About II-VI
II-VI Incorporated, a global leader in engineered materials and
optoelectronic 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 support our customers.
The photos on the cover represent
diverse applications enabled by
electronic devices that are based on
silicon carbide (SiC) and for which the
demand is growing rapidly. The thermal
efficiency of SiC semiconductors is
particularly well-suited to RF electronics
for high performance 4G and 5G
wireless applications. The wide bandgap
properties of SiC semiconductors
allow electronic devices to achieve high
electrical power conversion efficiencies
in electric vehicles and other applications
that are driven by the demand for clean
and renewable energy.
For the year ended or as of June 30
($000 except per share data)
Revenues
Net earnings
Adjusted net earnings
Diluted earnings per share
Adjusted diluted earnings per share
As of June 30
Total assets
Total shareholders’ equity
Working capital
$1200
$1000
$800
14% CAGR
1,158.8
972.0
827.2
741.9
$600
683.2
$400
$200
$0
FY14
FY15
FY16
FY17
FY18
Financial Summary
2018
2017
$ 1,158,794
$
88,002
$ 132,000
1.35
$
2.03
$
$ 1,761,661
$ 1,024,311
$ 525,370
$ 972,046
$
95,274
$ 115,900
1.48
$
1.80
$
$ 1,477,297
$ 900,563
$ 517,344
$160
$140
$120
$100
$80
$60
$40
$20
$0
14% CAGR
161.0
129.4
123.0
118.6
95.5
FY14
FY15
FY16
FY17
FY18
Net Revenues ($ in millions)
Cash Flow from Operations ($ in millions)
$1800
$1600
$1400
$1200
$1000
$800
$600
$400
$200
$0
13% CAGR
1,761.7
1477.3
1,070.8
1,057.3
1,212.0
11% CAGR
$1000
$800
$600
675.0
782.3
729.1
1,024.3
900.6
FY14
FY15
FY16
FY17
FY18
$400
$200
$0
FY14
FY15
FY16
FY17
FY18
Total Assets ($ in millions)
Total Shareholders’ Equity ($ in millions)
CAGR – Compound Annual Growth Rate
Adjusted net earnings and adjusted diluted earnings per share excludes the following items: share-based
compensation of $19.7 million, amortization expense of $14.6 million, certain one-time transaction
expenses of $2.0 million and the effects of the Tax Act and related actions of $8.0 million.
ii-vi.com 1
Shareholder Letter
Our sales throughout Fiscal Year 2018 continued to be strategically
diversified, with 39% in communications, including wireless and
optical communications, 30% in industrial, 10% in military, 8% in
semiconductor capital equipment and the remainder in emerging
applications, including in consumer electronics, automotive and life
sciences. Our sales were also geographically diverse with 43% in
North America, 21% in Europe, 20% in China, 8% in Japan and 8% in
the rest of world.
For many of our product lines, we expanded our capabilities for our
customers as the end markets grew, including addressing many
sold-out conditions. Some of our investment highlights include:
• The ramp in manufacturing of our VCSEL arrays for 3D sensing.
This followed two strategic acquisitions, bold investments and an
accelerated timeline to qualify the world’s first in-house vertically
integrated 6-inch VCSEL platform for the consumer electronics
end market. We believe that our technical capabilities position us
to participate in the growing market for 3D sensing in biometrics,
augmented reality and LiDAR for many years to come.
• The expansion of our new high tech compound semiconductor
epitaxial materials center of excellence. In May, we hosted
Illinois Governor Bruce Rauner at the ribbon-cutting for this new
center in Champaign, Illinois. This was a significant investment
in our manufacturing footprint to develop and produce
compound semiconductor epitaxial wafers that are at the core
of 3D sensing, optical networking, wireless communications
and power electