handling optics and beam delivery solutions. Our vertically integrated and market leading ZnSe optics and
components, due to their inherent low loss at around 10 micron wavelength, have enabled high-power CO2 laser systems for many
decades and remain critical to the steady stream of new deployments as well as to the continued operation, serving as replacement
optics, of the installed base of CO2 lasers. II-VI continues to introduce products that address new and growing applications for low-
power CO2 lasers, such as cutting textiles, leather, wood and other organic materials, for which the CO2 laser’s 10 micron wavelength
is ideally suited. CO2 lasers are also at the core of EUV lithography systems which are now emerging on the market to enable a new
generation of smaller and more powerful personal computing devices.
10
Over the past several years, fiber laser-based systems operating at one micron wavelength in pulsed or continuous mode have taken a
central role in nearly all materials processing segments and especially for precision machining such as marking and micro drilling.
From the laser chips that generate the input optical power to the beam delivery systems that direct the output optical power to the
target, II-VI supplies a broad set of laser optics and fused fiber products that enable many functions within these systems. The same
set of II-VI products is also at the core of existing and emerging direct diode laser systems. II-VI is also driving innovation with a
direct-diode laser engine small enough to be mounted on a robotic arm so that the end user can apply square beams directly to the
work piece at wavelengths optimized for aluminum processing.
Another emerging and fast growing application is the processing of displays for consumer electronics including those based on the
OLED technology that are scribed with CO lasers and sealed with UV lasers. II-VI’s broad portfolio of coated optics and crystal
materials serve all of these growing laser markets.
Military Market:
Our focus in the military market is enabling lasers for targeting, night vision, navigation, as well as intelligence, surveillance and
reconnaissance systems. Multiple fighter jets are equipped with our large area sapphire windows that surround advanced targeting and
imaging systems. 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.
Rotary and fixed-wing aircraft 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.
Many military systems employ laser designation and range-finding capabilities supported by our semiconductor lasers bars and
yttrium-based materials and laser optics, all manufactured in-house, as well as our competency in short wave infrared and visible
optics. Our thermo-electric coolers are used to increase thermal imaging sensitivity or to maintain a constant window temperature in
various visible and infrared applications.
We provide a range of battlefield-ready technologies for soldier equipment or for law enforcement. Our precision patterned reticles are
embedded in rifle scopes. Our reaction bonded boron carbide materials are shaped into torso plates and employed as protective body
armor. Our thermo-electric coolers are used to regulate the soldier’s body heat. They are also used to convert heat produced by
battlefield fuel burners into electrical power, for example to extend battery life on the battlefield.
We maintain engineering and manufacturing facilities in the United States with strictly controlled access that are dedicated to our U.S.
government supported contracts.
Semiconductor Equipment Market:
Semiconductor equipment requires advanced materials to meet the need for tighter tolerances, enhanced thermal stability, faster wafer
transfer speeds and reduced stage settling times. Our metal matrix composites and reaction bonded ceramics enable these applications
thanks to their optimum combination of light weight, strength, hardness and coefficient of thermal expansion. Our reaction bonded
SiC materials are used to manufacture wafer chucks, light-wave scanning stages and high temperature, corrosion resistant wafer
support systems. Our cooled SiC mirrors and precision patterned reticles are used in the illumination systems of lithography tools.
In the emerging market of EUV lithography systems, CO2 lasers are used to generate extreme ultraviolet radiation. These CO2 lasers
and beam delivery systems leverage our broad portfolio of CO2 laser optics, CdTe Modulators, high power handling polycrystalline
CVD diamond windows to route the powerful laser beam to a tin droplet from which EUV light will emanate. Due to their very high
mechanical and thermal performance characteristics, our reaction bonded SiC are used in structural support systems that are integral to
EUV optics to meet critical requirements for optical system stability.
Life Sciences Market:
Today the majority of our business in the life sciences end market is in analytical tools. Many such analytical tools found in modern
biotech laboratories are based on some form of interaction with light. This applies to flow cytometry, cell sorting, confocal
microscopy, genome sequencing, Raman spectroscopy, fluorescence spectroscopy and particle sizing to name a few. Our multi-
colored laser engines along with our broad portfolio of application-specific optics, filters and gratings are embedded in these analytical
tools. We also supply objective lenses, precision patterned reticles and assemblies for microscopes.
11
Genome sequencing involves temperature cycling DNA in flow cells with a high degree of temperature uniformity and precision. We
believe that our thermal engines are the state of the art in chiller technology, and they achieve what we believe to be industry-leading
temperature control and uniformity across large areas. Our green lasers are used to excite the fluorescence of the DNA to reveal their
structure. Our flow cells are micro-machined with a high degree of precision to insure the smooth flow of sample fluids undergoing
analysis. Our thermal engines are also used in a multitude of other biomedical applications, for example to measure substance
concentration in complex mixtures, to protect blood supplies and to perform heating- and cooling-based physical therapy.
Clinical procedures are increasingly performed with tools that embed our lasers and optics. For example, our semiconductor laser bars
are used in hair and wrinkle removal procedures and our custom designed lens assemblies are used for laser eye surgery. We continue
to leverage our core lasers, optics and temperature control expertise into new applications to grow our business in life sciences.
Consumer Electronics Market:
II-VI manufactures low cost VCSELs, VCSEL arrays and low angle shift filters for the consumer electronics market. Our VCSEL
products leverage our world-class 6-inch GaAs platform, comprising our epitaxial wafer growth and wafer fabrication capabilities.
Our VCSELs, unlike many on the market, have already been designed into consumer products such as the computer mouse as well as
for menu navigation in smart phones and in car steering wheels. Our VCSELs are also widely deployed in datacenters and in the
emerging market for HDMI optical cables. This expertise in VCSEL technology is being leveraged for the upcoming 3D sensing
market. Following our acquisition in fiscal year 2016 of a 6-inch epitaxy and wafer capabilities, we invested significantly in fiscal year
2017 to complete our capacity expansion and be ready to ramp our sales significantly in the near future.
Automotive Market:
Power conversion electronics for high-efficiency electric vehicles need a combination of high-power density, high-efficiency and high
temperature operation that are only afforded by advanced material systems based on SiC substrates. Our SiC substrates are available in
large diameters and have what we believe to be best-in-class quality and low defect levels.
Our thermo-electric modules are used to cool the batteries to extend their operating life. They are also more efficient than resistive
heaters when used in heated car seats and extend a battery’s range of travel in cold environments.
To operate safely, self-driving cars will rely on control systems that are informed by a comprehensive number of sensors. One such
sensor is based on LiDAR, which employs semiconductor lasers to properly identify and measure the distance to obstacles ahead. Our
GaAs-based semiconductor laser platform, which already enables a broad portfolio of products in communications and materials
processing, is now being scaled further for consumer electronics, and will be leveraged to deliver a highly reliable and cost-effective
laser product for this emerging market.
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 introduced to our new and established customers in all markets.
The Company has centralized its worldwide marketing and sales functions across the Company’s business units. Sales offices have
been strategically established to best serve and distribute products to our worldwide customer base. There is significant cooperation,
coordination and synergies among our business units that capitalize on the most efficient and appropriate marketing channels to
address diverse applications within our 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 applications engineers to assist customers in designing, testing and qualifying our parts as key
components of our customers’ systems. As of June 30, 2017, we employed approximately 246 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 – Risk Factors of this Annual Report on Form 10-K.
12
Customers
The main groups of customers by segments are as follows:
Segment:
II-VI Laser
Solutions
Group/Division:
II-VI Infrared
II-VI HIGHYAG
II-VI Laser Systems
II-VI Opto Electronics
II-VI
Photonics
II-VI Optical
Communications & II-VI
Photop
II-VI
Performance
Products
II-VI Optical Systems
II-VI M Cubed
II-VI Marlow
Our Customers Are:
OEM and system integrators of industrial,
medical and military laser systems. Laser
end-users who require replacement optics
for their existing laser systems.
Automotive manufacturers, laser
manufacturers and system integrators.
OEM and subsystem integrators of aiming,
machine vision, bio-medical instruments,
and fiber lasers.
Manufacturers of industrial laser
components, optical communication
equipment and consumer technology
applications.
Worldwide network system and sub-system
providers of telecommunications, data
communications and CATV.
Global manufacturers of industrial and
medical laser optics and crystals including
commercial and consumer products used in
a wide array of instruments, sensors, fiber
lasers, displays and projection devices.
Manufacturers of equipment and devices for
aerospace, defense 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 defense, space,
telecommunications, medical, industrial,
automotive, personal comfort and
commercial markets.
Representative Customers:
• TRUMPF GmbH + Co. KG
• Bystronic Laser AG
• Coherent, Inc.
• Ford Motor Company
• Laserline GmbH
• BGI Complete Genomics,
Shenzhen Co., Ltd.
• SPI Lasers Limited
• Laserline GmbH
• Wuhan Raycus Fiber Laser
Technologies Co., Ltd
• Cisco Systems, Inc.
• Fujitsu Network
Communications
• Corning Incorporated
• Coherent, Inc.
• Acacia Communications, Inc.
• Han’s Laser Technology
Industry Group Co. Ltd.
• Lockheed Martin Corporation
• ASML Holding NV
• Carl Zeiss AG
• Nikon Corporation
• KLA-Tencor Corporation
• Corning Incorporated
II-VI Advanced Materials 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.
II-VI Performance Metals Primary mineral processors, refineries and
providers of specialized materials that are
used in laser optics, photovoltaics,
semiconductors, thermoelectric coolers,
metallurgy and industrial products.
• Sumitomo Electric Device
Innovations, Inc.
• Showa Denko K. K.
• STMicroelectronics
• IQE PLC
• Infineon Technologies AG
• Aurubis AG
13
Competition
We believe we are a global leader in many of our product families. We compete on the basis of our reputation for offering the highly
engineered nature of our products, product and technology roadmaps, IP, ability to scale, 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
Bio-medical instruments for flow
cytometry, DNA sequencing, fluoresce
microscopy
Semiconductor laser diodes for the
industrial and consumer markets
II-VI Photonics
Optics and optical components for
networking
Optical modules and subsystems for
amplification, monitoring and wavelength
management
Optical and crystal components, thin film
coatings and sub-assemblies for lasers and
metrology instruments
II-VI Performance
Products
Infrared optics for military applications
Competitors:
• Sumitomo Electric Industries, Ltd.
• Newport Corporation
• Optoskand AB
• Precitece GmbH
• Lumentum Operations LLC
• Coherent, Inc.
• BWT Beijing Ltd
• Lumentum Operations LLC
• Finisar Corporation
• Broadcom Ltd.
• Koninklijke Philips N.V
• Jenoptik AG
• Osram Licht AG
• O-Net Communications Group Ltd.
• OPLINK Communication, LLC
• Axsun
• Casix, Inc. (Fabrinet)
• Lumentum Operations LLC
• Finisar Corporation
• Accelink
• O-Net Communications Group, Ltd.
• Casix, Inc. (Fabrinet)
• Castech
• REO
• Laser Components
• UTC Aerospace Systems (formerly Goodrich
Corporation)
• In-house fabrication and thin-film coating
capabilities of major military customers
Thermoelectric components, sub-assemblies
and systems
Metal Matrix Composites and reaction
bonded ceramics products
Single crystal SiC substrates
Refining and materials recovery services for
high purity rare metals
• Komatsu, Ltd.
• Laird plc
• Ferrotec Corporation
• Berliner Glas
• CoorsTek, Inc.
• Japan Fine Ceramics Co. Ltd.
• Cree, Inc.
• Dow Corning Corporation
• Nippon Steel & Sumitomo Metal
• SiCrystal AG
• Vital
• 5NPlus
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.
14
Our Strategy
Our strategy is to grow businesses with world-class engineered material capabilities to advance our current customers’ strategies,
penetrate new markets through innovative technologies and platforms, and enable new applications in large and growing markets. A
key strategy of ours is to develop and manufacture high-performance materials that are differentiated from those produced by our
competitors. We focus on providing components that are critical to the heart of our customers’ assembly lines for products serving the
applications mentioned above.
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 business strategies in the areas of:
Key Business Strategies:
Our Plan to Execute:
Identify New Products and Markets
Identify new technologies, products and markets to meet evolving customer
requirements for high performance engineered materials through our dedicated
corporate R&D program to increase new product revenue and maximize return
on investment.
Balanced Approach to Research and
Development
Internally and externally funded R&D expenditures, targeting an overall
investment of between 7 and 10 percent of revenues.
Leverage Vertical Integration
Investment in Scalable Manufacturing
We are committed to accepting the right mix of internally and externally funded
research that ties closely to our long-term strategic objectives.
Combine R&D and manufacturing expertise, operating with a bias to both
components and production machines, reducing cost and lead time to enhance
competitiveness, time to market, and profitability.
Strategically invest in, evaluate and identify opportunities to consolidate
manufacturing operations worldwide to increase production capacity,
capabilities and cost effectiveness.
Enhance Our Performance and Reputation as
a Quality and Customer Service Leader
Continue to improve upon our established reputation as a consistent, high-quality
supplier of engineered materials and optoelectrical components into our
customers’ products.
Execute our global quality transformation process thereby eliminating costs of
non-conforming materials and processes.
Identify and Complete Strategic Acquisitions
and Alliances
Identify acquisition opportunities that accelerate our access to emerging high-
growth segments of the markets we serve and further leverage our competencies
and economies of scale.
Research, Development and Engineering
During the fiscal year ended June 30, 2017, the Company continued 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 approach is managed under a disciplined
innovation program that we refer to as the “II-VI Phase Gate Process”.
Our research and development program includes internally and externally funded research and development expenditures targeting an
overall annual investment of between 7% and 10% of product revenues. From time to time, the ratio of externally funded contract
activity to internally funded contract activity varies due to the unevenness of government funded research programs and changes in the
focus of our internally funded research programs. We are committed to having the right mix of internally and externally funded
research that ties closely to our long-term strategic objectives. The Company continues to believe that externally funded research and
development will decrease in the near term due to governmental budget constraints.
We devote significant resources to RD&E programs directed at the continuous improvement of our existing products and processes
and to the timely development of new technologies, materials and products. We believe that our RD&E activities are essential to
establish and maintain a leadership position in each of the markets we serve. As of June 30, 2017, we employed 1,117 people in
RD&E functions, 687 of whom are engineers or scientists. In addition, certain manufacturing personnel support or participate in our
research and development efforts on an ongoing basis. We believe this interaction between the development and manufacturing
functions enhances the direction of our projects and design for manufacturing, reducing costs and accelerating technology transfers.
15
During the fiscal year ended June 30, 2017, we focused our research and development investments in the following areas:
Segment:
Area of Development:
Our Research and Development Investments:
II-VI Laser Solutions
High Power Laser Diodes and
High Volume Manufacturing
Focusing on increasing fiber coupled optical output power of multi-
emitter modules.
Developing high power VCSELs for consumer devices and next
generation high speed VCSELs for 3D sensing and datacom
applications.
CVD Diamond Technology
Developing CVD synthetic diamond for EUV applications.
II-VI Photonics
Photonics Design
Pump Lasers
Optical Amplifiers
Focusing on broadening our portfolio beyond infrared windows
applications.
Continuing to improve photonic crystal materials, precision optical
parts, and laser device components.
Continuing to invest in next generation GaAs pump portfolio to
address evolving terrestrial and undersea markets
Developing indium phosphide growth and processing capability.
Investing and broadening the range of semi-custom and custom
amplifiers for Tier 1 customers.
Optical Monitoring
Continuing optical channel monitor investment.
Developing compact OTDRs embedded in optical system
equipment to monitor the health of the fiber plant.
Micro-Optics Manufacturing
Shifting toward smaller, more compact platforms and packages.
Investing in manufacturing equipment for computerized processes.
II-VI Performance
Products
Silicon Carbide Technology
Developing advanced SiC substrate growth technologies to support
emerging markets in GaN RF and power electronics.
Focused on continuous improvements to maintain world-class, high
quality, large diameter substrates.
Thermoelectric Materials and
Devices
Continuing to develop leading bismuth telluride for thermoelectric
cooling/heating.
Focusing on thermoelectric power generation capability in order to
introduce new products to the market.
Metal Matrix Composites and
Reaction Bonded Ceramics
Support Industrial customers in developing application specific
wear and thermal management solutions.
The development of our products and manufacturing processes is largely based on proprietary technical know-how and expertise. We
rely on a combination of contract provisions, trade secret laws, invention disclosures and patents to protect our proprietary rights. We
have entered into selective intellectual property licensing agreements. We have in the past and expect that we will continue to assert
and vigorously protect our intellectual property rights.
Internally funded research and development expenditures were $96.8 million, $60.4 million and $51.3 million for the fiscal years
ended June 30, 2017, 2016 and 2015, respectively. For these same periods, externally funded research and development expenditures
were $7.8 million, $8.7 million and $9.5 million, respectively.
16
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 administered by the U.S. Department of State, Directorate of Defense
Trade Controls, which, among other things, impose licensing requirements on the export from the United States of certain
defense articles and defense services, which generally include items that are specially designed or adapted for a military
application and/or listed on the U.S. Munitions List;
The Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and
Security, which, among other things, impose licensing requirements on certain dual-use goods, technology and software,
which are items that potentially have both 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 regulations administered by 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 – Risk Factors of this Annual Report Form on Form 10-K.
Trade Secrets, Patents and Trademarks
Our use of trade secrets, proprietary know-how, trademarks, copyrights, patents and contractual confidentiality and IP ownership
provisions help us develop and maintain our competitive position with respect to our products and manufacturing processes. We
aggressively pursue process and product patents in certain areas of our businesses. We have entered into selective intellectual property
licensing agreements. We have in the past and will continue to assert and vigorously protect our intellectual property rights. We have
confidentiality and non-competition agreements with certain personnel. We require that our U.S. employees sign a confidentiality and
noncompetition agreement upon their commencement of employment with us.
The design, processes and specialized equipment utilized in our engineered materials, advanced components and subsystems are
innovative, complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar
technology or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a variety of
materials, devices, equipment, configurations and processes, and others could obtain patents covering technology similar to our
technology. We may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain
such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted which
may adversely affect our results of operations. In addition, our research and development contracts with agencies of the U.S.
Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are
fulfilled.
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and positions as of June 30, 2017 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
Vincent D. Mattera, Jr. ................................................................................ 61 President and Chief Executive Officer; Director
Mary Jane Raymond ................................................................................... 57 Chief Financial Officer and Treasurer and Assistant
Position
Age
Gary A. Kapusta.......................................................................................... 57 Chief Operating Officer
Giovanni Barbarossa ................................................................................... 57 Chief Technology Officer and President II-VI Laser
David G. Wagner ........................................................................................ 54 Vice President, Human Resources
Jo Anne Schwendinger................................................................................ 62 General Counsel and Secretary
Solutions
Secretary
17
Vincent D. Mattera, Jr. Dr. Mattera initially served as a member of the II-VI Board of Directors from 2000-2002. Dr. Mattera joined
the company as a Vice President in 2004 and served as Executive Vice President from January of 2010 to November of 2013, when he
became the Chief Operating Officer. In November of 2014, Dr. Mattera became the President and Chief Operating Officer, and was
reappointed to the Board of Directors. In November of 2015, he became the President of II-VI. In September of 2016, Dr. Mattera
became the Company’s third President and Chief Executive Officer in 45 years. During his career at II-VI he has assumed
successively broader management roles, including as a lead architect of the Company’s diversification strategy. He has provided
vision, energy and dispatch to the Company’s growth initiatives including overseeing the acquisition-related integration activities in
the US, Europe, and Asia-especially in China-thereby establishing additional platforms. These have contributed to a new positioning
of the Company into large and transformative global growth markets while increasing considerably the global reach of the Company,
deepening the technology and IP portfolio, broadening the product roadmap and customer base, and increasing potential of II-VI.
Prior to joining II-VI as an executive, Dr. Mattera had a continuous 20 year career in the Optoelectronic Device Division of AT&T
Bell Laboratories, Lucent Technologies and Agere Systems during which he led the development and manufacturing of semiconductor
laser based materials and devices for optical and data communications networks. Dr. Mattera has 34 years of leadership experience in
the compound semiconductor materials and device technology, operations and markets that are core to II-VI’s business and strategy.
Dr. Mattera holds a B.S. in chemistry from the University of Rhode Island (1979), and a Ph.D. degree in chemistry from Brown
University (1984). He completed the Stanford University Executive Program (1996). His 14 year tenure at II-VI underpins a valuable
historical knowledge about the Company’s operational and strategic issues. We believe that Dr. Mattera’s expertise and experience
qualifies him to provide the board with continuity and a unique perspective about on the Company.
Mary Jane Raymond has been Chief Financial Officer and Treasurer of the Company since March 2014. Previously, Ms. Raymond
was Executive Vice President and Chief Financial Officer of Hudson Global, Inc. (NASDAQ: HSON) from 2005 to 2013. Ms.
Raymond was the Chief Risk Officer and Vice President and Corporate Controller at Dun and Bradstreet, Inc., from 2002 to 2005.
Additionally, she was the Vice President, Merger Integration, at Lucent Technologies, Inc., from 1997 to 2002 and held several
management positions at Cummins Engine Company from 1988 to 1997. Ms. Raymond holds a B.A. degree in Public Management
from St. Joseph’s University, and an MBA from Stanford University.
Gary A. Kapusta joined II-VI in February 2016 and has served as the Company’s Chief Operating Officer. Prior to his employment
with the Company, Mr. Kapusta served in various roles at Coca-Cola, including as President & Chief Executive Officer, Coca-Cola
Bottlers’ Sales & Services L.L.C., President, Customer Business Solutions and Vice President, Procurement Transformation, Coca-
Cola Refreshments. He joined Coca-Cola following a 19 year career at Agere Systems, Lucent Technologies, and AT&T. Mr. Kapusta
graduated from The University of Pittsburgh with B.S. and M.S. degrees in Industrial Engineering, and holds an M.B.A from Lehigh
University.
Giovanni Barbarossa joined II-VI in 2012 and has been the President, Laser Solutions Segment, since 2014, and the Chief
Technology Officer since 2012. Dr. Barbarossa was employed at Avanex Corporation from 2000 through 2009, serving in various
executive positions in product development and general management, ultimately serving as President and Chief Executive Officer.
When Avanex merged with Bookham Technology, forming Oclaro, Dr. Barbarossa became a member of the Board of Directors of
Oclaro and served as such from 2009 to 2011. Previously, he had management responsibilities at British Telecom, AT&T Bell Labs,
Lucent Technologies, and Hewlett-Packard. 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 through 2008,
serving in various human resource management positions, ultimately becoming the Vice President, Human Resources, for Owen
Corning’s global sales force. Mr. Wagner graduated with a B.S. degree in Human Resources Management from Juniata College in
1985.
Jo Anne Schwendinger joined II-VI in March 2017 and serves as the Company’s General Counsel and Secretary. Prior to her
employment with the Company, Ms. Schwendinger practiced law with the law firm Blank Rome, LLP from August 2016 until
February 2017. Previously, Ms. Schwendinger served in various legal roles at Deere & Company from February 2000 until August
2016, including Regional General Counsel and Assistant General Counsel. Ms. Schwendinger holds a Bachelor’s degree from the
Université d'Avignon et des Pays de Vaucluse, a Master’s degree from the Université de Strasbourg, Maitrise and a Juris Doctor
degree from the University of Pittsburgh Law School.
18
Availability of Information
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
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.
Item 1A. RISK FACTORS
We caution our investors that our performance is subject to risks and uncertainties. The following material risk factors may cause our
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.
Investments in Future Markets of Potential Significant Growth May Not Result in Expected Returns
We previously announced an investment program with the goal of gaining a greater share of end markets using semiconductor lasers,
especially those used for 3D sensing. We cannot guarantee that our investments in capital and capabilities will be sufficient. The
potential market, as well as our ability to gain market share in such market, may not materialize on the timeline anticipated or at all.
We cannot be sure of the end market price for products incorporating our technologies. Our technologies could fail to fulfill,
completely or at all, our target customers’ finalized specifications. We cannot guarantee the end market customers’ acceptance of our
technologies. Further, we may be unable to fulfill the terms of our contracts with our target customers, which could result in penalties
of a material nature, including consequential damages, loss of market share and loss of reputation.
Our Competitive Position Depends on Our Ability to Develop New Products and Processes
To meet our strategic objectives, we must develop, manufacture and market new products and continue to update our existing products
and processes to keep pace with market developments to address increasingly sophisticated customer requirements. Our success in
developing and selling new and enhanced products and processes depends upon a variety of factors including strategic product
selection, efficient completion of product design and development, timely implementation of manufacturing and assembly processes,
effective sales and marketing, and successful product performance in the market.
The introduction by our competitors of products or processes using new developments better or faster than ours could render our
products or processes obsolete or unmarketable. We intend to continue to make significant investments in research and development
to achieve our goals. There can be no assurance that we will be able to develop and introduce new products or enhancements to our
existing products and processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could
have a material adverse effect on our ability to grow our business and maintain our competitive position and on our results of
operations and/or financial condition.
Our Competitive Position May Require Significant Investments in Strategic Acquisitions, With Associated Integration Risks,
Which May Not Be Successful
We continuously monitor the marketplace for strategic opportunities, and our business strategy includes expanding our product lines
and markets through both internal product development and acquisitions. Consequently, we expect to continue to consider strategic
acquisition of businesses, products or technologies complementary to our business. This may require significant investments of
management time and financial resources. If market demand is outside our organic capabilities, if a strategic acquisition is required
and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the
expected return on investment, expose us to unforeseen liabilities or jeopardize our ability to comply with our credit facility covenants
due to any inability to integrate the business, retain staff, or work with the customers or otherwise we could suffer a material adverse
effect on our business, results of operations or financial condition.
19
Our Future Success Depends on Continued International Sales
Sales to customers in countries other than the United States accounted for approximately 69%, 63% and 63% of revenues during the
years ended June 30, 2017, 2016 and 2015, respectively. We anticipate that international sales will continue to account for a
significant portion of our revenues for the foreseeable future. If we do not maintain our current volume of international sales, we could
suffer a material adverse effect on our business, results of operations and/or financial condition.
Foreign Currency Risk May Negatively Affect our Revenues, Cost of Sales and Operating Margins and Could Result in
Foreign Exchange Losses
We conduct our business and incur costs in the local currency of most countries in which we operate. Our net sales outside the United
States represented a majority of our total sales in each of the last three fiscal years. We incur currency transaction risk whenever one
of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it
operates or holds assets or liabilities in a currency different than its functional currency. Changes in exchange rates can also affect our
results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S. dollars. We cannot accurately
predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we
may not be able to effectively manage our currency risks, and any volatility in currency exchange rates may increase the price of our
products in local currency to our foreign customers or increase the manufacturing cost of our products, either of which may have an
adverse effect on our financial condition, cash flows and profitability.
Any Inability to Access Financial Markets from Time to Time to Raise Capital, Finance Working Capital Requirements or
Our Acquisition Strategies, or Otherwise to Support our Liquidity Needs Could Negatively Impact our Ability to Finance our
Operations, Meet Certain Obligations or Implement our Growth Strategy.
We occasionally borrow under our existing credit facilities to fund operations, including working capital investments, and to finance
our acquisition strategies. In the past, market disruptions experienced in the United States and abroad have materially impacted
liquidity in the credit and debt markets, making financing terms for borrowers less attractive, and, in certain cases, have resulted in the
unavailability of certain types of financing. Uncertainty in the financial markets may negatively impact our ability to access additional
financing or to refinance our existing credit facilities or existing debt arrangements on favorable terms or at all, which could
negatively affect our ability to fund current and future expansion as well as future acquisitions and development. These disruptions
may include turmoil in the financial services industry, volatility in the markets where our outstanding securities trade, and general
economic downturns in the areas where we do business. If we are unable to access funds at competitive rates, or if our short-term or
long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating
strategies could be adversely affected.
In the future we may be required to raise additional capital through public or private financing or other arrangements. Such financing
may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business and prospects.
Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve
restrictive covenants that may limit our ability to undertake certain operational activities that we otherwise would find to be desirable.
Further, debt service obligations associated with any such debt financing could reduce our profitability. If we cannot raise funds on
acceptable terms, we may not be able to grow our business or respond to competitive pressures.
We May Fail to Accurately Estimate Our Customers’ Demands
We make significant decisions based on our estimates of customer requirements. We use our estimates to determine the levels of
business we seek and accept, production schedules, personnel needs and other resource requirements.
Customers may require rapid increases in production on short notice. We may not be able to purchase sufficient supplies or allocate
sufficient manufacturing capacity to meet such increases in demand. Rapid customer ramp-up and significant increases in demand
may strain our resources or negatively affect our margins. Inability to satisfy customer demand in a timely manner may harm our
reputation, reduce our other opportunities, damage our relationships with customers, reduce revenue growth, and/or incur contractual
penalties.
Alternatively, downturns in the industries in which we compete may cause our customers to significantly reduce their demand. With
respect to orders we initiate with our suppliers to address anticipated demand from our customers, certain suppliers may have required
non-cancelable purchase commitments or advance payments from us, and those obligations and commitments could reduce our ability
to adjust our inventory or expense levels to declining market demands. Unexpected decline in customer demands can result in excess
or obsolete inventory and result in additional charges. Because certain of our sales, research and development and internal
manufacturing overhead expenses are relatively fixed, a reduction in customer demand likely would decrease our gross margins and
operating income.
20
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.
They may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not
be able to compete successfully against our present or future competitors. Our failure to effectively compete could have a material
adverse effect on our business, 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 confidentiality,
noncompetition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps
taken by us will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no
assurance that third-parties will not assert infringement claims against us in the future.
Asserting our intellectual property rights or defending against third-party claims could involve substantial expense. In the event a
third-party were successful in a claim that one of our processes infringed its proprietary rights, we could be required to pay substantial
damages or royalties, or spend substantial amounts in order to obtain a license or modify processes so that they no longer infringe such
proprietary rights. Any such events could have a material adverse effect on our business, results of operations or financial condition.
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. Fluctuations in demand could have a
material adverse effect on our business, results of operations or financial condition.
Data Breach Incidents and Breakdown of Information and Communication Technologies Could Disrupt our Operations and
Impact Our Financial Results
In the course of our business, we collect and store sensitive data, including intellectual property (both our own and that of our
customers), as well as proprietary business information. We could be subject to service outages or breaches of security systems which
may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or
data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can
create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an
incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted or we could suffer legal
claims, loss of reputation, financial loss, property damage, or regulatory penalties because of lost or misappropriated information.
Global Economic Downturns May Adversely Affect Our Business, Operating Results and Financial Condition
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the
level of growth or contraction for the global economy as a whole. It is even more difficult to estimate growth or contraction in various
parts, sectors and regions of the economy, including industrial, military, optical communications, telecommunications, semiconductor,
and medical and life science markets in which we participate. All aspects of our company forecast depend on estimates of growth or
contraction in the markets we serve. Thus, prevailing global economic uncertainties render estimates of future income and
expenditures very difficult to make.
Global economic downturns may affect industries in which our customers operate. These changes could include decreases in the rate
of consumption or use of our customers’ products. Such conditions could have a material adverse effect on demand for our customers’
products, and in turn, on demand for our products.
Adverse changes may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in
currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, decline in stock markets,
contraction of credit availability or other factors affecting economic conditions. For example, factors that may affect our operating
results include disruption in the credit and financial markets in the United States, Europe and elsewhere, adverse effects of ongoing
stagnation in the European economy, slowdown in the Chinese economy, reductions or limited growth in consumer spending or
consumer credit, and other adverse economic conditions that may be specific to the Internet, e-commerce and payments industries.
21
These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, the cost
and availability of financing, and costs associated with manufacturing and distributing products. Any economic downturn could have a
material adverse effect on our business, results of operations or financial condition.
We Are Subject to Governmental Import and Export Regulations
We are subject to the passage of and changes in the interpretation of regulation by U.S. government entities at the federal, state and
local levels and non-U.S. agencies, including, but not limited to, the following:
•
•
We are required to comply with import laws and export control and economic sanctions laws, which may affect our
transactions with certain customers, business partners and other persons, including dealings with or between our
employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the
export of certain products, services and technologies. We may be required to obtain an export license before exporting a
controlled item. Compliance with the import laws that apply to our businesses may restrict our access to, and may
increase the cost of obtaining, certain products and could interrupt our supply of imported inventory.
Exported technologies necessary to develop and manufacture certain products are subject to U.S. export control laws and
similar laws of other jurisdictions. We may be subject to adverse regulatory consequences, including government
oversight of facilities and export transactions, monetary penalties and other sanctions for violations of these laws. In
certain instances, these regulations may prohibit the Company from developing or manufacturing certain of its products
for specific end applications outside the United States.
Failure to comply with any of these laws and regulations could result in civil and criminal, monetary and non-monetary penalties,
disruptions to our business, limitations on our ability to import and export products and services and damage to our reputation.
Our Global Operations are Complex to Manage
We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, and Switzerland, and through
contract manufacturers in Thailand and China. We also maintain direct sales offices in Hong Kong, Japan, Germany, Switzerland, the
United Kingdom, Belgium, China, Singapore, Italy, South Korea, and Taiwan. Our operations vary by location and are influenced on
a location-by-location basis by local customs, languages and work practices, as well as different local weather conditions,
management styles and education systems. In addition, multiple complex issues may arise concurrently in different countries,
potentially hampering our management’s ability to respond in an effective and timely manner. Any inability to respond in an effective
and timely manner to issues in our global operations could have a material adverse effect on our business, results of operations or
financial condition.
We Have Entered into Supply Agreements which Commit Us to Supply Products on Specified Terms
We have supply agreements with some customers which require us to supply products and to allocate sufficient capacity to make these
products. We have also agreed to pricing schedules and methodologies which could result in penalties if we fail to meet development,
supply and quality commitments. Failure to do so may cause us to be unable to generate the amount of revenue or the level of
profitability we expect from these arrangements. Our ability to realize a profit under some of these agreements will be subject to the
level of customer demand, the cost of maintaining facilities and manufacturing capacity, and supply chain capability.
If we fail to fulfill our commitments under these supply agreements our business, after using all remedies available, financial
conditions and results of operations may suffer a material adverse effect.
We Depend on Highly Complex Manufacturing Processes That Require Products from Limited Sources of Supply
Our operations are dependent upon a supply chain of difficult-to-make or difficult-to-refine products and materials. Some of our
product inflow is subject to yield reductions from growth or fabrication losses, and thus the quantities we may receive are not
consistently predictable. Customers may also change the specification for a product that our suppliers cannot meet.
We also make products for which the Company is one of the world’s largest suppliers. We use high-quality, optical grade ZnSe in the
production of many of our IR optical products. We are a leading producer of ZnSe for our internal use and for external sale. The
production of ZnSe is a complex process requiring a highly controlled environment. A number of factors, including defective or
contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high quality ZnSe. Lack of
adequate availability of high quality ZnSe could have a material adverse effect upon our business. There can be no assurance that we
will not experience manufacturing yield inefficiencies which could have a material adverse effect on our business, results of
operations or financial condition.
22
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. Our
potential inability to internally produce hydrogen selenide could have a material adverse effect on our business, results of operations
or financial condition.
In addition, we produce and use other high purity and relatively uncommon materials and compounds to manufacture our products
including, but not limited to, ZnS, GaAs, Yttrium Aluminum Garnet, Yttrium Lithium Fluoride, Calcium Fluoride, Germanium,
Selenium, Telluride, Bismuth Telluride and SiC. A significant failure of our internal production processes or our suppliers to deliver
sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on our business, results of
operations or financial condition.
Our Global Operations Are Subject to Complex Legal and Regulatory Requirements
We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, and Switzerland, and through
contract manufacturers in Thailand and China. We also maintain direct sales offices in Hong Kong, Japan, Germany, Switzerland, the
United Kingdom, Belgium, China, Singapore, Italy, South Korea and Taiwan. Operations outside of the United States are subject to
many legal and regulatory requirements, some of which are not aligned with others. These include tariffs, quotas, taxes and other
market barriers, restrictions on the export or import of technology, potentially limited intellectual property protection, customs import
and export requirements, anti-corruption and anti-bribery laws, foreign exchange controls and cash repatriation restrictions, foreign
investment rules and regulations, data privacy requirements, anti-competition laws, employment and labor laws, pensions and social
insurance, and environmental health, and safety laws and regulations.
Compliance with these laws and regulations can be onerous and expensive, and requirements differ among jurisdictions. New laws,
changes in existing laws and abrogation of local regulations by national laws result in significant uncertainties in how they will be
interpreted and enforced. Failure to comply with any of these foreign laws and regulations could have a material adverse effect on our
business, results of operations or financial condition.
We Use and Generate Hazardous Substances that Are Subject to Stringent Environmental Regulations
Hazardous substances used or generated in our research and manufacturing facilities are subject to stringent environmental regulation.
We believe that our handling of such substances is in material compliance with applicable local, state and federal environmental,
safety and health regulations at each operating location. We invest substantially in proper protective equipment, process controls and
specialized training to minimize risks to employees, surrounding communities and the environment that could result from the presence
and handling of such hazardous substances. We regularly conduct employee physical examinations and workplace monitoring
regarding such substances. When exposure problems or potential exposure problems have been uncovered, corrective actions have
been implemented and re-occurrence has been minimal or non-existent.
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.
We do not carry environmental impairment insurance. Although we do not know of any material environmental, safety or health
problems in our properties or processes, 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.
23
We May Be Adversely Affected by Climate Change Regulations
In many of the countries in which we operate, government bodies are increasingly enacting legislation and regulations in response to
potential impacts of climate change. These laws and regulations may be mandatory. They have the potential to impact our operations
directly or indirectly as a result of required compliance by our customers or our supply chain. Inconsistency of regulations may also
affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change legislation,
regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in
which we operate.
We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations, added
costs to purchase or lower profits from sales of our products, allowances or credits under a “cap and trade” system, increased
insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position
relative to industry peers, and changes to profit or loss arising from increased or decreased demand for goods produced by us and
indirectly, from changes in costs of goods sold.
Some Systems That Use our Products Are Complex in Design and May Contain Defects that Are Not Detected Until Deployed
Which Could Increase Our Costs and Reduce Our Revenues
Some systems that use our products are inherently complex in design and require ongoing maintenance. Our customers may discover
defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our
products are combined with products from other vendors which may contain defects. Should problems occur, it may be difficult to
identify the source of the problem. If we are unable to correct defects or other problems, we could experience, among other things loss
of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new
customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers.
The occurrence of any one or more of the foregoing factors could have a material adverse effect on our business, results of operations
or financial condition.
Significant Defense Spending Cuts and/or Reductions in Defense Programs Could Adversely Impact Our Business
Specific to the military business within our II-VI Laser Solutions and II-VI Performance Products segments, sales to customers in the
defense industry totaled approximately 11% of our revenues for the fiscal year ended June 30, 2017. These customers generally
contract with a governmental entity, typically a U.S. governmental agency. Future reductions in defense spending could result from
the current or future economic or political environment. For example, the ongoing sequestration of the defense budget could result in
reductions in demand for defense-related products that we produce. Further, changes to existing defense procurement laws and
regulations could adversely affect our results of operations. Most governmental programs are subject to funding approval and can be
modified or terminated with no warning upon the determination of a legislative or administrative body. The loss of or failure to obtain
certain contracts or the loss of a major government customer could have a material adverse effect on our business, results of operations
or financial condition.
Changes in Tax Rates, Tax Liabilities or Tax Accounting Rules Could Affect Future Results
As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. As such, we must
exercise a level of judgment in determining our worldwide tax liabilities. Our future tax rates could be affected by changes in the
composition of earnings in countries with differing tax rates or changes in tax laws. Changes in tax laws or tax rulings may have a
significantly adverse impact on our effective tax rate. For example, proposals for fundamental U.S. international tax reform, if enacted,
could have a significant adverse impact on our effective tax rate. In addition, we are subject to regular examination of our income tax
returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable
outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax
estimates are reasonable, there can be no assurance that any final determination will not be materially different than the treatment
reflected in our historical income tax provision and accruals, which could materially and adversely affect our business, results of
operation or financial condition.
Increases in Commodity Prices May Adversely Affect Our Results of Operations and Financial Condition
We are exposed to a variety of market risks, including the effects of increases in commodity prices. Our businesses purchase, produce
and sell high-purity selenium and other raw materials based upon quoted market prices from minor metal exchanges. The negative
impact from increases in commodity prices may not be recovered through our product sales which could have a material adverse effect
on our net earnings and financial condition.
24
Natural Disasters or Other Global or Regional Catastrophic Events Could Disrupt Our Operations and Adversely Affect Our
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.
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. There can be no assurance that we will be able to retain or
attract the personnel necessary for our success. The loss of the services of our key personnel could have a material adverse effect on
our business, results of operations or financial condition.
We Have Agreements with Government Entities That Are Subject to Significant Compliance Requirements and Changes in
Government Spending
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 procurement integrity, export control, employment
practices, the accuracy of records and the recording of costs. Failure to comply with these requirements might result in suspension of
these contracts and suspension or debarment from government contracting or subcontracting.
Our Stock Price Has Been Highly Volatile in the Past and May Be Extremely Volatile in the Future
The market price for our common stock on The NASDAQ Global Select Market varied between a high of $41.10 and a low of $17.76
in the fiscal year ended June 30, 2017. We expect that this volatility will continue. 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 or equity-linked securities.
Many of these factors are beyond our control. However, these factors could cause the market price of our common stock to decline,
regardless of our actual operating performance. In addition, in recent years, the stock market in general, and The NASDAQ Stock
Market and the securities of technology companies in particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market
fluctuations have in the past, and may in the future, materially and adversely affect our stock price, regardless of our operating results.
This volatility may affect the price at which our shareholders can sell our common stock.
Some Anti-takeover Provisions Contained in Our Articles of Incorporation and By-laws, as Well as Provisions of Pennsylvania
Law, Could Impair a Takeover Attempt, Which Could Also Reduce the Market Price of Our Common Stock
Our articles of incorporation and by-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 our 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).
25
In addition, the Pennsylvania Business Corporation Law (the “BCL”) contains provisions that may have the effect of delaying or
preventing a change in control of us or changes in our management. Many of these provisions are triggered if any person or group
acquires, or discloses intent to acquire, 20% or more of a corporation’s voting power, subject to certain exceptions. These provisions:
•
•
•
•
provide the other shareholders of the corporation with certain rights against the acquiring group or person;
prohibit the corporation from engaging in a broad range of business combinations with the acquiring group or person;
restrict the voting and other rights of the acquiring group or person; and
provide that certain profits realized by the acquiring group or person from the sale of our equity securities belong to and
are recoverable by us.
Regardless of the amount of a person’s holdings, if a shareholder or shareholder group (including affiliated persons) would be a party
to certain proposed transactions with us or would be treated differently from other shareholders of ours in certain proposed
transactions, the BCL requires approval by a majority of votes entitled to be cast by all shareholders other than the interested
shareholder or affiliate group, unless the transaction is approved by independent directors or other criteria are satisfied. Furthermore,
under the BCL, a “short-form” merger of II-VI cannot be implemented without the consent of our board of directors.
In addition, as permitted by Pennsylvania law, an amendment to our articles of incorporation or other corporate action that is approved
by shareholders may provide mandatory special treatment for specified groups of nonconsenting shareholders of the same class. For
example, an amendment to our articles of incorporation or other corporate action may provide that shares of common stock held by
designated shareholders of record must be cashed out at a price determined by the corporation, subject to applicable dissenters’ rights.
Furthermore, the BCL provides that directors may, in discharging their duties, consider, to the extent they deem appropriate, the
effects of any action upon shareholders, employees, suppliers, customers and the communities in which its offices are located.
Directors are not required to consider the interests of shareholders to a greater degree than other constituencies’ interests. The BCL
expressly provides that directors do not violate their fiduciary duties solely by relying on “poison pills” or the anti-takeover provisions
of the BCL. We do not currently have a “poison pill.”
All of these provisions may limit the price that investors may be willing to pay for shares of our common stock.
Because We Do Not Currently Intend to Pay Dividends, Holders of Our Common Stock Will Benefit from an Investment in
Our Common Stock Only If It Appreciates in Value
We have never declared or paid any dividends on our common stock, and do not expect to pay cash dividends in the foreseeable future.
We currently anticipate that we will retain any future earnings to support operations and to finance the development of our business.
As a result, the success of an investment in our common stock will depend entirely upon future appreciation in its value. There is no
guarantee that our common stock will maintain its value or appreciate in value.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
26
Item 2.
PROPERTIES
Information regarding our principal U.S. properties at June 30, 2017 is set forth below:
Location
Saxonburg, PA ................................. Manufacturing, Corporate
Headquarters and Research
and Development
Manufacturing and
Research and Development
Warren, NJ
Primary Use(s)
Primary Business Segment(s)
II-VI Laser Solutions and
II-VI Performance
Products
II-VI Laser Solutions
Approximate
Square
Footage
252,000
151,000
Ownership
Owned
and
Leased
Leased
Newark, DE ...................................... Manufacturing and
Research and Development
Temecula, CA................................... Manufacturing and
Research and Development
Dallas, TX ........................................ Manufacturing and
Research and Development
Monroe, CT ...................................... Manufacturing and
Research and Development
Easton, PA........................................ Manufacturing and
Research and Development
II-VI Performance
Products
II-VI Performance
Products
II-VI Performance
Products
II-VI Performance
Products
II-VI Laser Solutions
Santa Rosa, CA ................................ Manufacturing and
II-VI Photonics
Research and Development
Pine Brook, NJ ................................. Manufacturing and
Research and Development
Tustin, CA ........................................ Manufacturing and
Research and Development
Philadelphia, PA............................... Manufacturing and
Champaign, IL
Research and Development
Manufacturing and
Research and Development
II-VI Performance
Products
II-VI Performance
Products
II-VI Performance
Products
II-VI Laser Solutions
Hillsborough, NJ .............................. Manufacturing and
II-VI Photonics
Research and Development
Woburn, MA .................................... Manufacturing and
II-VI Photonics
Starkville, MS................................... Manufacturing
Research and Development
Newtown, CT ................................... Manufacturing and
Research and Development
Tyngsboro, MA ................................ Research and Development
II-VI Performance
Products
II-VI Performance
Products
II-VI Laser Solutions
90,000
87,000
67,000
48,000
48,000
39,000
36,000
31,000
30,000
27,000
23,000
20,000
19,000
13,000
10,000
Leased
Leased
Owned
and
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
We also maintain some additional small research and development, distribution, and administrative facilities in leased space in the
United States.
27
Information regarding our principal foreign properties at June 30, 2017 is set forth below:
Location
China ................................................
Philippines........................................
Primary Use(s)
Manufacturing, Research and
Development, and
Distribution
Manufacturing
Vietnam ............................................
Manufacturing
Switzerland.......................................
Germany ...........................................
Manufacturing, Research and
Development, and
Distribution
Manufacturing
and Distribution
Singapore.......................................... Manufacturing
Primary Business Segment(s)
II-VI Laser Solutions, II-
VI Photonics and II-VI
Performance Products
II-VI Laser Solutions and
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
Approximate
Square
Footage
1,227,000
Ownership
Leased
314,000
Leased
207,000
134,000
80,000
Leased
Leased
Owned and
Leased
35,000
Leased
We also maintain some additional small distribution facilities in leased space in Belgium, Italy, Japan, South Korea, Taiwan, and the
United Kingdom.
The square footage listed for each of the above properties represents facility square footage, except in the case of the Philippines
location, which includes land.
Item 3.
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.
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 trading prices per share of the Company’s Common Stock for the fiscal periods
indicated, as reported by NASDAQ.
Fiscal 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
High
24.46
32.45
41.10
36.35
19.30
19.46
22.18
23.39
$
$
$
$
$
$
$
$
Low
17.76
23.80
29.10
27.25
15.04
15.69
16.09
17.91
$
$
$
$
$
$
$
$
On August 14, 2017, the last reported sale price for the Company’s Common Stock was $36.60 per share. As of such date, there were
approximately 771 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, 2017, the
Company did not repurchase shares of its Common Stock pursuant to the repurchase program. Since inception of the repurchase
program, the Company has repurchased 1,316,587 shares of its Common Stock for approximately $19.0 million in the aggregate.
The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended June
30, 2017.
Period
April 1, 2017 to April 30, 2017
May 1, 2017 to May 31, 2017
June 1, 2017 to June 30, 2017
Total Number of Average Price Paid
Shares Purchased
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs (a)
Dollar Value of
Shares That May
Yet be Purchased
Under the Plan or
Program
2,698 (1)$
3,873 (2)$
15,069 (3)$
32.50
33.25
34.05
-
-
-
$
$
$
30,906,904
30,906,904
30,906,904
(1)
(2)
(3)
Includes 2,698 shares of our Common Stock transferred to the Company from employees in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted share awards.
Includes 3,873 shares of our Common Stock transferred to the Company from employees in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted share awards.
Includes 15,069 shares of our Common Stock transferred to the Company from employees in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted share awards.
The information incorporated by reference in Item 12 of this Annual Report on Form 10-K from our 2017 Proxy 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, 2012, through June 30, 2017. The Company’s current fiscal year peer group includes Cabot Microelectronics
Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., Silicon Laboratories, Lumentum Holdings Inc., Finisar Corp,
Coherent, Inc. and Corning Inc. The Company’s prior fiscal year peer group reflected below consisted of Cabot Microelectronics
Corporation, Franklin Electric Co., Inc., MKS Instruments, Inc., and Silicon Laboratories. The prior year peer group does not include
Rofin-Sinar Technologies, Inc., which previously had been included in the Company’s peer group, as this company was acquired
during fiscal year 2017 and ceased to be publicly traded.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among II-VI Incorporated, the NASDAQ Composite Index,
Prior Peer Group and Current Peer Group
$300
$250
$200
$150
$100
$50
$0
6/12
6/13
6/14
6/15
6/16
6/17
II-VI Incorporated
NASDAQ Composite
Prior Peer Group
Current Peer Group
*$100 invested on 6/30/12 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 the Company’s audited Consolidated
Financial Statements. All periods presented have been adjusted to present this product line on a discontinued operations basis. The
data should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included elsewhere in this
Annual Report on Form 10-K.
Year Ended June 30,
($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
2017
2016
2015
2014
2013
$ 972,046 $ 827,216 $ 741,961 $ 683,261 $ 551,075
58,720
(6,789)
65,486
-
65,975
-
38,316
133
95,274
-
-
95,274
-
65,486
-
65,975
-
38,449
1,118
50,813
1.52
-
1.52
1.07
-
1.07
1.08
-
1.08
0.62
-
0.62
0.92
(0.11)
0.81
1.48
-
1.48
64,507
1.04
-
1.04
62,909
1.05
-
1.05
62,586
0.60
-
0.60
63,686
0.90
(0.11)
0.80
63,884
2017
2016
2015
2014
2013
$ 517,344 $ 411,721 $ 373,812 $ 370,666 $ 366,710
863,317
113,551
113,551
482,878
636,108
1,057,273
155,066
175,066
587,302
729,081
1,070,753
220,787
240,787
521,327
675,043
1,211,981
215,307
235,307
652,788
782,338
1,477,297
322,022
342,022
748,062
900,563
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
optoelectronic components and devices for precision use in industrial materials processing, optical communications, consumer
electronics, semiconductor equipment, life sciences and automotive 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, consumer, 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 related 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.
Revenue Recognition
Revenues for product shipments are realizable when we have persuasive evidence of a sales arrangement, the product has been
shipped or delivered, the sales price is fixed or determinable and collectability is reasonably assured. Title and risk of loss passes from
the Company to its customer at the time of shipment in most cases, with the exception of certain customers for whom customer’s title
does not pass and revenue is not recognized until the customer has received the product at its physical location.
The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical
locations. Further for the periods covered herein, we did not have post shipment obligations such as training or installation, customer
acceptance provisions, credits and discounts, rebates and price protection or other similar privileges. Our distributors and agents are
not granted price protection. Our distributors and agents, who comprise less than 10% of consolidated revenue, have no additional
product return rights beyond the right to return defective products covered by our warranty policy. We believe our revenue recognition
practices are consistent with Staff Accounting Bulletin 104 and that we have adequately considered the requirements of Accounting
Standards Codification 605 Revenue Recognition. Revenues generated from transactions other than product shipments are contract-
related and have historically accounted for less than 1% of the Company’s consolidated revenues.
Allowance for Doubtful Accounts
The Company establishes an allowance for doubtful accounts based on historical experience and believes the collection of revenues,
net of this reserve, is reasonably assured. The allowance for doubtful accounts is an estimate for potential non-collection of accounts
receivable based on historical experience. The Company did not experience a non-collection of accounts receivable materially
affecting its financial condition or results of operations as of and for each of the fiscal years ended June 30, 2017, 2016 and 2015. If
the financial condition of the Company’s customers were to deteriorate, causing an impairment of their ability to make payments,
additional provisions for bad debts could be required in future periods. The Company’s allowance for doubtful accounts reserve
estimates have historically been proven to be materially correct based upon actual charges incurred.
Warranty Reserve
The Company records a warranty reserve as a charge against earnings based on a historical percentage of revenues utilizing actual
returns over a period that approximates historical warranty experience. If actual returns in the future are not consistent with the
historical data used to calculate these estimates, additional warranty reserves could be required. The Company’s warranty reserve
estimates have historically been proven to be materially correct based upon actual charges incurred.
32
Inventory Reserves
The Company generally records an inventory reserve as a charge against earnings for all products on hand for more than 12 to 24
months, depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative
customers. An additional reserve may be recorded for products on hand that are in excess of product sold to customers over the same
periods noted above. If actual market conditions are less favorable than projected, additional inventory reserves may be required. The
Company’s inventory reserve estimates have historically been proven to be materially correct based upon actual write-offs incurred.
Business Acquisitions
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 and Indefinite-Lived Intangibles
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 annual
goodwill impairment analysis considers the financial projections of the reporting unit based on our most recently completed long-term
strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting
unit. Changes in our internal structuring, financial performance, judgments and projections could result in an impairment of goodwill
or indefinite-lived intangible assets. As of June 30, 2017, no reporting units are at risk for impairment as the fair value of the reporting
units substantially exceed the carrying value.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise,
the Company will forego the two-step process and does not need to perform any further testing.
As a result of the purchase price allocations from our acquisitions, and due to our decentralized structure, our goodwill is included in
multiple reporting units which are the same as the Company’s operating segments. 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 and indefinite-lived intangible
assets impairment tests, the Company did not record any impairments of goodwill or indefinite-lived intangible assets for the fiscal
year ended June 30, 2017.
Bonus and Profit Sharing
The Company records certain bonus and profit sharing estimates as a charge against earnings. These estimates are adjusted to actual
based on final results of operations achieved during the fiscal year. Certain partial bonus amounts are paid quarterly based on interim
company performance, and the remainder is paid after the fiscal year end. Other bonuses are paid annually.
Income Taxes
The Company prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on
these judgments and interpretations. In the normal course of business, the Company’s tax returns are subject to examination by various
taxing authorities, which may result in future tax, interest and penalty assessments by these authorities. Inherent uncertainties exist in
estimates of many tax positions due to changes in tax law resulting from legislation, regulation and/or as concluded through the
various jurisdictions’ tax court systems. The Company recognizes the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
33
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 and acquired U.S. carryforwards. The Company adopted an accounting
policy to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance
for acquired deferred tax assets. In evaluating whether the Company would more likely than not recover these deferred tax assets, it
has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carry-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.
Share-Based Compensation
The Company recognizes share-based compensation expense over the requisite service period of the individual grantees, which
generally equals the vesting period. The Company utilizes the Black-Scholes valuation model for estimating the fair value of share-
based equity 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 2017 Compared to Fiscal Year 2016
The Company aligns 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 reporting segments in this Annual
Report on Form 10-K.
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30,
2017 and June 30, 2016 ($ 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
Net earnings
Year Ended
June 30, 2017
$
1,072.2
$
Year Ended
June 30, 2016
875.3
% of
Revenues
% of
Revenues
$
$
972.0
583.7
388.3
96.8
176.0
(3.3)
118.8
23.5
95.3
100.0% $
60.1
39.9
10.0
18.1
(0.3)
12.2
2.4
9.8% $
827.2
514.4
312.8
60.4
160.6
1.9
89.9
24.5
65.5
100.0%
62.2
37.8
7.3
19.4
0.2
10.9
3.0
7.9%
Diluted earnings per share
$
1.48
$
1.04
34
Executive Summary
Net earnings for fiscal year 2017 were $95.3 million ($1.48 per-share diluted), compared to $65.5 million ($1.04 per-share diluted) for
the same period last fiscal year. The increase in net earnings for the fiscal year ended June 30, 2017 compared to the same period last
year was primarily the result of increased revenues, favorable product mix at the II-VI Photonics segment and improved operational
performance from all three segments. In particular, the Company has seen continued increased demand from the optical
communications customer base as a result of continuation of the China broadband initiative, datacenter and U.S. metro upgrade cycles
(including cable television). The Company’s II-VI Laser Solutions segment realized increased demand for its carbon dioxide (“CO2”),
one-micron laser and diamond optics product lines. Net earnings were also favorably impacted by the earnout and technology transfer
income received as part of the sale of the RF business of ANADIGICS last fiscal year recorded in Other expense (income), net. The
Company recorded $7.0 million or $0.09 per share diluted of other income related to these transactions. In addition, the Company
benefitted from lower income tax expenses as a result of reversing certain U.S. valuation allowances in conjunction with the
acquisition of IPI. Partially offsetting the increase in net earnings were increased internal research and development expenses incurred
in the II-VI Laser Solutions segment for the Company’s investment in the high-volume VCSELs platform.
Consolidated
Bookings. Bookings are defined as customer orders received that are expected to be converted to revenues over the next 12 months.
For long-term customer orders, the Company does not include in bookings the portion of the customer order that is beyond 12 months,
due to the inherent uncertainty of such an order that far out in the future. Bookings for the year ended June 30, 2017 increased 22% to
$1.1 billion, compared to $875.3 million for the same period last fiscal year. The Company’s II-VI Photonics segment realized
increased bookings of $81.3 million, or 22%, over the same period last fiscal year due to increased orders from the ongoing Chinese
broadband initiative, U.S. Metro, datacenter communications, and the continued investment in undersea fiber optic networks. The
Company’s II-VI Laser Solutions segment realized increased bookings of $60.8 million, or 20%, over the same period last fiscal year.
The increase was driven by higher demand for high and low power laser optics, fiber laser and direct diode laser components and
optics and components supporting semiconductor photolithography. Additionally, the Company’s II-VI Performance Products
segment realized increased bookings of $54.8 million, or 28% driven by increased demand for silicon carbide (“SiC”) substrates
supporting radio frequency (“RF”) development and also power device products in automotive and industrial markets.
Revenues. Revenues for the year ended June 30, 2017 increased 18% to $972.0 million, compared to $827.2 million for the prior
fiscal year. The Company has seen continued increased demand from the optical communications customer base as a result of
continuation of the China broadband initiative, datacenter and U.S. metro upgrade cycles (including cable television). In addition, the
Company’s II-VI Laser Solutions segment saw increased demand for its products addressing CO2, one-micron laser and diamond optic
products.
Gross margin. Gross margin for the year ended June 30, 2017 was $388.3 million, or 39.9%, of total revenues, compared to $312.8
million, or 37.8%, of total revenues for the same period last fiscal year. The improvement in gross margin was primarily driven by
incremental margins realized on the Company’s higher revenue levels which increased approximately $145.0 million from the prior
year as well as favorable product mix primarily in the II-VI Photonics segment.
Internal research and development. Company-funded internal research and development expenses for the fiscal year ended June 30,
2017 were $96.8 million, or 10.0% of revenues, compared to $60.4 million, or 7.3% of revenues, last fiscal year. The increase in
internal research and development expense for fiscal year 2017 is the result of the Company’s continued investments in the
development of the technology required to produce new optoelectronic devices in large volume for future applications as well as new
product introductions across the Company’s segments. The Company anticipates the internal research and development expenses as a
percentage of revenues to approximate the current run rate as the Company continues to invest in its growth strategies across its
segments.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2017 were
$176.0 million, or 18.1% of revenues, compared to $160.6 million, or 19.4% of revenues, last fiscal year. The increase in SG&A in
absolute dollars is the result of a higher revenue base requiring more level of SG&A support. The Company experienced favorable
leverage as a result of capitalizing on synergies created from the Company’s recent acquisitions over the past several years.
Interest and other, net. Interest and other, net for the year ended June 30, 2017 was income of $3.3 million compared to expense of
$1.9 million last fiscal year. Included in interest and other, net were interest expense on borrowings, interest income on excess cash
reserves, foreign currency gains and losses and contingent earnout and technology transfer income from the sale of the ANADIGICS
RF business that occurred in June 2016. In particular, for the fiscal year ended June 30, 2017, other income consisted primarily of
foreign currency gains of $1.3 million, income from the residual agreements on the sale of the RF business noted above of $7.0
million, and interest income of $0.9 million on the Company’s excess cash reserves offset by interest expense of $6.8 million on
outstanding borrowings. The prior year’s expense of $1.9 million included $3.1 million of interest expense on the Company’s
35
outstanding borrowings offset by $1.2 million of interest income on the Company’s excess cash reserves. The increase in interest
expense in the current fiscal year is the result of higher levels of outstanding borrowings during the current fiscal year.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2017 was 19.8%, compared to an effective tax rate of
27.3% last fiscal year. The variation between the Company’s effective tax rate and the U.S. statutory rate of 35% was primarily due to
the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The lower year-to-date effective tax rate
was primarily driven by the reversal of certain valuation allowances triggered by the acquisition of IPI which generated deferred tax
liabilities which offset the previously reserved deferred tax asset.
Segment Reporting
Bookings, revenues and operating income for each of the Company’s reportable segments are discussed below. Operating income
differs from income from operations in that operating income excludes certain operational expenses included in other expense (income)
– net as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment
performance over which management has direct control and is used by management in its evaluation of segment performance. See
“Note 11. Segment and Geographic Reporting,” to the Consolidated Financial Statements included in this Annual Report on Form 10-
K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which
is incorporated herein by reference.
II-VI Laser Solutions ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
2017
2016
$
$
$
366.8 $
339.3 $
30.9 $
306.0
303.0
36.2
%
Increase
(Decrease)
20%
12%
(15%)
The Company’s II-VI Laser Solutions segment includes the combined operations of II-VI Infrared Optics, II-VI HIGHYAG, II-VI
Laser Enterprise, II-VI Laser Systems Group, II-VI OED, and II-VI EpiWorks. The Company acquired II-VI EpiWorks on February 1,
2016 and II-VI OptoElectronic Devices Division, on March 15, 2016.
Bookings for the fiscal year ended June 30, 2017 for II-VI Laser Solutions increased 20% to $366.8 million, compared to $306.0
million last fiscal year. Bookings included $27.2 million for fiscal year 2017 and $14.3 million for fiscal year 2016, respectively,
attributed to the acquisitions of II-VI EpiWorks and II-VI OED. Exclusive of acquisitions, the increase in bookings for the current
fiscal year was driven by higher demand for CO2 and fiber laser and direct diode laser components and photolithography related
products, including diamond product optics.
Revenues for the fiscal year ended June 30, 2017 for II-VI Laser Solutions increased 12% to $339.3 million, compared to revenues of
$303.0 million last fiscal year. Revenues included $24.0 million for fiscal 2017 and $13.9 million for fiscal year 2016, respectively,
attributed to the recent acquisitions. Exclusive of acquisitions, the increase in revenues for the fiscal year ended June 30, 2017 was the
result of higher demand for high and low power laser optics, one-micron laser applications and semiconductor photolithography tools
and precision optics in laser applications up to 1 kilowatt for marking and engraving.
Operating income for the fiscal year ended June 30, 2017 for II-VI Laser Solutions decreased 15% to $30.9 million, compared to
$36.2 million last fiscal year. Operating income was impacted by the segment’s ongoing internal research and development
investments for its new optoelectronic laser platform. During the current year, this expense increased approximately $30.2 million
over the prior year.
II-VI Photonics ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
Increase
2017
2016
453.5 $
418.5 $
63.0 $
372.2
325.9
37.8
22%
28%
67%
$
$
$
36
The Company’s II-VI Photonics segment includes the combined operations of II-VI Photop and II-VI Optical Communications.
Bookings for the year ended June 30, 2017 for II-VI Photonics increased 22% to $453.5 million, compared to $372.2 million for the
prior fiscal year. The increase in bookings during the current fiscal year was the result of increased orders from the ongoing Chinese
broadband initiative, U.S. Metro, datacenter communications, and the continued investment in undersea fiber optic networks. The
broadband China initiative continued to increase demand for the segment’s transport and amplification component products,
particularly 980nm pumps, optical channel monitors and integrated passive components used in optical communications. In addition,
the segment saw increased demand for its infrared optics and industrial filters.
Revenues for the year ended June 30, 2017 for II-VI Photonics increased 28% to $418.5 million, compared to $325.9 million for last
fiscal year. The Company continued to realize increased revenues from the broadband China initiative as China continues to expand
its geographical broadband networks. In addition, increased market share gains in the datacenter communications market and undersea
fiber optic networks and new product introductions fueled the higher revenues during the fiscal year ended June 30, 2017.
Operating income for the year ended June 30, 2017 for II-VI Photonics increased 67% to $63.0 million, compared to an operating
income of $37.8 million last fiscal year. The increase in operating income was primarily due to incremental margin realized on the
higher revenue volume as well as higher margin product mix, including terrestrial and submarine 980nm pumps and amplifiers, and
new product introductions which have higher margin profiles.
II-VI Performance Products ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
Increase
2017
2016
$
$
$
251.9 $
214.2 $
21.6 $
197.1
198.3
17.8
28%
8%
21%
The Company’s II-VI Performance Products segment includes the business units of II-VI Marlow, II-VI M Cubed, II-VI Advanced
Materials, II-VI Optical Systems and II-VI Performance Metals.
Bookings for the year ended June 30, 2017 for II-VI Performance Products increased 28% to $251.9 million, compared to $197.1
million for last fiscal year. The increase in bookings for the year ended June 30, 2017 were driven by increasing demand for SiC
substrates for RF and power applications supporting growth in the 4G base station market, and supporting development of power
device products in automotive and industrial markets as well as increased demand for EUV lithography wafer handling components
for the segment’s reaction bonded SiC material.
Revenues for the year ended June 30, 2017 for II-VI Performance Products increased 8% to $214.2 million, compared to $198.3
million for last fiscal year. The increase in revenues for the year ended June 30, 2017 was driven by continued growth in the 4G base
station market which is expanding geographically. Revenue growth was also driven by increasing demand for 150mm power device
products as the market enters the manufacturing phase in the transition from 100mm to 150mm SiC substrates. In addition, the
segment’s semiconductor product offerings experienced increased demands as EUV lithography begins to ramp as part of its
anticipated adoption.
Operating income for the year ended June 30, 2017 for II-VI Performance Products increased 21% to $21.6 million, compared to
$17.8 million for last fiscal year. Incremental margins on higher segment revenues led by SiC substrate revenues contributed to the
increased operating income.
37
Fiscal Year 2016 Compared to Fiscal Year 2015
The following table sets forth bookings and select items from our Consolidated Statements of Earnings for the years ended June 30,
2016 and 2015. ($ 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
Net earnings
Year Ended
June 30, 2016
875.3
Year Ended
June 30, 2015
761.7
$
% of
Revenues
% of
Revenues
827.2
514.4
312.8
60.4
160.6
1.9
89.9
24.5
65.5
100.0% $
62.2
37.8
7.3
19.4
0.2
10.9
3.0
7.9% $
742.0
470.4
271.5
51.3
143.5
(2.3)
79.1
13.1
66.0
100.0%
63.4
36.6
6.9
19.3
(0.3)
10.7
1.8
8.9%
$
$
$
Diluted earnings per shares
$
1.04
$
1.05
Consolidated
Bookings. Bookings for the year ended June 30, 2016 increased 15% to $875.3 million, compared to $761.7 million for the 2015
fiscal year. All of the Company’s operating segments experienced stronger booking volumes in fiscal year ended June 30, 2016
compared to fiscal year ended June 30, 2015. The increased bookings were primarily lead by II-VI Photonics which realized increased
bookings of $89.3 million or 32% over fiscal year ended June 30, 2015. This segment experienced strong orders from the China
broadband buildout program as well as increased demand for 100G metro deployments in the United States and demand for products
that served the datacenter expansion.
Revenues. Revenues for the year ended June 30, 2016 increased 11% to $827.2 million, compared to $742.0 million for the fiscal year
ended June 30, 2015. The increase in revenues during fiscal year 2016 as compared to fiscal year 2015 was driven by optical and data
communication markets which experienced a cycle of investment and expansion. The Company’s II-VI Photonics segment capitalized
on these markets dynamics and realized increased revenues of $65.1 million for fiscal year 2016.
Gross margin. Gross margin as a percentage of revenues for the year ended June 30, 2016 was 37.8%, compared to 36.6% for the
fiscal year ended June 30, 2015. Improvement in gross margin for fiscal year 2016 was primarily driven by incremental margins
realized on the Company’s higher revenue levels as well as product mix at II-VI Photonics towards higher margin products relating to
980 nm pumps and undersea network deployments. The inclusion of the fiscal year 2016 acquisitions did not have a material impact to
the year’s gross margin.
Internal research and development. Company-funded internal research and development expenses for the year ended June 30, 2016
were $60.4 million, or 7.3% of revenues, compared to $51.3 million, or 6.9% of revenues, for the fiscal year ended June 30, 2015. The
increase in internal research and development expense is the result of the Company’s continued investments in the development of the
technology required to fabricate VCSELs in large volume for future applications as well as new product introductions across the
Company’s business units.
Selling, general and administrative. SG&A expenses for the fiscal year ended June 30, 2016 were $160.6 million, or 19.4% of
revenues, compared to $143.5 million, or 19.3% of revenues, for the fiscal year ended June 30, 2015. The increase in SG&A expense
in absolute dollars was primarily due to the fiscal year 2016 acquisitions’ transaction expenses and severance totaling approximately
$11.3 million. The remaining increase in relative dollars was to support the higher revenue base in fiscal year 2016.
Interest and other, net. Interest and other, net for the year ended June 30, 2016 was expense of $1.9 million compared to income of
$2.3 million for the prior fiscal year. Included in interest and other, net for the year ended June 30, 2016 were earnings on the
Company’s equity interest in Guangdong Fuxin Electronic Technology, interest expense on borrowings, interest income on excess
cash reserves, and unrealized gains and losses on the Company’s deferred compensation plan and foreign currency gains and losses. In,
the fiscal year ended June 30, 2016 expense of $1.9 million included $3.1 million of interest expense on the Company’s outstanding
38
borrowings, offset by $1.2 million of interest income on the Company’s excess cash reserves. In the fiscal year ended June 30, 2015,
income of $2.3 million primarily included a one-time settlement gain of $7.7 million related to certain payment obligations from prior
year acquisitions offset by foreign currency losses of $2.2 million and $2.0 million impairment charge on certain tradenames in the II-
VI Photonics segment.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2016 was 27.3%, compared to an effective tax rate of
16.6% in fiscal year 2015. 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
higher effective tax rate during the fiscal year ended June 30, 2016 is due to an $8.5 million valuation allowance against certain U.S.
based deferred tax assets.
II-VI Laser Solutions ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
2016
2015
$
$
$
306.0 $
303.0 $
36.2 $
284.8
287.9
55.0
%
Increase
(Decrease)
7%
5%
(34%)
Bookings for the year ended June 30, 2016 for II-VI Laser Solutions increased 7% to $306.0 million, compared to $284.8 million for
fiscal year June 30, 2015. Included in the bookings amounts was $14.3 million of bookings attributed to the fiscal year 2016
acquisitions. Exclusive of this amount, bookings increased approximately $6.9 million driven by demand for one-micron components
for the industrial materials processing market as well higher aftermarket demand for the segment’s CO2 laser optics.
Revenues for the year ended June 30, 2016 for II-VI Laser Solutions increased 5% to $303.0 million, compared to $287.9 million for
fiscal year ended June 30, 2015. Included in the revenue amount was $13.9 million of revenue attributed to the fiscal year 2016
acquisitions. Exclusive of this amount, revenues were consistent with fiscal year 2015.
Operating income for the year ended June 30, 2016 for II-VI Laser Solutions decreased 34% to $36.2 million, compared to $55.0
million for fiscal year June 30, 2015. The decrease in operating income was primarily due to the inclusion of the operating results of
the fiscal year 2016 acquisitions. Operating income was also negatively impacted by acquisition related transaction and severance
expenses of $11.3 million.
II-VI Photonics ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
Increase
2016
2015
$
$
$
372.2 $
325.9 $
37.8 $
282.9
260.8
7.2
32%
25%
425%
Bookings for the year ended June 30, 2016 for II-VI Photonics increased 32% to $372.2 million, compared to $282.9 million for the
fiscal year ended June 30, 2015. The increase in bookings was the result of market demand from the China broadband build-out, 100G
metro deployments in the United States and undersea 980 nm pumps and high performance optical amplifiers.
Revenues for the year ended June 30, 2016 for II-VI Photonics increased 25% to $325.9 million, compared to $260.8 million for the
fiscal year ended June 30, 2015. The increase in revenues was mainly attributable to increased customer demand for optical
components and modules for the new deployment of CATV optical networks, the continued strength of the China broadband program
by the government to extend the fiber to the home deployment, 4G wireless deployment, and accelerated 5G wireless development.
Operating income for the year ended June 30, 2016 for II-VI Photonics increased 425% to $37.8 million, compared to an operating
income of $7.2 million for the fiscal year ended June 30, 2015. The increase in operating income was primarily due to incremental
margins realized on the higher revenue levels as well as product mix to higher margin products including 980 nm pumps and optical
amplifiers.
39
II-VI Performance Products ($ in millions)
Bookings
Revenues
Operating income
Year Ended
June 30,
%
Increase
2016
2015
$
$
$
197.1 $
198.3 $
17.8 $
194.0
193.3
14.6
2%
3%
22%
Bookings for the year ended June 30, 2016 for II-VI Performance Products increased 2% to $197.1 million, compared to $194.0
million for fiscal year June 30, 2015. The moderate increase in bookings was driven by increased demand of silicon carbide substrates
used in RF applications.
Revenues for the year ended June 30, 2016 for II-VI Performance Products increased 3% to $198.3 million, compared to $193.3
million for fiscal year June 30, 2015. The increase in revenues was due to increased shipments of military and personal comfort
related products.
Operating income for the year ended June 30, 2016 for II-VI Performance Products increased 22% to $17.8 million, compared to
$14.6 million for fiscal year June 30, 2015. The increase in operating income was a combination of higher revenue levels as well as a
shift in product mix to higher margin products primarily serving the segment’s military markets.
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 and businesses. 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 payments in satisfaction of employees’ minimum tax 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,
Net cash provided by operating activities
Additions to property, plant & equipment
Net proceeds (payments) on long-term borrowings
Purchases of businesses, net of cash acquired
Proceeds from exercises of stock options
Payments in satisfaction of employees' minimum tax
obligations
Payment on earnout consideration
Purchases of treasury stock
Proceeds from the sale of business
Payments on holdback arrangements
Other financing activities
Effect of exchange rate changes on cash and cash
equivalents and other
2017
2016
2015
$
118.6 $
(138.5)
104.0
(40.0)
15.1
123.0 $
(58.2)
59.5
(122.2)
9.7
(4.1)
(2.0)
-
-
-
-
(2.0)
-
(6.3)
45.0
-
0.6
129.4
(52.3)
(65.5)
-
5.2
(1.1)
-
(12.7)
-
(2.4)
0.4
0.3
(4.3)
(2.1)
Net cash provided by operating activities:
Net cash provided by operating activities was $118.6 million and $123.0 million for the fiscal years ended June 30, 2017 and 2016,
respectively. The decrease in cash provided by operating activities during the current fiscal year was due to increased working capital
requirements to support higher revenue growth mainly relating to increased inventory build to address product demand as well as
higher levels of accounts receivable from the revenue growth.
Net cash provided by operating activities was $123.0 million and $129.4 million for the fiscal years ended June 30, 2016 and 2015,
respectively. The decrease in cash flows from operating activities in fiscal year 2016 compared to the fiscal year 2015 was mostly due
to higher working capital requirements to accommodate the Company’s increased business activities.
40
Net cash (used in) investing activities:
Net cash used in investing activities was $177.2 million and $135.2 million for the fiscal years ended June 30, 2017 and 2016,
respectively. The increase in cash used in investing activities was the result of increased levels of capital expenditures of $138.5
million in fiscal year 2017 compared to $58.2 million in fiscal year 2016 was primarily driven by additional capital expenditures to
increase the Company’s capability to produce new optoelectronic devices as it accelerates its new technology investment platform.
Additionally, during fiscal year 2017, the Company purchased Integrated Photonics Inc., located in Hillsborough, New Jersey, for
$39.4 million net of cash acquired and certain assets of DirectPhotonics Industries GmbH, located in Berlin, Germany, for $0.6
million.
Net cash used in investing activities was $135.2 million and $52.2 million for the fiscal years ended June 30, 2016 and 2015,
respectively. Net cash used in investing activities during the year ended June 30, 2016 consisted of $122.2 million paid for purchases
of businesses, net of cash acquired, capital expenditures of $58.2 million offset by cash received for the sale of the RF business in the
amount of $45.0 million. Net cash used in investing activities for fiscal year 2015 consisted entirely of capital expenditures.
Net cash provided by (used in) financing activities:
Net cash provided by financing activities was $111.6 million for the year ended June 30, 2017 compared to net cash provided by
financing activities of $61.5 million for the year ended June 30, 2016. During fiscal year 2017, the Company borrowed $129.0 million
to finance its current year acquisitions and investments in capital expenditures for its new VCSEL investment platform and other
growth platforms. The Company also received $15.1 million of proceeds from stock option exercises. Offsetting the increase in cash
were payments made on outstanding borrowings of $25.0 million, $4.1 million of minimum tax withholding obligations on the vesting
of employees’ restricted and performance shares, $2.0 million of payments on contingent earnout arrangements and $1.4 million of
debt issuance costs associated with the Amended Credit Facility (as defined below) entered into on July 28, 2016.
Company Credit Facilities
On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit
Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 million, as well as a $100 million term
loan. The term loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July
and October, with the first payment having commenced on October 1, 2016, as follows: (i) twenty consecutive quarterly installments
of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 2021. Amounts
borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but
is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiary of the Company. The
Company has the option to request an increase to the size of the revolving credit facility in an aggregate additional amount not to
exceed $100 million. The Amended Credit Facility has a five-year term through July 28, 2021 and has an interest rate of either a Base
Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility. If
the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.25% and if the Euro-Rate Option is selected for
a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the Company’s ratio of consolidated
indebtedness to consolidated EBITDA. Additionally, the Amended Credit Facility is subject to certain covenants, including those
relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2017, the Company was in compliance with all
covenants under its Amended Credit Facility.
In conjunction with the Company’s Amended Credit Facility, the Company incurred approximately $1.4 million of debt issuance costs
which are being amortized over the term of the agreement.
The Company’s yen denominated line of credit is a 500 million Yen ($4.5 million) facility. The Yen line of credit matures in August
2020. The interest rate equal to the Euro-Rate, as defined in the loan agreement, plus 1.00% to 2.25%. At June 30, 2017 and 2016, 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, 2017, the Company had $2.7 million
outstanding and was in compliance with all covenants under its Yen facility.
The Company had aggregate availability of $73.5 million and $37.7 million under its lines of credit as of June 30, 2017 and 2016,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30,
2017 and 2016, total outstanding letters of credit supported by the credit facilities were $1.3 million and $1.2 million respectively.
The weighted average interest rate of total borrowings was 2.2% and 1.6% for the years ended June 30, 2017 and 2016, respectively.
The weighted-average of total borrowings for the fiscal years ended June 30, 2017 and 2016 was $272.1 million and $193.7 million,
respectively.
41
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. Since inception of
the repurchase program the Company has repurchased 1,316,587 shares of its Common Stock for approximately $19.0 million in the
aggregate.
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,
2017
June 30,
2016
$
271.9 $
73.5
343.5
218.4
37.7
235.9
The Company believes cash flow from operations, existing cash reserves and additional available borrowing capacity from its
Amended Credit Facility will be sufficient to fund its working capital needs, capital expenditures and internal and external growth at
least through fiscal year 2018. The Company’s cash and cash equivalent balances are generated and held in numerous locations
throughout the world, including amounts held outside the United States As of June 30, 2017, the Company held approximately $245
million of cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to
the United States, but, under current law, would potentially be subject to United States federal income taxes, less applicable foreign
tax credits. The Company has not recorded deferred income taxes related to the majority of its undistributed earnings outside of the
United States, as the majority of the earnings of the Company’s foreign subsidiaries are indefinitely reinvested.
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 obligation
Operating lease obligations(2)
Purchase obligations(3)(4)
Other long-term liabilities reflected on the balance sheet under
GAAP
Total
Payments Due By Period
Less
Than 1
1-3
3-5
More
Than 5
Total
Year
Years
Years
Years
$ 343,513 $ 20,000 $ 43,834 $ 279,679 $
12,854
2,664
11,400
-
47,381
24,489
66,600
29,227
18,375
2,349
22,900
3,309
10,058
1,069
14,400
25,918
-
$ 511,210 $ 71,445 $ 90,767 $ 306,597 $
-
-
-
-
6,094
18,407
17,900
-
-
42,401
(1)
(2)
Interest payments represent variable rate interest obligations based on the interest rate in place at June 30, 2017 relating to the
Amended Credit Facility and interest relating to the Company’s capital lease obligation.
Includes an obligation for the use of two parcels of land related to II-VI Performance Metals. The lease obligations extend
through years 2039 and 2061, respectively.
(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.
Includes cash earnout opportunities based upon II-VI EpiWorks and IPI for the achievement of certain agreed upon financial
and operational targets.
(4)
42
Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $2.6
million in 2018. Estimated funding obligations are determined by asset performance, workforce and retiree demographics, tax and
employment laws and other actuarial assumptions which may change the annual funding obligations. The funded status of our defined
benefit plans is disclosed in Note 14 to the Company’s Consolidated Financial Statements.
The gross unrecognized income tax benefits at June 30, 2017, which are excluded from the above table, were $7.6 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 derivative financial instruments as part of its overall risk
management strategy, primarily focused on its exposure to the Japanese Yen, Chinese Renminbi and the Euro. The Company also has
transactions denominated in Euros, British Pounds Sterling, Chinese Renminbi and Swiss Francs. The Company commenced certain
techniques to limit its exposure to the Renminbi and Euro during fiscal year 2017.
Foreign Exchange Risks
In the normal course of business, the Company enters into foreign currency forward exchange contracts with its financial institutions.
The purpose of these contracts is to hedge ordinary business risks regarding foreign currencies on product sales. Foreign currency
exchange contracts are used to limit transactional exposure to changes in currency rates.
Japanese Yen
The Company enters into foreign currency forward contracts that permit it to sell specified amounts of Japanese Yen expected to be
received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the
same foreign currencies in which export sales are denominated. These contracts provide the Company with an economic hedge in
which settlement will occur in future periods, thereby limiting the Company’s exposure. These contracts had a total notional amount
of $12.7 million and $9.2 million at June 30, 2017 and 2016, respectively.
A 10% change in the yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of approximately
$6.9 million to an increase of approximately $8.5 million for the year ended June 30, 2017.
Chinese Renminbi
During June 2017, the Company entered into a $50.0 million month-to-month forward contract that matured on June 30, 2017, to limit
exposure to the Chinese Renminbi. Upon expiration of this contract, the Company recorded $1.1 million gain in the Consolidated
Statement of Earnings.
Euro
During June 2017, the Company entered into a $25.0 million month-to-month forward contract that matured on June 30, 2017, to limit
exposure to the Euro. Upon expiration of this contract, the Company recorded an immaterial gain in the Consolidated Statement of
Earnings.
The Company has short-term intercompany notes that are denominated in U.S. dollars with certain European subsidiaries. A 10%
change in the euro to dollar exchange rate would have changed net earnings in the range from a decrease of $1.7 million to an increase
of $2.0 million for the year ended June 30, 2017.
The Company monitors its positions and the credit ratings of the parties to these contracts. While the Company may be exposed to
potential losses due to risk in the event of non-performance by the counterparties to these financial instruments, it does not currently
anticipate such losses.
Assets and liabilities of foreign operations are translated into U.S. dollars using the period-end exchange rate, while income and
expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated
other comprehensive income within shareholders’ equity.
43
Interest Rate Risks
As of June 30, 2017, the Company’s total borrowings of $343.5 million were from a line of credit borrowing of $252.0 million
denominated in U.S. dollars, a term loan denominated in U.S. dollars of $85.0 million, a line of credit borrowing of $2.7 million
denominated in Japanese yen and a non-interest bearing note payable assumed in the acquisition of IPI of $3.8 million. 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 $1.3 million, or $0.02 per-share diluted, for the fiscal year ended June 30, 2017.
Discount Rate Risks
As of June 30, 2017, a 10% change in the Company’s discount rate used to determine the pension benefit obligation of the Switzerland
Defined Benefit Plan would have had an immaterial impact on the Consolidated Financial Statements.
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,
2017. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included reviewing the
documentation of its controls, evaluating the design effectiveness of controls and testing their operating effectiveness. Management
excluded from the scope of its assessment of internal control over financial reporting the operations and related assets of Integrated
Photonics, Inc. which was acquired on June 19, 2017. The recent acquisition excluded from management’s assessment of internal
controls over financial reporting represented approximately $59.8 million and $45.3 million of total assets and net assets, respectively,
as of June 30, 2017 and approximately $1.3 million and $0.1 million of total revenues and net income, respectively, for the fiscal year
then ended. Based on the evaluation, management concluded that as of June 30, 2017, the Company’s internal controls over financial
reporting were effective.
Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal control
over financial reporting as of June 30, 2017. 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, 2017, 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.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of
and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Integrated
Photonics, Inc., which is included in the 2017 consolidated financial statements of II-VI Incorporated and Subsidiaries and constituted
$59.8 million and $45.3 million of total and net assets, respectively, as of June 30, 2017 and approximately $1.3 million and $0.1
million of total revenues and net income, respectively, for the fiscal year then ended. Our audit of internal control over financial
reporting of II-VI Incorporated and Subsidiaries also did not include an evaluation of the internal control over financial reporting of
Integrated Photonics
In our opinion, II-VI Incorporated and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of II-VI Incorporated and Subsidiaries as of June 30, 2017 and 2016, and the related consolidated
statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended
June 30, 2017 of II-VI Incorporated and Subsidiaries and our report dated August 21, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 21, 2017
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, 2017 and 2016,
and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
II-VI Incorporated and Subsidiaries at June 30, 2017 and 2016, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2017, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), II-VI
Incorporated and Subsidiaries' internal control over financial reporting as of June 30, 2017, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated August 21, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, PA
August 21, 2017
47
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
($000)
June 30,
Assets
Current Assets
Cash and cash equivalents
Accounts receivable - less allowance for doubtful accounts of $1,314 at June 30, 2017 and
$2,016 at June 30, 2016
Inventories
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
Other accrued liabilities
Total Current Liabilities
Long-term debt
Capital lease obligation
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 - 74,081,451 shares at June
30, 2017; 72,840,257 shares at June 30, 2016
Accumulated other comprehensive income (loss)
Retained earnings
2017
2016
$
271,888 $
218,445
$
$
193,379
203,695
6,732
26,602
702,296
367,728
250,342
133,957
11,727
3,023
8,224
1,477,297 $
20,000 $
65,540
58,178
12,178
29,056
184,952
322,022
23,415
15,345
31,000
576,734
-
269,638
(13,778)
748,062
1,003,922
164,817
175,133
6,535
18,033
582,963
242,857
233,755
124,590
11,354
7,848
8,614
1,211,981
20,000
53,796
59,012
12,588
25,846
171,242
215,307
-
11,103
31,991
429,643
-
243,812
(14,017)
652,788
882,583
Treasury stock, at cost - 10,940,062 shares at June 30, 2017 and 10,965,925 shares at June 30,
2016
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
(103,359)
900,563
1,477,297 $
(100,245)
782,338
1,211,981
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
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)
Earnings Before Income Taxes
Income Taxes
Net Earnings
Basic Earnings Per Share
Diluted Earnings Per Share
See Notes to Consolidated Financial Statements.
2017
2016
2015
$
972,046 $
827,216 $
741,961
583,693
96,810
176,002
6,809
(10,056)
853,258
514,403
60,354
160,646
3,081
(1,223)
737,261
118,788
89,955
23,514
24,469
470,363
51,260
143,539
3,863
(6,176)
662,849
79,112
13,137
$
$
$
95,274 $
65,486 $
65,975
1.52 $
1.07 $
1.48 $
1.04 $
1.08
1.05
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 $674, ($1,886), and $($602) for the years
ended June 30, 2017, 2016, and 2015, respectively
Other comprehensive income (loss)
Comprehensive income
See Notes to Consolidated Financial Statements.
2017
2016
2015
$
$
95,274 $
65,486 $
65,975
(2,275)
(15,651)
(8,497)
2,514
239
95,513 $
(7,031)
(22,682)
42,804 $
(2,244)
(10,741)
55,234
50
II-VI Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Accumulated
Other
Common Stock Comprehensive Retained Treasury Stock
Shares Amount Income (Loss) Earnings Shares Amount Total
19,406 $ 521,327 (9,482) $ (79,263) $ 675,043
4,111
- 65,975
(936) (12,729) (12,729)
-
-
- 65,975
-
-
(75)
-
(1,085)
-
-
-
-
-
-
(72)
-
-
-
-
-
-
(8,497)
-
(2,244)
-
-
-
(418)
-
(8,497)
- 11,340
(2,244)
-
(3,812)
-
(106)
-
8,665 $ 587,302 (10,565) $ (93,495) $ 729,081
7,649
(112)
- 65,486
-
(6,284)
(381)
-
-
- 65,486
-
-
(6,284)
(2,004)
1,538
-
-
-
-
-
92
-
-
-
-
-
(15,651)
-
(7,031)
-
-
- (15,651)
-
9,675
(7,031)
-
(587)
-
(14,017) $ 652,788 (10,966) $ (100,245) $ 782,338
(4,136) 10,956
- 95,274
-
-
- 95,274
(159)
-
-
(2,275)
-
2,514
1,022
-
(2,275)
-
- 11,756
2,514
-
(13,778) $ 748,062 (10,940) $ (103,359) $ 900,563
185
-
-
-
-
-
-
-
(000)
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
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 ($1,886)
Tax deficiency from share-based compensation expense
Balance - June 30, 2016
Shares issued under share-based compensation plans
Net earnings
Treasury stock under deferred compensation
arrangements
Foreign currency translation adjustments
Share-based compensation expense
Pension adjustment, net of taxes of $674
Balance - June 30, 2017
See Notes to Consolidated Financial Statements.
70,935 $ 213,573 $
773
-
-
5,196
-
-
418
72
-
-
- 11,340
-
-
(3,812)
-
(106)
-
71,780 $ 226,609 $
1,046
-
-
9,653
-
-
14
-
-
-
-
(1,538)
-
9,675
-
(587)
72,840 $ 243,812 $
1,204 15,092
-
-
37
(1,022)
-
-
- 11,756
-
-
74,081 $ 269,638 $
51
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
($000)
Cash Flows from Operating Activities
2017
2016
2015
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
95,274 $
65,486 $
65,975
Depreciation
Amortization
Share-based compensation expense
Impairment of intangible assets
(Gains) losses on foreign currency remeasurements and transactions
Earnings from equity investment
Deferred income taxes
Excess tax benefits from share-based compensation expense
Increase (decrease) in cash from changes in (net of effects of acquisitions and
dispositions):
Accounts receivable
Inventories
Accounts payable
Income taxes
Other operating net assets
Net cash provided by operating activities
Cash Flows from Investing Activities
Additions to property, plant & equipment
Proceeds from the sale of business
Purchases of businesses, net of cash acquired
Other investing activities
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from borrowings
Payments on borrowings
Payment on earnout consideration
Proceeds from exercises of stock options
Payments in satisfaction of employees' minimum tax obligations
Debt issuance costs
Purchases of treasury stock
Payments on holdback arrangements
Other financing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) 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 business - earnout consideration recorded in Other liabilities
Purchases of business - earnout consideration recorded in Other accrued liabilities
Capital lease obligation incurred on facility lease
Additions to property, plant & equipment included in accounts payable
See Notes to Consolidated Financial Statements.
50,894
12,743
11,756
-
(1,275)
(744)
(1,184)
-
(26,247)
(24,992)
6,704
735
(5,048)
118,616
(138,517)
-
(40,015)
1,291
(177,241)
129,000
(25,000)
(2,000)
15,092
(4,136)
(1,384)
-
-
-
111,572
496
53,443
218,445
271,888 $
- $
2,250 $
25,000 $
4,428 $
44,324
12,339
9,675
-
(51)
(29)
977
(589)
(20,770)
(8,650)
5,715
13,416
1,127
122,970
(58,170)
45,000
(122,157)
161
(135,166)
125,200
(65,700)
-
9,653
(2,004)
-
(6,284)
-
587
61,452
(4,445)
44,811
173,634
218,445 $
2,417 $
1,935 $
- $
- $
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
(52,313)
-
-
67
(52,246)
3,000
(68,500)
-
5,196
(1,089)
-
(12,729)
(2,350)
408
(76,064)
(2,082)
(1,026)
174,660
173,634
-
-
-
-
$
$
$
$
$
52
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 optoelectronic components and devices, is a vertically-integrated manufacturing company that develops, manufactures
and markets engineered materials and optoelectronic componenets and devices for precision use in industrial materials processing,
optical communications, military, consumer electronics, semiconductor equipment, life sciences and automotive applications. The
Company markets its products through its direct sales force and through distributors and agents.
The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available
from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company’s
manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the
Company does occasionally experience problems associated with vendor-supplied materials not meeting specifications for quality or
purity. A significant failure of the Company’s suppliers to deliver sufficient quantities of necessary high-quality materials on a timely
basis could have a material adverse effect on the Company’s results of operations.
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 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, the United Kingdom, South Korea and
Taiwan.
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, 2017 and
2016. Factoring is done with high credit quality financial institutions in Japan. During the years ended June 30, 2017 and 2016, $23.1
million and $20.5 million, respectively, of accounts receivable had been factored. As of June 30, 2017 and 2016, the amount included
in Other accrued liabilities representing the Company’s obligation to the bank for these receivables factored with recourse was
immaterial.
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
considers, if applicable, other factors as well, including known trends, market conditions, currency exchange rates and other such
issues. The Company generally records an inventory reserve as a charge against earnings for all products on hand more than 12 to 24
months depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative
customers. An additional reserve may be recorded for product on hand that is in excess of product sold to customers over the same
periods noted above. Inventories are presented net of reserves. The reserves totaled $18.5 million and $17.7 million at June 30, 2017
and 2016, respectively.
53
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 three 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. The Company accounts for
contingent consideration received in accordance with the “Loss Recovery Approach” under U.S. GAAP. Contingent consideration is
accounted for as a gain contingency and not recognized in other expense (income), net until all contingencies have been satisfied.
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 five
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 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, 2017 and June 30, 2016 was $11.7 million and $11.4 million, respectively. During the years ended
June 30, 2017, 2016 and 2015, the Company’s pro-rata share of earnings from this investment was $0.7 million, $0.1 million and $0.9
million, respectively, and was recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years
ended June 30, 2017, 2016 and 2015, the Company received dividends from this equity investment of $0.4 million, $0.6 million and
$0.6 million, respectively.
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 material loss contingency
liabilities at June 30, 2017 related to commitments and contingencies.
Accrued Bonus Compensation and Benefits. The Company records bonus and profit sharing estimates as a charge against earnings.
These estimates are adjusted to actual based on final results of operations achieved during the fiscal year. Certain partial bonus
amounts are paid on an interim basis, and the remainder is paid after the fiscal year end after the final determination of the applicable
percentage or amounts. Other bonuses are paid annually.
Warranty Reserve. The Company records a warranty reserve as a charge against earnings based on a percentage of revenues utilizing
actual returns over a period that approximates historical warranty experience with adjustments possible for changes in product lines or
unusual conditions that come to the Company’s attention.
54
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 adopted an accounting policy to apply acquired deferred tax liabilities to pre-existing deferred tax assets
before evaluating the need for a valuation allowance for acquired deferred tax assets.
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 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 1% 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, 2017, 2016 and 2015.
Research and Development. Internal research and development costs and costs not related to customer and government funded
research and development contracts are expensed as incurred.
Share-Based Compensation. Share-based compensation arrangements require the recognition 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
($8.4) million and ($6.2) million as of June 30, 2017 and 2016, respectively, and pension adjustments of ($5.4) million and ($7.8)
million as of June 30, 2017 and 2016, respectively.
55
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
determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market
in which the Company would transact, and the market-based risk measurements or assumptions that market participants would use in
pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
Operating Leases. The Company classifies operating leases in accordance with the provisions of lease accounting. Rent expense
under noncancelable operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the
lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess straight-
line rent expense over scheduled payments is recorded as a deferred liability. The current portion of unamortized deferred lease costs
is included in other accrued liabilities and the long-term portion is included in other liabilities in the Consolidated Balance Sheets.
Capital Leases. The Company accounts for capital leases at the lesser of the estimated fair market value of the leased property or the
net present value of the aggregate future minimum lease payments. The current and long-term portion of the capital lease obligation is
recorded in Other accrued liabilities and Capital lease obligations, respectively, in the Consolidated Balance Sheet. Capital lease assets
are included in property, plant & equipment and are generally depreciated over the term of the lease. Interest expense on capital leases
are included in interest expense in the Consolidated Statement of Earnings.
Recently Issued Financial Accounting Standards
Adopted Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest –
Imputation of Interest (Subtopic 835-30): 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 Company adopted ASU 2015-03, as clarified by ASU 2015-15, which did not have a material impact on the
Company’s Consolidated Financial Statements other than corresponding reductions to total assets and total liabilities on the
Condensed Consolidated Balance Sheets. Prior to adoption, the Company recorded deferred financing costs as Other assets. Upon
adoption, the Company reclassified these costs as a reduction to long term debt and retrospectively reclassified $0.6 million that were
previously presented as deferred financing costs, an asset on the Consolidated Balance Sheets as of June 30, 2016. There was no effect
on the Consolidated Statements of Earnings as a result of the adoption.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments. This update requires that an acquirer recognize adjustments to provisional amounts that are
identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adoption of
this standard did not have a material effect on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance about whether a cloud
computing arrangement includes a software license. The adoption of this standard did not have a material effect on the Company’s
Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This
update affects reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The adoption
of this standard did not have a material effect on the Company’s Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern. This update provides U.S.
GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to
continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to
evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern
within one year from the date the financial statements are issued. The adoption of this ASU did not have a material effect on the
Company’s Consolidated Financial Statements.
56
Revenue Recognition Pronouncement Currently Under Evaluation
In May 2014, the FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606) which supersedes virtually all
existing revenue recognition guidance under U.S. GAAP. The update's core principle is that an entity should recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. The update allows for the use of either the retrospective or modified
retrospective approach of adoption. On July 9, 2015, the FASB approved a one year deferral of the effective date of the update. The
update will be effective for the Company’s 2019 fiscal year (July 1, 2018). In May 2016, the FASB issued an amendment which did
not change the core principles of the guidance in Topic 606. Rather, the amendments in this update affect only narrow aspects of
Topic 606.
We commenced our evaluation of the impact of the ASU in fiscal 2017 by evaluating its impact on selected contracts at each of our
business segments. As the ASU will supersede all existing revenue guidance affecting U.S. GAAP, it could impact revenue and cost
recognition on our contracts across all our business segments, as well as our business processes and our information technology. As a
result, our evaluation of the effect of the ASU will extend through fiscal year 2018. To date, the Company has completed its
assessment of its military related contracts that comprise approximately 10% of consolidated revenues and have tentatively concluded
that the Company will accelerate the recognition of revenue under the ASU for these contracts as the customer obtains control of the
goods or service promised in the contract. For the commercial portion of the Company’s business, we will complete our assessment in
fiscal year 2018. Based upon our evaluation to date, we cannot currently estimate the impacts of adopting the ASU. We have
periodically updated our Audit Committee on our progress made towards this adoption. The Company will adopt this ASU using the
modified retrospective method whereby the cumulative effect of applying the ASU would be recognized at the beginning of the year
of adoption.
Other Pronouncements Currently Under Evaluation
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.
ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a
share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting
guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required
if the changes are considered non-substantive. The new guidance will be applied prospectively to awards modified on or after the
adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted. The standard will be effective for the Company’s 2018 fiscal year. The adoption of
this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, Consolidation (Topic 715): Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. This update affects employers’ presentation of defined benefit retirement plan costs.
Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The
adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment. This standard removes the second step of the goodwill impairment test, where a determination of the fair value
of individual assets and liabilities of a reporting unit were needed to measure the goodwill impairment. Under this updated standard,
goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the
carrying amount of goodwill. The Company will adopt this for any impairment test performed after July 1, 2017 as permitted under
the standard.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. This
update changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The
adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.
This update requires that when intra-entity asset transfers occur, the entity must recognize tax effects in the period in which the
transfer occurs. The standard will be effective for The Company’s 2019 fiscal year. Early adoption is permitted. The adoption of this
ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash
flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have
aspects of more than one class of cash flow. The update will be effective for the Company’s 2019 fiscal year. Early adoption is
permitted. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
57
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. This update is intended to provide financial statement users with more decision-useful information about
expected credit losses and other commitments to extend credit held by the reporting entity. The standard replaces the incurred loss
impairment methodology in current GAAP with one that reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. The update will be effective for the Company’s 2021 fiscal
year. Early adoption is permitted. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial
Statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. This update simplifies several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, and classification in
the statement of cash flows. The standard will be effective for the Company’s 2018 fiscal year. Early adoption is permitted. The
adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the
Transition to the Equity Method of Accounting. This update eliminates the requirement to retrospectively apply the equity method in
previous periods when an investor obtains significant influence over an investee. The standard will be effective for the Company’s
2018 fiscal year. Early adoption is permitted. The adoption of this ASU is not expected to have a material effect on the Company’s
Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): This update requires that a lessee recognize leased assets with
terms greater than 12 months on the balance sheet for the rights and obligations created by those leases. The standard will be effective
for the Company’s 2020 fiscal year. Early adoption is permitted. The Company is evaluating the impact of this guidance on the
Company’s Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Recognition and measurement of Financial Assets and
Financial Liabilities (Topic 825): This update requires that public entities measure equity investments with readily determinable fair
values, at fair value, with changes in their fair value recorded through net income. This ASU also clarifies that an entity should
evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the
entity’s other deferred tax assets. Early adoption is permitted. The standard will be effective for the Company’s 2018 fiscal year. The
adoption of this ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update
simplifies the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated
selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new
inventory measurement requirements will be effective for the Company’s 2018 fiscal year and will replace the current inventory
valuation guidance that requires the use of a lower of cost or market framework. The adoption of this ASU is not expected to have a
material effect on the Company’s Consolidated Financial Statements.
Note 2.
Acquisitions
Acquisition of Integrated Photonics, Inc.
In June 2017, the Company acquired all the outstanding shares of Integrated Photonics, Inc. (“IPI”) a privately held company based in
New Jersey. IPI is a leader in engineered magneto-optic materials that enable high-performance directional components such as
optical isolators for the optical communications market. Under the terms of the merger agreement, the consideration consisted of
initial cash paid at the acquisition date of $39.4 million, net of cash acquired and a working capital adjustment of $0.7 million. In
addition, the agreement provides up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving
certain agreed upon financial and transitional objectives, which if earned would be payable in the amount of $2.5 million for the
achievement of the annual target.
The following table presents the preliminary purchase price at the date of acquisition ($000):
Net cash paid at acquisition
Fair value of cash earnout arrangement
Purchase price
$
$
39,436
2,250
41,686
58
The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date
of acquisition, as the Company intends to finalize its accounting for the valuation of property, plant and equipment, identifiable
intangibles and deferred income tax liabilities and anticipates completion of the valuation within one year from the date of the
acquisition ($000):
Assets
Accounts receivable
Inventories
Prepaid and other assets
Property, plant & equipment
Intangible assets
Goodwill
Total assets acquired
Liabilities
Accounts payable
Other accrued liabilities
Long-term debt assumed
Deferred tax liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
2,083
3,968
322
11,257
22,213
17,107
56,950
846
1,032
3,834
9,552
15,264
41,686
The goodwill of $17.1 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled
workforce of IPI. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1
million with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the
accounts receivable. The Company expensed transaction costs of $0.3 million for the year ended June 30, 2017.
The amount of revenues and net earnings of IPI included in the Company’s Consolidated Statement of Earnings since the acquisition
was immaterial. Pro forma information was omitted due to the immaterial impact of IPI financial results.
Acquisition of DirectPhotonics Industries GmbH
During the quarter ended December 31, 2016, the Company purchased certain assets, mainly inventory and fixed assets, of
DirectPhotonics Industries GmbH located in Berlin, Germany for approximately $0.6 million. This business was combined with the
Company’s II-VI HIGHYAG division in the II-VI Laser Solutions segment. Due to the insignificant amount of the acquisition
purchase price, certain business combinations disclosures typically required under U.S. GAAP have been omitted.
Acquisition of EpiWorks, Inc.
In February 2016, the Company acquired all the outstanding shares of EpiWorks, Inc. (“EpiWorks”) a privately held company based
in Illinois. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $43.0
million, net of cash acquired and a working capital adjustment of $0.2 million. In addition, the agreement provided up to a maximum
of $6.0 million of additional cash earnout opportunities based upon EpiWorks achieving certain agreed upon financial and operational
targets for capacity, wafer output and gross margin, which if earned would be payable in the amount of $2.0 million for the
achievement of each specific annual target over the next three years. EpiWorks develops and manufactures compound semiconductor
epitaxial wafers for applications in optical components, wireless devices and high-speed communication systems. EpiWorks is a
business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.
The following table presents the allocation of the purchase price at the date of acquisition ($000):
Net cash paid at acquisition
Cash paid for working capital adjustment
Fair value of cash earnout arrangement
Purchase price
$
$
42,981
163
4,352
47,496
59
The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of
acquisition. ($000):
Assets
Accounts receivable
Inventories
Prepaid and other assets
Property, plant & equipment
Intangible assets
Goodwill
Total assets acquired
Liabilities
Accounts payable
Other accrued liabilities
Deferred tax liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
2,121
2,435
68
9,043
14,124
27,588
55,379
605
859
6,419
7,883
47,496
The goodwill of $27.6 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the
assembled workforce of EpiWorks. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable
acquired was $2.1 million with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to
collect all of the accounts receivable. The Company expensed transaction costs of $0.4 million for the year ended June 30, 2016.
The purchase price allocation was finalized in the 2017 first quarter and did not result in any adjustments to the preliminary fair values.
Acquisition of ANADIGICS, Inc.
In March 2016, the Company acquired all the outstanding shares of ANADIGICS (Nasdaq:ANAD), which was a publicly traded
company based in New Jersey. Under the terms of the merger agreement, the consideration consisted of both a working capital
advance of $3.5 million and cash paid of $78.2 million at the acquisition date, net of cash acquired of $2.7 million. ANADIGICS has a
6-inch gallium arsenide wafer fabrication capability allowing for the production of high performance lasers and integrated circuits in
high volume. In addition, at the time of the acquisition, ANADIGICS designed and manufactured innovative radio frequency (RF)
solutions for CATV infrastructure, small-cell, WIFI and cellular markets. The Company divested this portion of the business in June
2016. In conjunction with the sale of the RF business, the Company renamed ANADIGICS as II-VI Optoelectronic Devices Division.
OED is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.
The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of
acquisition. ($000):
Assets
Accounts receivable
Inventories
Prepaid and other assets
Property, plant & equipment
Intangible assets
Goodwill
Total assets acquired
Liabilities
Accounts payable
Other accrued liabilities
Total liabilities assumed
Net assets acquired
60
$
$
$
$
3,973
8,322
2,347
25,810
1,060
48,312
89,824
3,586
7,226
10,812
79,012
The goodwill of $48.3 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the
assembled workforce of ANADIGICS. None of the goodwill is deductible for income tax purposes. In conjunction with the June 3,
2016 sale of the RF business noted below, the Company disposed of $35.4 million of goodwill. The fair value of accounts receivable
acquired was $4.0 million with the gross contractual amount being $4.0 million. At the time of acquisition, the Company expected to
collect all of the accounts receivable. The Company expensed transaction costs of $2.9 million for the year ended June 30, 2016.
The purchase price allocation was finalized in the 2017 first quarter and did not result in any adjustments to the preliminary fair values.
Deferred Income Taxes
In connection with the acquisitions of EpiWorks and ANADGICS, the Company adopted an accounting policy to apply acquired
deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax
assets. During fiscal year 2016, the Company recorded a $36.2 million valuation allowance within purchase accounting as a result of
the Company incurring a cumulative U.S. three year loss.
Divesture of the RF Business of ANADIGICS
On June 3, 2016, the Company sold the RF business of ANADIGICS that it acquired on March 15, 2016. The consideration consisted
of $45.0 million of cash received at closing, a working capital adjustment of $0.6 million to be received within 60 days after closing
and $5.0 million contingent consideration to be earned based upon supplying minimum volumes of wafers to the purchaser over an
18-month period through December 2017. The $5.0 million contingent consideration will be recognized in net earnings when earned
and received from the purchaser. The Company believes the sale of this non-strategic business will allow the Company to focus its
financial resources and devote greater attention to the 6-inch wafer fab business. The Company incurred approximately $0.4 million in
transaction expenses and recorded an immaterial gain of less than $0.1 million on the sale of the RF business.
The following table presents the carrying value of the assets and liabilities included as part of the disposal of the RF business of
ANADIGICS ($000):
Assets
Inventories
Equipment
Goodwill
Liabilities
Accounts payable
Total Consideration
$
$
$
$
5,378
5,813
35,352
46,543
963
45,580
In conjunction with the sale of the RF business, the Company recorded approximately $7.5 million of severance expense for
employees of the business. The amount of revenue and net loss from the RF business of ANADIGICS from the acquisition date to the
date of sale included in the Company’s Consolidated Statements of Earnings were $10.1 million and $8.4 million, respectively, for the
year ended June 30, 2016.
Note 3.
Inventories
The components of inventories, net of reserves, were as follows:
June 30,
($000)
Raw materials
Work in progress
Finished goods
2017
2016
$
$
78,979 $
61,679
63,037
203,695 $
70,623
57,566
46,944
175,133
61
Note 4.
Property, Plant and Equipment
Property, plant and equipment consist of the following:
June 30,
($000)
Land and land improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation
2017
2016
$
$
5,667 $
144,293
492,042
88,458
730,460
(362,732)
367,728 $
4,990
110,219
409,551
34,602
559,362
(316,505)
242,857
During the quarter ended March 31, 2017, the Company sold its manufacturing facility located in Newport Ritchey, Florida. The
Company received $1.7 million, net of customary closing costs and a $0.3 million reserve held in escrow for environmental purposes.
The gain on sale of $0.3 million was recorded in other expense (income), net in the Consolidated Statement of Earnings.
Depreciation expense was $50.9 million, $44.3 million and $41.1 million for the fiscal years ended June 30, 2017, 2016 and 2015,
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
Goodwill acquired
Foreign currency translation
Balance-end of period
Balance-beginning of period
Goodwill acquired
Goodwill attributed to the RF business sold
Foreign currency translation
Balance-end of period
II-VI Laser
Solutions
Year Ended June 30, 2017
II-VI
Photonics
II- VI Performance
Products
84,105 $
-
75
84,180 $
96,760 $
17,107
(595)
113,272 $
52,890 $
-
-
52,890 $
II-VI Laser
Solutions
Year Ended June 30, 2016
II-VI
Photonics
II- VI Performance
Products
43,578 $
75,900
(35,352)
(21)
84,105 $
99,426 $
-
-
(2,666)
96,760 $
52,890 $
-
-
-
52,890 $
$
$
$
$
Total
233,755
17,107
(520)
250,342
Total
195,894
75,900
(35,352)
(2,687)
233,755
The Company reviews the recoverability of goodwill at least annually and any time business conditions indicate a potential change in
recoverability. The measurement of a potential impairment begins with comparing the current fair value of the Company’s reporting
units to the recorded value (including goodwill). The Company primarily used a discounted cash flow (DCF) model and a market
analysis to determine the current fair value of its reporting units. A number of significant assumptions and estimates are involved in
estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to
produce, working capital changes and income tax rates. Management considers historical experience and all available information at
the time the fair values of the reporting units are estimated. The Company has the option to perform a qualitative assessment of
goodwill to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
including goodwill and other intangible assets. As of April 1 of fiscal years 2017 and 2016, the Company completed its annual
impairment tests of its reporting units. Based on the results of these analyses, the Company’s goodwill was not impaired.
62
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2017
and 2016 were as follows ($000):
Gross
Carrying
Amount
June 30, 2017
Accumulated
Amortization
Net
Book
Value
Gross
Carrying
Amount
June 30, 2016
Accumulated
Amortization
Net
Book
Value
Technology and Patents
Trade Names
Customer Lists
Other
Total
$
$
65,438 $
15,806
123,058
1,571
205,873 $
(27,313) $
(1,340)
(41,740)
(1,523)
(71,916) $
38,125 $
14,466
81,318
48
133,957 $
54,344 $
15,869
112,141
1,571
183,925 $
(22,724) $
(1,209)
(33,912)
(1,490)
(59,335) $
31,620
14,660
78,229
81
124,590
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2017, 2016 and 2015 was $12.7 million,
$12.3 million, and $12.0 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 100 months. The customer lists are being amortized over 60 to 240 months with a
weighted-average remaining life of approximately 149 months.
In conjunction with the acquisitions of IPI, the Company recorded $11.3 million of technology and patents and $10.9 million of
customer lists. The intangibles were recorded based on the Company’s preliminary purchase price allocation which is expected to be
finalized within one year from the date of the acquisition.
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade
names of $14.0 million as of June 30, 2017 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 2017 and 2016. Based on the results of
these tests, the trade names were not impaired in fiscal years 2017 and 2016.
During the year ended June 30, 2015, the Company recognized an impairment charge on two of its indefinite lived trade names in the
II-VI Photonics reporting unit as these trade names were abandoned as a result of the Company’s rebranding efforts. Total impairment
recorded during the year ended June 30, 2015 was $2.0 million, which represented the entire carrying value of these two trade names
and was recorded in other expense (income), net in the Consolidated Statements of Earnings.
Included in the gross carrying amount and accumulated amortization of the Company’s technology and patents, customer list and
other component of intangible assets and goodwill is the effect of the foreign currency translation on the portion relating to the
Company’s German and China subsidiaries. The estimated amortization expense for existing intangible assets for each of the five
succeeding years is as follows ($000):
Year Ending June 30,
2018
2019
2020
2021
2022
Note 6.
Debt
The components of debt were as follows ($000):
$
13,800
13,500
12,500
11,800
10,300
June 30,
Line of credit, interest at LIBOR, as defined, plus 1.5%
Term loan, interest at LIBOR, as defined, plus 1.5%
Yen denominated line of credit, interest at LIBOR, as
defined, plus 0.625%
Note payable assumed in IPI acquisition
Total debt
Current portion of long-term debt
Unamortized debt issuance costs
Long-term debt, less current portion
$
2017
252,000 $
85,000
2016
188,000
45,000
2,679
3,834
343,513
(20,000)
(1,491)
322,022 $
2,917
-
235,917
(20,000)
(610)
215,307
$
63
On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit
Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 million, as well as a $100 million term
loan. The term loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July
and October, with the first payment having commenced on October 1, 2016, as follows: (i) twenty consecutive quarterly installments
of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 2021. Amounts
borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but
is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiary of the Company. The
Company has the option to request an increase to the size of the revolving credit facility in an aggregate additional amount not to
exceed $100 million. The Amended Credit Facility has a five-year term through July 28, 2021 and has an interest rate of either a Base
Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility. If
the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.25% and if the Euro-Rate Option is selected for
a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the Company’s ratio of consolidated
indebtedness to consolidated EBITDA. Additionally, the Amended Credit Facility is subject to certain covenants, including those
relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2017, the Company was in compliance with all
financial covenants under its Amended Credit Facility.
The Company’s Yen denominated line of credit is a 500 million Yen ($4.9 million) facility. The Yen line of credit matures August
2020. The interest rate equal to the Euro-Rate, as defined in the loan agreement, plus 1.00% to 2.25%. At June 30, 2017, the
Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including
those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2017, the Company had $2.7 million
outstanding and was in compliance with all financial covenants under its Yen facility.
The Company had aggregate availability of $73.5 million and $37.7 million under its lines of credit as of June 30, 2017 and 2016,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30,
2017 and 2016, total outstanding letters of credit supported by the credit facilities were $1.3 million and $1.2 million, respectively.
The weighted-average interest rate of total borrowings for each of the years ended June 30, 2017 and 2016 was 2.2% and 1.6%,
respectively. The weighted-average of total borrowings for the fiscal years ended June 30, 2017 and 2016 was $272.1 million and
$193.7 million, respectively.
The Company has a line of credit facility with a Singapore bank which permits maximum borrowings in the local currency of
approximately $0.6 million for the fiscal years ended June 30, 2017 and 2016, respectively. Borrowings are payable upon demand
with interest charged at the rate of 1.00% above the bank’s prevailing prime lending rate. The interest rate was 5.25% at June 30, 2017
and June 30, 2016. At June 30, 2017 and 2016, there were no outstanding borrowings under this facility. The Company had $0.3
million and $0.2 million of letters of credit supported by the Singapore line of credit facility as of June 30, 2017 and 2016,
respectively.
In conjunction with the acquisition of IPI, the Company assumed a non-interest bearing note payable owed to a major customer of IPI.
The agreement if not terminated early by either party is payable in full in May 2019.
There are no interim maturities or minimum payment requirements related to the credit facilities before their respective expiration
dates. Interest and commitment fees paid during the fiscal year ended June 30, 2017, 2016 and 2015 were $6.1 million, $3.1 million
and $4.0 million, respectively.
Remaining annual principal payments under the Company’s existing credit facilities and note payable as of June 30, 2017 were as
follows ($000):
Period
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total
Term
Loan
Yen Line
of Credit
U.S.
Dollar
Line of
Credit
Note
Payable
$
$
20,000
20,000
20,000
20,000
5,000
-
85,000
$
$
-
-
-
2,679
-
-
2,679
$
$
$
-
-
-
252,000
-
252,000
$
-
3,834
-
-
-
3,834
$
$
$
$
$
$
$
Total
20,000
23,834
20,000
22,679
257,000
-
343,513
64
Note 7.
Income Taxes
The components of earnings (losses) before income taxes were as follows:
Year Ended June 30,
($000)
U.S. loss
Non-U.S. income
Earnings before income taxes
The components of income tax expense were as follows:
Year Ended June 30,
($000)
Current:
Federal
State
Foreign
Total Current
Deferred:
Federal
State
Foreign
Total Deferred
Total Income Tax Expense
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
2017
2016
2015
(6,944) $
125,732
118,788 $
(5,809) $
95,764
89,955 $
(5,326)
84,438
79,112
2017
2016
2015
2,133 $
253
22,312
24,698 $
(6,963) $
(1,251)
7,030
(1,184) $
23,514 $
$
3,704
5
19,783
23,492 $
$
2,759
1,302
(3,084)
977 $
24,469 $
(146)
86
16,978
16,918
(2,762)
(251)
(768)
(3,781)
13,137
$
$
$
$
$
$
$
2017
2016
$
$
$
$
$
6,338 $
1,705
9,738
53,048
12,386
1,761
(42,562)
42,414 $
(7,803) $
(38,108)
(6,210)
(2,615)
(54,736) $
(12,322) $
6,814
2,212
15,543
43,516
11,693
1,770
(42,641)
38,907
(9,759)
(29,628)
(797)
(1,978)
(42,162)
(3,255)
65
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
Valuation allowance
Research and manufacturing incentive deductions
Other
2017
%
2016
%
2015
%
$
41,576
35 $
31,484
35
$
27,689
(641)
(12,907)
(806)
(3,346)
(362)
23,514
$
-
(11)
(1)
(3)
-
20 $
864
(13,860)
8,464
(3,074)
591
24,469
1
(15)
9
(3)
-
27
$
(196)
(11,687)
678
(2,573)
(774)
13,137
35
-
(15)
1
(3)
(1)
17
During the fiscal years ended June 30, 2017, 2016, and 2015, net cash paid by the Company for income taxes was $23.6 million, $18.5
million, and $13.0 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
0.31%, 0.37% and 0.22% for the fiscal years ended June 30, 2017, 2016 and 2015, respectively, and the impact of the tax holidays on
diluted earnings per share is immaterial.
The cumulative amount of the Company’s foreign undistributed net earnings for which no deferred taxes have been provided was
approximately $715 million at June 30, 2017. If the earnings of such foreign subsidiaries were not indefinitely reinvested, an
additional deferred tax liability of approximately $108 million would have been required as of June 30, 2017. It is the Company’s
intention to permanently reinvest substantially all of its undistributed earnings of its foreign subsidiaries; therefore, no provision has
been made for future income taxes on the undistributed earnings of the majority of foreign subsidiaries, as they are considered
indefinitely reinvested. The Company has provided a deferred tax liability for future income taxes on the earnings of certain foreign
subsidiaries as these earnings are planned to be repatriated.
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2017:
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
$
$
10,953
4,539
4,820
June 2019-June 2037
June 2024-June 2027
June 2018-June 2037
100,922
71,536
2,610
June 2020-June 2037
June 2018-June 2037
June 2018-June 2024
The Company has recorded a valuation allowance against the majority of the loss and 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 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, 2017, 2016 and 2015 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
2017
2016
2015
$
$
5,559 $
895
2,605
-
(1,143)
(339)
7,577
$
$
4,022
2,146
190
(67)
-
(732)
5,559
$
2,775
2,450
203
-
-
(1,406)
4,022
66
The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal year 2017, there was $0.5
million of interest and penalties within income tax expense. During the fiscal year 2016, there was no interest and penalties within
income tax expense. During the fiscal year 2015, there was a benefit of $0.1 million of interest and penalties within tax expense. The
Company had $0.3 million, $0.1 million, and $0.1 million of interest and penalties accrued at June 30, 2017, 2016, and 2015,
respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities as the amounts are not
expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet
the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position,
the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate was approximately $1.3 million and
$0.5 million at June 30, 2017 and 2016, respectively. The Company expects a decrease of $0.4 million of unrecognized tax benefits
during the next 12 months due to the expiration of statutes of limitation.
Fiscal years 2014 to 2017 remain open to examination by the Internal Revenue Service, fiscal years 2012 to 2017 remain open to
examination by certain state jurisdictions, and fiscal years 2007 to 2017 remain open to examination by certain foreign taxing
jurisdictions. The Company’s subsidiary in Germany has been notified of an examination to start in fiscal year 2018. The Company
believes its income tax reserves for these tax matters are adequate.
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 140,000, 153,000 and 576,000 for the fiscal years ended
June 30, 2017, 2016 and 2015, respectively, because they were anti-dilutive.
Year Ended June 30,
($000 except per share)
Net earnings
Divided by:
Weighted average shares
Basic earnings per common share
Net earnings
Divided by:
Weighted average shares
Dilutive effect of common stock equivalents
Diluted weighted average common shares
2017
2016
2015
$
95,274 $
65,486 $
65,975
$
$
62,576
61,366
61,219
1.52 $
1.07 $
1.08
95,274 $
65,486 $
65,975
62,576
1,931
64,507
61,366
1,543
62,909
61,219
1,367
62,586
Diluted earnings per common share
$
1.48 $
1.04 $
1.05
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, 2017 are as follows:
Year Ending June 30,
($000)
2018
2019
2020
2021
2022
Thereafter
$
14,400
12,400
10,500
6,800
4,600
17,900
Rent expense was approximately $14.7 million, $14.2 million, and $15.0 million for the fiscal years ended June 30, 2017, 2016 and
2015, respectively.
67
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
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, 2017, there were approximately 1,644,000 shares available to be issued under the Plan,
including forfeited shares from predecessor plans.
The Company records share-based compensation expense for these awards which requires the recognition of the grant-date fair value
of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite
service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-based stock
appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as liability awards, in
accordance with applicable accounting standards.
Share-based compensation expense for the fiscal years ended June 30, 2017, 2016 and 2015 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
2017
2016
2015
$
5,611
$
4,309
$
6,799
4,401
$
3,626
16,036
$
2,196
10,906
$
5,158
5,182
2,649
12,989
The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and
administrative expense in the Consolidated Statements of Earnings, based on the employee classification of the grantees. Share-based
compensation expense associated with liability awards was $4.3 million, $1.2 million, and $1.6 million, in fiscal years ended June 30,
2017, 2016, and 2015, respectively.
Stock Options and Cash-Based Stock Appreciation Rights:
The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense. During the fiscal years
ended June 30, 2017, 2016 and 2015, the weighted-average fair value of options granted under the stock option plan was $8.88, $7.35
and $5.76, respectively, per option using the following assumptions:
Year Ended June 30,
Risk-free interest rate
Expected volatility
Expected life of options
Dividend yield
2017
2016
2015
1.43%
37%
1.68%
38%
6.28 years
None
6.43 years
None
1.71%
41%
5.94 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 18.71%. 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.
68
Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2017 was as follows:
Stock Options
Number of
Shares
Cash-Based Stock Appreciation Rights
Weighted Average Number of
Exercise Price
Rights
Weighted Average
Exercise Price
Outstanding - July 1, 2016
Granted
Exercised
Forfeited and Expired
Outstanding - June 30, 2017
Exercisable - June 30, 2017
4,251,926 $
771,900 $
(858,445) $
(84,466) $
4,080,915 $
2,242,901 $
17.15
23.15
17.58
19.62
18.15
16.97
178,234 $
86,705 $
(44,856) $
(5,616) $
214,467 $
34,334 $
17.13
22.51
17.42
19.39
19.17
17.59
As of June 30, 2017, 2016 and 2015, the aggregate intrinsic value of stock options and cash-based stock appreciation rights
outstanding and exercisable was $69.3 million, $10.1 million and $14.3 million, respectively. Aggregate intrinsic value represents the
total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30,
2017, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on June 30, 2017. This amount varies based on the fair market value of the
Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years
ended June 30, 2017, 2016, and 2015 was $12.3 million, $4.5 million, and $2.9 million, respectively. As of June 30, 2017, total
unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $12.0 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, 2017 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
1,093,446
2,852,141
328,075
21,720
4,295,382
4.80 $
6.61 $
3.78 $
9.62
5.95 $
13.18
19.12
25.53
39.65
18.20
Range of
Exercise Prices
$10.04 - $15.38
$15.41 - $23.45
$23.49 - $35.50
$39.65 - $39.65
Number of
Shares or
Rights
717,394
1,331,371
228,470
-
2,277,235 $
Stock Options and Cash-Based Stock
Appreciation Rights Exercisable
Weighted
Average Remaining
Contractual Term
(Years)
Weighted
Average
Exercise
Price
3.59 $
4.76 $
1.29 $
- $
4.04 $
12.74
18.13
23.65
-
16.98
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 13.0%.
Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2017, was as follows:
Restricted Share Awards
Number of Weighted Average
Shares
Grant Date Fair Value Units
Cash-Based Restricted Share Units
Number of Weighted Average
Nonvested - June 30, 2016
Granted
Vested
Forfeited
Nonvested - June 30, 2017
760,915 $
271,113 $
(200,799) $
(19,396) $
811,833 $
17.49
23.23
17.22
18.32
19.45
Grant Date Fair Value
16.67
22.09
17.22
18.61
19.12
105,935 $
67,790 $
(29,470) $
(3,328) $
140,927 $
As of June 30, 2017, total unrecognized compensation cost related to non-vested restricted share and cash-based restricted share unit
awards was $9.5 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The
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
69
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, 2017, 2016 and 2015, was $7.8 million, $6.3 million and $5.9 million, respectively. The total fair
value of restricted shares vested was $6.2 million, $5.5 million and $5.1 million during fiscal years 2017, 2016 and 2015, respectively.
Performance Share Awards and Cash-Based Performance Share Unit Awards:
The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees
performance share awards and performance share unit awards under the Plan. As of June 30, 2017, the Company had outstanding
grants covering performance periods ranging from 12 to 36 months. These awards are intended to provide continuing emphasis on
specified financial performance goals that the Company considers important contributors to the creation of long-term shareholder
value. These awards are payable only if the Company achieves specified levels of financial performance during the performance
periods.
The performance share compensation expense was calculated based on the number of shares expected to be earned multiplied by the
stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation
expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the period-end date, and
is being recognized over the vesting period. Performance share and cash-based performance share unit award activity relating to the
plan during the year ended June 30, 2017, was as follows:
Nonvested - June 30, 2016
Granted
Vested
Forfeited
Nonvested - June 30, 2017
Performance Share Awards
Number of Weighted Average
Shares
Grant Date Fair Value
16.12
21.67
15.56
17.16
19.52
293,541 $
234,174 $
(88,354) $
(61,651) $
377,710 $
Cash-Based Performance Share Units
Number of
Units
Weighted Average
Grant Date Fair Value
18.44
21.67
18.52
18.70
19.37
98,659 $
10,808 $
(58,654) $
(33,661) $
17,152 $
As of June 30, 2017, total unrecognized compensation cost related to non-vested performance share and cash-based performance share
unit awards was $4.2 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,
2017, 2016 and 2015 was $5.3 million, $2.4 million and $2.3 million, respectively. The total fair value of performance shares vested
during the fiscal years ended June 30, 2017, 2016 and 2015 was $5.9 million, $1.5 million and $1.6 million, respectively.
For our relative Total Shareholder Return, or TSR, performance-based awards, which are based on market performance of our stock as
compared to the Russel 2000 Index, the compensation cost is recognized over the performance period on a straight-line basis net of
forfeitures, because the awards vest only at the end of the measurement period and the probability of actual shares expected to be
earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate
the fair value of the TSR performance-based awards using the Monte-Carlo simulation model.
Note 11.
Segment and Geographic Reporting
The Company reports its business segments using the “management approach” model for segment reporting. This means that the
Company determines its reportable business segments based on the way the chief operating decision maker organizes business
segments within the Company for making operating decisions and assessing performance.
The Company reports its financial results in the following three segments: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI
Performance Products, and the Company’s chief operating decision maker receives and reviews financial information based on these
segments. The Company evaluates business segment performance based upon segment operating income, which is defined as
earnings before income taxes, interest and other income or expense. The segments are managed separately due to the market,
production requirements and facilities unique to each segment.
The II-VI Laser Solutions segment is located in the United States, Singapore, China, Germany, Switzerland, Japan, Belgium, the
United Kingdom, Italy, South Korea, the Philippines and Taiwan. II-VI Laser Solutions is directed by the President of II-VI Laser
Solutions, while each geographic location is directed by a general manager, and is further divided into production and administrative
units that are directed by managers. II-VI Laser 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, 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
70
brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers for applications in optical
components, wireless devices, and high-speed communication systems and manufactures 6-inch gallium arsenide wafers allowing for
the production of high performance lasers and integrated circuits in high volume sold under the II-VI EpiWorks and II-VI
OptoElectronic Devices Division brand names.
The II-VI Photonics segment is located in the United States, China, Vietnam, Germany, Japan, the United Kingdom., 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 optoelectronic modules for
use in optical communication networks and other diverse consumer and commercial applications. In addition, the segment also
manufactures pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for both terrestrial and
submarine applications within the optical communications market.
The II-VI Performance Products segment is located in the United States, Vietnam, Japan, China, Germany and the Philippines. II-VI
Performance Products is directed by the President of II-VI Performance Products, while each geographic location is directed by a
general manager. II-VI Performance Products is further divided into production and administrative units that are directed by managers.
II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for
military, medical and commercial laser imaging applications. In addition, the segment designs, manufactures and markets unique
engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, military and medical markets.
On June 19, 2017, the Company completed its acquisition of IPI. See Note 2. Acquisitions. The operating results of this acquisition
have been reflected in the selected financial information of the Company’s II-VI Photonics segment
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:
($000)
2017
Revenues
Inter-segment revenues
Operating income
Interest expense
Other income, net
Income taxes
Net earnings
Depreciation and amortization
Expenditures for property, plant & equipment
Segment assets
Equity investment
Goodwill
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
$
$
$
339,341
33,792
30,931
-
-
-
-
24,958
82,760
589,239
-
84,180
$
418,515
14,236
62,975
-
-
-
-
21,442
27,397
578,315
-
113,272
214,190
10,189
21,635
-
-
-
-
17,237
32,788
309,743
11,727
52,890
-
(58,217)
-
-
-
-
-
-
-
-
-
-
$ 972,046
-
115,541
(6,809)
10,056
(23,514)
95,274
63,637
142,945
1,477,297
11,727
250,342
71
($000)
2016
Revenues
Inter-segment revenues
Operating income
Interest expense
Other income, net
Income taxes
Net earnings
Depreciation and amortization
Expenditures for property, plant & equipment
Segment assets
Equity investment
Goodwill
($000)
2015
Revenues
Inter-segment revenues
Operating income
Interest expense
Other income, net
Income taxes
Net earnings
Depreciation and amortization
Expenditures for property, plant & equipment
$
$
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
$
$
303,002
24,290
36,184
-
-
-
-
17,222
25,620
469,754
-
84,105
$
325,879
12,081
37,849
-
-
-
-
19,855
21,096
467,486
-
96,760
198,335
7,274
17,780
-
-
-
-
19,586
11,454
274,741
11,354
52,890
-
(43,645)
-
-
-
-
-
-
-
-
-
-
$ 827,216
-
91,813
(3,081)
1,223
(24,469)
65,486
56,663
58,170
1,211,981
11,354
233,755
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
$
$
287,881
21,021
55,039
-
-
-
-
14,127
27,349
$
260,825
13,210
7,208
-
-
-
-
21,073
11,324
193,255
9,325
14,552
-
-
-
-
17,883
13,640
-
(43,556)
-
-
-
-
-
-
-
$ 741,961
-
76,799
(3,863)
6,176
(13,137)
65,975
53,083
52,313
Geographic information for revenues from the country of origin (shipped from), and long-lived assets from the country of origin,
which include property, plant and equipment, net of related depreciation, and certain other long-term assets, were as follows:
Year Ended June 30,
($000)
United States
Non-United States
China
Hong Kong
Germany
Japan
Switzerland
Vietnam
Italy
United Kingdom
Belgium
Korea
Singapore
Philippines
Taiwan
Australia
Total Non-United States
2017
Revenues
2016
2015
$
294,200
$
266,347
$
241,974
208,595
190,702
88,304
76,212
50,497
22,497
10,791
8,473
7,503
6,584
3,913
3,057
718
-
677,846
972,046
$
172,292
140,821
72,070
57,287
54,760
24,267
10,160
8,154
6,026
3,887
3,039
8,106
-
-
560,869
827,216
$
140,586
109,428
77,524
52,864
56,940
24,307
9,313
7,749
5,731
-
3,897
11,334
-
314
499,987
741,961
$
72
June 30,
($000)
United States
Non-United States
China
Switzerland
Germany
Vietnam
Philippines
Hong Kong
Other
Total Non-United States
2017
Long-Lived Assets
2016
2015
$
240,029
$
137,521
$
102,171
62,024
36,795
15,323
8,272
6,115
1,914
1,100
131,543
371,572
$
51,824
38,202
15,162
8,895
4,399
1,765
1,146
121,393
258,914
$
46,794
26,384
15,790
7,985
6,003
2,476
1,282
106,714
208,885
$
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, 2017, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments
were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued
by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts.
In February 2016, the Company entered into a contingent earnout arrangement which provides up to a maximum of $6.0 million of
additional cash earnout opportunities based upon EpiWorks achieving certain agreed upon financial and operational targets for
capacity, wafer output and gross margin, which if earned would be payable for the achievement of each specific annual target over the
next three years. The Company paid the first year earnout amount of $2.0 million during the quarter ended June 30, 2017.
In June 2017, the Company entered into a contingent earnout arrangement which provides up to a maximum of $2.5 million of
additional cash earnout opportunities based upon IPI achieving certain agreed upon financial and transitional objectives relating to
finance, information technology and human resources, which if earned would be payable for the achievement of each specific annual
target over the next year.
The fair values of these contingent earnout arrangements were measured using valuations based upon other unobservable inputs that
are significant to the fair value measurement (Level 3).
73
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, 2017 and 2016 ($000):
Fair Value Measurements at June 30, 2017 Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2017
Assets:
Foreign currency forward contracts
Liabilities:
Contingent earnout arrangements
$
$
191
$
5,795
$
-
$
-
$
191
$
-
-
$
5,795
Fair Value Measurements at June 30, 2016 Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2016
Liabilities:
Foreign currency forward contracts
Contingent earnout arrangement
$
$
511
4,352
$
$
-
-
$
$
511
-
$
$
-
4,352
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 2017 and 2016.
The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s level 3
contingent earnout arrangement related to the acquisitions of II-VI EpiWorks and IPI ($000):
Balance at July 1, 2016
Contingent earnout arrangements:
Contingent earnout - IPI
Payments
Changes in fair value recorded in other expense,
(income)
Balance at June 30, 2017
$
$
Significant
Unobservable Inputs
(Level 3)
4,352
2,250
(2,000)
1,193
5,795
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because
of the short-term maturity of those instruments. The Company’s borrowings include variable interest rate, non-interest bearing debt
and a capital lease obligation and are considered Level 2 among the fair value hierarchy 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.
74
The Company has recorded the fair market value of these contracts in the Company’s financial statements. These contracts had a total
notional amount of $12.7 million and $9.2 million at June 30, 2017 and 2016, respectively. As of June 30, 2017, these forward
contracts had expiration dates ranging from July 2017 through October 2017, with Japanese Yen denominations individually between
300 million and 400 million Yen. The Company does not account for these contracts as hedges as defined by U.S. GAAP and records
the change in the fair value of these contracts in Other expense (income), net in the Consolidated Statements of Earnings as they occur.
The fair value measurement takes into consideration foreign currency rates and the current creditworthiness of the counterparties to
these contracts, as applicable, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments and thus
represents a Level 2 measurement. These contracts are recorded in prepaid and other current assets in the Company’s Consolidated
Balance Sheets as of June 30, 2017. The change in the fair value of these contracts for the fiscal year ended June 30, 2017, 2016 and
2015 was insignificant.
Note 14.
Employee Benefit Plans
Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at
the discretion of the Company’s board of directors and were $4.3 million, $3.4 million, and $2.8 million for the years ended June 30,
2017, 2016 and 2015, 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 477,949 and
492,913 shares of Common Stock available for purchase under the plan at June 30, 2017 and 2016, respectively.
Switzerland Defined Benefit Plan
In conjunction with the acquisition of II-VI Laser Enterprise in fiscal year 2014, 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, 2017 were $2.4 million. Expected employer contributions in fiscal year 2018 are $2.6 million.
75
The funded status of the Swiss Plan in the fiscal years ended June 30, 2017 and 2016 were as follows:
Year Ended June 30,
Change in projected benefit obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Participant contributions
Benefits 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 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
$
$
$
$
$
$
$
2017
2016
54,094
3,689
163
1,262
1,743
(2,777)
1,344
59,518
35,857
805
2,432
1,262
1,743
891
42,990
$
$
$
42,575
2,680
434
1,046
1,567
8,071
(2,279)
54,094
32,509
431
2,043
1,046
1,567
(1,739)
35,857
3,496
$
3,857
16,528
18,237
2,514
56,457
$
$
$
$
(7,031)
50,772
2016
2,680
434
(1,097)
(234)
1,783
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
Prior service cost
Net period pension cost
2017
3,689
163
(742)
594
3,704
$
$
The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 2017 and 2016 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)
2017
2016
0.8%
2.0%
2.0%
9.9
0.3%
2.0%
2.0%
10.2
The discount rate is based on assumed pension benefit maturity and estimates developed using the rate of return and yield curves for
high quality Swiss corporate and government bonds. The salary increase rate is based on our best assessment for on-going increases
over time. The expected long-term rate of return on plan assets is based on the expected asset allocation and taking into consideration
historical long-term rates of return for the relevant asset categories.
As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no
investment authority over the assets of the plan that are held and invested by a Swiss insurance company. The investment strategy of
the Swiss Plan is managed by an independent asset manager with the objective of achieving a consistent long-term return which will
provide sufficient funding for future pension obligations while limiting risk.
76
The Swiss Plan is legally separate from II-VI, as are the assets of the plan. As of June 30, 2017, 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)
2018
2019
2020
2021
2022
Next five years
2017
2016
10.0%
52.0%
26.0%
9.0%
3.0%
100.0%
15.0%
51.0%
28.0%
3.0%
3.0%
100.0%
$
2,683
4,062
1,575
2,533
2,681
19,163
Other Employee Benefit Plans
The Company has no program for post-retirement health and welfare benefits.
The II-VI Incorporated Deferred Compensation Plan (the “Compensation Plan”) is designed to allow officers and key employees of
the Company to defer receipt of compensation into a trust fund for retirement purposes. Under the Compensation Plan, as it is
currently implemented by the Company, eligible participants can elect to defer up to 100% of certain discretionary incentive
compensation and certain equity awards into the Compensation Plan. The Compensation Plan is a nonqualified, defined contribution
employees’ retirement plan. At the Company’s discretion, the Compensation Plan may be funded by the Company making
contributions based on compensation deferrals, matching contributions and discretionary contributions. Compensation deferrals will
be based on an election by the participant to defer a percentage of compensation under the Compensation Plan. All assets in the
Compensation Plan are subject to claims of the Company’s creditors until such amounts are paid to the Compensation Plan
participants. Employees of the Company made contributions to the Compensation Plan in the amounts of approximately $0.8 million,
$1.2 million, and $0.7 million for the fiscal years ended June 30, 2017, 2016, and 2015, respectively. During the fiscal year ended
June 30, 2017, the Company made a contribution of $0.1 million to the Compensation Plan on behalf of Dr. Mattera for his
appointment as Chief Executive Officer. There were no employer contributions made to the Compensation Plan for the fiscal years
ended June 30, 2016 and 2015.
Note 15. Other Accrued Liabilities
The components of other accrued liabilities were as follows:
Year Ended June 30,
($000)
Deferred revenue
Warranty reserve
Current portion of earnout arrangements
Other accrued liabilities
2017
2016
$
$
2,345
4,546
3,930
18,235
29,056
$
$
4,014
3,908
1,935
15,989
25,846
77
The following table summarizes the change in the carrying value of the Company’s warranty reserve included in Other Accrued
Liabilities as of and for the year ended June 30, 2017.
Year Ended June 30,
($000)
Balance-Beginning of Year
Settlements during the period
Additional warranty liability recorded
Balance-End of Year
2017
$
$
3,908
(4,212)
4,850
4,546
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)
2018
2019
2020
2021
2022
$
21,988
866
578
-
-
Note 17.
Share 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, 2017, the Company did not repurchase shares of its Common Stock. During fiscal years ended June 30, 2016 and 2015,
the Company purchased 380,538 and 936,049 shares of its Common Stock for $6.3 million and $12.7 million respectively, under this
repurchase program.
78
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, 2017,
2016, and 2015 were as follows ($000):
Foreign
Currency
Translation
Adjustment
Defined
Benefit
Pension Plan
Total
Accumulated Other
Comprehensive
Income
$
17,963
$
1,443
$
(8,497)
-
(8,497)
9,466
(15,651)
-
(15,651)
(6,185)
(2,275)
-
(2,275)
(8,460)
$
$
$
$
(2,244)
-
(2,244)
(801)
(6,805)
(226)
(7,031)
(7,832)
1,920
594
2,514
(5,318)
$
$
19,406
(10,741)
-
(10,741)
8,665
(22,456)
(226)
(22,682)
(14,017)
(355)
594
239
(13,778)
AOCI - June 30, 2014
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2015
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2016
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2017
Note 19. Capital Lease
During the quarter ended December 31, 2016, the Company’s OptoElectronic Devices subsidiary entered into a capital lease related to
a building in Warren, New Jersey. The following table shows the future minimum lease payments due under the non-cancelable
capital lease ($000):
Fiscal Year Ending June 30,
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of capitalized payments
Less: current portion
Long-term portion
Amount
2,579
2,579
2,579
2,579
2,579
24,503
37,398
12,909
24,489
1,074
23,415
$
$
$
$
The current and long-term portion of the capital lease obligation was recorded in Other accrued liabilities and Capital lease obligation,
respectively, in the Company’s Consolidated Balance Sheet as of June 30, 2017. The present value of the minimum capital lease
payments at inception was $25.0 million recorded in Property, Plant & Equipment, net, in the Company’s Consolidated Balance Sheet
as of June 30, 2017, with associated depreciation being recorded over the 15 year life of the lease. During the fiscal year ended June
30, 2017, the Company recorded $0.8 million of depreciation expense associated with the capital leased asset.
Note 20.
Subsequent Events
On July 26, 2017, the Company signed a definitive purchase agreement to acquire 100% of the outstanding stock of Kaim Laser
Limited, a company located in the United Kingdom for $80 million. The Company will operate under the name II-VI Compound
Semiconductor Ltd. and will be included in the II-VI Laser Solutions segment for financial reporting purposes. The preliminary
purchase price allocation is incomplete at this time and will be accounted for in accordance with ASU 805 Business Combinations.
79
Quarterly Financial Data (unaudited)
Fiscal Year 2017
Quarter Ended
($000)
2017
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 2016
Quarter Ended
($000)
2016
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
September 30, December 31, March 31,
2016
2016
2017
June 30,
2017
$
$
$
$
221,520 $
133,918
21,832
42,079
1,246
(1,402)
23,847
7,553
16,294 $
231,822 $
137,559
23,632
43,495
1,365
(6,045)
31,816
7,913
23,903 $
244,987 $
147,277
25,380
43,291
1,936
(2,164)
29,267
6,837
22,430 $
0.26 $
0.38 $
0.36 $
0.26 $
0.37 $
0.35 $
273,717
164,939
25,966
47,137
2,262
(445)
33,858
1,211
32,647
0.52
0.50
September 30, December 31, March 31,
2015
2015
2016
June 30,
2016
$
$
$
$
189,207 $
118,018
13,151
36,310
649
(1,057)
22,136
4,922
17,214 $
191,434 $
120,090
12,155
37,408
597
(994)
22,178
3,187
18,991 $
205,105 $
127,436
14,946
43,333
769
1,257
17,364
2,426
14,938 $
0.28 $
0.31 $
0.24 $
0.27 $
0.30 $
0.24 $
241,470
148,859
20,102
43,595
1,066
(429)
28,277
13,934
14,343
0.23
0.23
80
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2017, 2016, 2015 AND
(IN THOUSANDS OF DOLLARS)
YEAR ENDED JUNE 30, 2017:
Allowance for doubtful accounts
Warranty reserves
Deferred tax asset valuation allowance
YEAR ENDED JUNE 30, 2016:
Allowance for doubtful accounts
Warranty reserves
Deferred tax asset valuation allowance
YEAR ENDED JUNE 30, 2015:
Allowance for doubtful accounts
Warranty reserves
Additions
Balance at
Beginning
of Year
Charged
to
Expense
Charged Deduction
from
to Other
Reserves
Accounts
Balance
at End
of Year
$
$
$
$
$
$
$
$
2,016
3,908
42,641
1,048
3,251
2,713
1,852
2,859
$
$
$
$
$
$
$
$
(134)
4,850
(79)
1,123
4,648
8,464
(482)
5,047
$
$
$
$
$
$
$
$
-
-
-
$
$
$
(568) (2) $
$
$
(4,212)
-
1,314
4,546
42,562
-
$
82 (1) $
36,240 (3) $
(155) (2) $
(4,073)
$
(4,776) (4) $
2,016
3,908
42,641
-
-
$
$
(322) (2) $
$
(4,655)
1,048
3,251
(1)
(2)
(3)
(4)
Relates to the warranty reserve acquired from the acquisitions.
Primarily relates to write-offs of accounts receivable.
Valuation allowance recorded through goodwill.
Reduction in valuation allowance as a result of divesture of portion of business.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Item 9.
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer, and the Company’s Chief
Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this
Annual Report on Form 10-K. The Company’s disclosure controls were designed to provide reasonable assurance that information
required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the SEC. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been
designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of June 30, 2017, the Company’s disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system is designed 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
81
conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2017. In making this
evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control – Integrated Framework (2013). Management excluded from the scope of its assessment of internal
control over financial reporting, the operations and related assets of Integrated Photonics Inc. which was acquired on June 19, 2017.
The recent acquisition excluded from management’s assessment of internal controls over financial reporting represented
approximately $59.8 million and $45.3 million of total assets and net assets, respectively, as of June 30, 2017 and approximately $1.3
million and $0.1 million of total revenues and net income, respectively, for the fiscal year then ended. Based on the evaluation,
management concluded that as of June 30, 2017, the Company’s internal controls over financial reporting were effective.
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 2017 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 2017,” “Executive Compensation,” “Compensation Committee Report” and “Compensation and Risk” in
the Company’s Proxy Statement.
82
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, 2017 is set forth under
Item 8 of this Annual Report on Form 10-K.
83
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.
Exhibit No.
3.01
Amended and Restated Articles of Incorporation of II-VI
Incorporated
Description
Location
3.02
Amended and Restated By-Laws of II-VI Incorporated
10.01
10.02
10.03
Third Amended and Restated Credit Agreement, by and among II-VI
Incorporated, each of the Guarantors party thereto, the Lenders party
thereto, and PNC Bank, National Association, as Administrative and
Documentation Agent, and Bank of America, N.A., as Syndication
Agent, dated as of July 28, 2016.
Credit Agreement, dated as of January 31, 2012, by and among II-VI
Japan Incorporated, each of the Guarantors party thereto, PNC Bank,
National Association, the other Banks party thereto, and PNC Bank,
National Association, in its capacity as agent for the Banks
thereunder (500,000,000 Yen Revolving Credit Facility)
Incorporated herein by reference to Exhibit 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 August 2, 2016.
Incorporated herein by reference to Exhibit
10.02 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the year ended June
30, 2015.
First Amendment to Credit Agreement, dated as of September 18,
2015, by and among II-VI Japan Incorporated, the Guarantors party
thereto, the Banks party thereto, and PNC Bank, National
Association, as agent.
Incorporated herein by reference to Exhibit
10.01 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2015.
10.04
Amended and Restated Employment Agreement, dated September 19,
2008, by and between II-VI and Francis J. Kramer*
10.05
10.06
Employment Agreement, dated August 1, 2016, 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*
10.07
Employment Agreement, dated October 3, 2012, by and between II-
VI Incorporated and Giovanni Barbarossa*
10.08
Employment Agreement, dated November 10, 2008, by and between
II-VI Incorporated and David G. Wagner*
10.09
Secondment Engagement Letter, dated November 6, 2015, among
Sherrard, German & Kelly, P.C., II-VI Incorporated, and Walter R.
Bashaw II*
10.10
Employment Agreement, dated February 1, 2016, by and between II-
VI Incorporated and Gary A. Kapusta*
Incorporated herein by reference to Exhibit
10.1 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
10.1 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on August 2, 2016.
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.
Incorporated herein by reference to Exhibit
10.07 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the year ended June
30, 2015.
Incorporated herein by reference to Exhibit
10.08 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the year ended June
30, 2015.
Incorporated herein by reference to Exhibit
10.02 to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the Quarter ended
December 31, 2015.
Incorporated herein by reference to Exhibit
10.01 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on February 1,
2016.
84
10.11
10.12
10.14
10.15
10.16
10.17
10.18
10.19
Employment Agreement, dated March 6, 2017, by and between II-VI
Incorporated and Jo Anne Schwendinger *
Filed herewith.
Consulting Agreement, dated June 30, 2016, between II-VI
Incorporated and Carl J. Johnson*
10.13
Form of Employment Agreement*
Form of Executive Employment Agreement
Form of Exhibit 1 to Employment Agreement
Form of Indemnification Agreement
Filed herewith
Filed herewith
Filed herewith
Form of Representative Agreement between II-VI and its foreign
representatives
II-VI Incorporated Amended and Restated Employees’ Stock
Purchase Plan
First Amendment to the II-VI Incorporated Amended and Restated
Employees’ Stock Purchase Plan
10.20
II-VI Incorporated Amended and Restated Employees’ Profit-Sharing
Plan and Trust Agreement, as amended
10.21
Description of Bonus Incentive Plan*
10.22
Description of Discretionary Incentive Plan (now known as the Goal/
Results Incentive Program)*
10.23
Description of Management-By-Objective Plan*
10.24
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods prior to January 1, 2015)*
10.25
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods after January 1, 2015)*
10.26
Trust Under the II-VI Incorporated Deferred Compensation Plan*
85
Incorporated herein by reference to Exhibit
10.01 to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the quarter ended
March 31, 2017.
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).
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.
Incorporated herein by reference to Exhibit
10.17 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference to Exhibit
10.18 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference is Exhibit
10.13 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 1996.
10.27
II-VI Incorporated 2009 Omnibus Incentive Plan*
10.28
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.29
Form of Restricted Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.30
Form of Performance Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.31
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.32
Form of Performance Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.33
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.34
II-VI Incorporated Amended and Restated 2012 Omnibus Incentive
Plan*
10.35
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.36
Form of Restricted Share Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.37
Form of Performance Share Award Agreement (Consolidated
Revenue) under the II-VI Incorporated Amended and Restated 2012
Omnibus Incentive Plan*
10.38
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.39
Form of Performance Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit 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.
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.
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.
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.
86
10.40
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.41
10.42
10.43
10.44
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*
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*
10.45
II-VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
10.46
10.47
10.48
10.49
10.50
10.51
10.52
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Restricted Share Award Agreement (3 year) under the
II-VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Restricted Share Award Agreement (1 year) under the
II-VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Restricted Share Unit Award Agreement under the II-
VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Performance Share Award Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Performance Unit Award Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Incorporated herein by reference to Exhibit
10.35 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.
Incorporated herein by reference to Exhibit
10.36 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference to Exhibit
10.37 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference to Exhibit
10.1to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the quarter ended
December 31, 2015.
Incorporated herein by reference to Exhibit
10.03 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.04 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.05 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.06 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.07 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.08 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.09 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
87
10.53
10.54
10.55
21.01
23.01
31.01
31.02
32.01
32.02
Form of Performance Share Award Agreement (June 30, 2019)
under the II-VI Incorporated Second Amended and Restated
Omnibus Incentive Plan*
Form of Total Shareholder Return Performance Share Award
Agreement under the II-VI Incorporated Second Amended and
Restated Omnibus Incentive Plan*
Form of Total Shareholder Return Performance Unit Award
Agreement under the II-VI Incorporated Second Amended and
Restated Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit
10.10 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.11 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.12 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
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
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
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
Furnished herewith.
Filed herewith.
Filed herewith.
101
Interactive Data File
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
(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.
Item 16.
FORM 10-K SUMMARY
None.
88
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 21, 2017
II-VI INCORPORATED
By:
/s/ Vincent D. Mattera Jr.
Vincent D. Mattera Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: August 21, 2017
Date: August 21, 2017
Date: August 21, 2017
Date: August 21, 2017
Date: August 21, 2017
Date: August 21, 2017
Date: August 21, 2017
Date: August 21, 2017
Principal Executive Officer:
By:
/s/ Vincent D. Mattera Jr.
Vincent D. Mattera Jr.
President and Chief Executive Officer
Principal Financial and Accounting Officer:
By:
By:
By:
By:
By:
By:
By:
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
/s/ Francis J. Kramer
Francis J. Kramer
Chairman of the Board and Director
/s/ Joseph J. Corasanti
Joseph J. Corasanti
Director
/s/ RADM Marc Y. E. Pelaez (retired)
RADM Marc Y. E. Pelaez (retired)
Director
/s/ Howard H. Xia
Howard H. Xia
Director
/s/ William Schromm
William Schromm
Director
/s/ Shaker Sadasivam
Shaker Sadasivam
Director
89
Exhibit No.
3.01
Amended and Restated Articles of Incorporation of II-VI
Incorporated
EXHIBIT INDEX
Description
Location
3.02
Amended and Restated By-Laws of II-VI Incorporated
Incorporated herein by reference to Exhibit 3.1
to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on November 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 August 2, 2016.
10.01
10.02
10.03
Third Amended and Restated Credit Agreement, by and among II-VI
Incorporated, each of the Guarantors party thereto, the Lenders party
thereto, and PNC Bank, National Association, as Administrative and
Documentation Agent, and Bank of America, N.A., as Syndication
Agent, dated as of July 20, 2016.
Credit Agreement, dated as of January 31, 2012, by and among II-VI
Japan Incorporated, each of the Guarantors party thereto, PNC Bank,
National Association, the other Banks party thereto, and PNC Bank,
National Association, in its capacity as agent for the Banks
thereunder (500,000,000 Yen Revolving Credit Facility)
Incorporated herein by reference to Exhibit
10.02 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the year ended June
30, 2015.
First Amendment to Credit Agreement, dated as of September 18,
2015, by and among II-VI Japan Incorporated, the Guarantors party
thereto, the Banks party thereto, and PNC Bank, National
Association, as agent.
Incorporated herein by reference to Exhibit
10.01 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2015.
10.04
Amended and Restated Employment Agreement, dated September 19,
2008, by and between II-VI and Francis J. Kramer*
10.05
10.06
Employment Agreement, dated August 1, 2016, 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*
10.07
Employment Agreement, dated October 3, 2012, by and between II-
VI Incorporated and Giovanni Barbarossa*
10.08
Employment Agreement, dated November 10, 2008, by and between
II-VI Incorporated and David G. Wagner*
10.09
Secondment Engagement Letter, dated November 6, 2015, among
Sherrard, German & Kelly, P.C., II-VI Incorporated, and Walter R.
Bashaw II*
10.10
Employment Agreement, dated February 1, 2016, by and between II-
VI Incorporated and Gary A. Kapusta*
Incorporated herein by reference to Exhibit
10.1 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
10.1 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on August 2, 2016.
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.
Incorporated herein by reference to Exhibit
10.07 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the year ended June
30, 2015.
Incorporated herein by reference to Exhibit
10.08 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the year ended June
30, 2015.
Incorporated herein by reference to Exhibit
10.02 to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the Quarter ended
December 31, 2015.
Incorporated herein by reference to Exhibit
10.01 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on February 1,
2016.
90
10.11
10.12
10.14
10.15
10.16
10.17
10.18
10.19
Employment Agreement, dated March 6, 2017, by and between II-VI
Incorporated and Jo Anne Schwendinger *
Filed herewith.
Consulting Agreement, dated June 30, 2016, between II-VI
Incorporated and Carl J. Johnson
10.13
Form of Employment Agreement*
Form of Executive Employment Agreement
Form of Exhibit 1 to Employment Agreement
Form of Indemnification Agreement
Filed herewith
Filed herewith
Filed herewith
Form of Representative Agreement between II-VI and its foreign
representatives
II-VI Incorporated Amended and Restated Employees’ Stock
Purchase Plan
First Amendment to the II-VI Incorporated Amended and Restated
Employees’ Stock Purchase Plan
10.20
II-VI Incorporated Amended and Restated Employees’ Profit-Sharing
Plan and Trust Agreement, as amended
10.21
Description of Bonus Incentive Plan*
10.22
Description of Discretionary Incentive Plan (now known as the Goal/
Results Incentive Program)*
10.23
Description of Management-By-Objective Plan*
10.24
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods prior to January 1, 2015)*
10.25
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods after January 1, 2015)*
10.26
Trust Under the II-VI Incorporated Deferred Compensation Plan*
91
Incorporated herein by reference to Exhibit
10.01 to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the quarter ended
March 31, 2017.
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).
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.
Incorporated herein by reference to Exhibit
10.17 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference to Exhibit
10.18 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference is Exhibit
10.13 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 1996.
10.27
II-VI Incorporated 2009 Omnibus Incentive Plan*
10.28
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.29
Form of Restricted Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.30
Form of Performance Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.31
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.32
Form of Performance Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.33
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.34
II-VI Incorporated Amended and Restated 2012 Omnibus Incentive
Plan*
10.35
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.36
Form of Restricted Share Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.37
Form of Performance Share Award Agreement (Consolidated
Revenue) under the II-VI Incorporated Amended and Restated 2012
Omnibus Incentive Plan*
10.38
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.39
Form of Performance Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
92
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.
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.
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.
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.
10.40
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.41
10.42
10.43
10.44
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*
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*
10.45
II-VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
10.46
10.47
10.48
10.49
10.50
10.51
10.52
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Restricted Share Award Agreement (3 year) under the
II-VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Restricted Share Award Agreement (1 year) under the
II-VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Restricted Share Unit Award Agreement under the II-
VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Performance Share Award Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
Form of Performance Unit Award Agreement under the II-VI
Incorporated Second Amended and Restated Omnibus Incentive
Plan*
93
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.
Incorporated herein by reference to Exhibit
10.36 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference to Exhibit
10.37 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2015.
Incorporated herein by reference to Exhibit
10.1to II-VI’s Current Report on Form 10-Q
(File No. 000-16195) for the quarter ended
December 31, 2015.
Incorporated herein by reference to Exhibit
10.03 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.04 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.05 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.06 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.07 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.08 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.09 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
10.53
10.54
10.55
21.01
23.01
31.01
31.02
32.01
32.02
Form of Performance Share Award Agreement (June 30, 2019)
under the II-VI Incorporated Second Amended and Restated
Omnibus Incentive Plan*
Form of Total Shareholder Return Performance Share Award
Agreement under the II-VI Incorporated Second Amended and
Restated Omnibus Incentive Plan*
Form of Total Shareholder Return Performance Unit Award
Agreement under the II-VI Incorporated Second Amended and
Restated Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit
10.10 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.11 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
Incorporated herein by reference to Exhibit
10.12 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
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
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
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
Furnished herewith.
Filed herewith.
Filed herewith.
101
Interactive Data File
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
(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.
Item 16.
FORM 10-K SUMMARY
None.
94
Corporate Information
Board of Directors
Joseph J. Corasanti
Retired President, CEO and Director
CONMED Corporation
Francis J. Kramer
Chairman
II-VI Incorporated
Dr. Vincent D. Mattera, Jr.
President and Chief Executive Officer
II-VI Incorporated
Marc Y. E. Pelaez
Rear Admiral
United States Navy (retired)
William A. Schromm
Executive Vice President and Chief Operating Officer
ON Semiconductor Corporation
Dr. Shaker Sadasivam
President
Andamijo LLC.
Dr. Howard H. Xia
Retired Executive
Vodafone China
Executive Officers
Dr. Vincent D. Mattera, Jr.
President and Chief Executive Officer
Gary A. Kapusta
Chief Operating Officer
Mary Jane Raymond
Chief Financial Officer
Annual Meeting
Friday, November 3, 2017
At 3:00 PM EST
Meeting to be webcast from:
Marriott Pittsburgh North
100 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
Dr. Giovanni Barbarossa
Chief Technology Officer and President Laser Solutions
David G. Wagner
Vice President, Human Resources
Jo Anne Schwendinger
General Counsel and Secretary
Securities Counsel
K&L Gates LLP
K&L Gates Center
210 Sixth Avenue
Pittsburgh, PA 15222
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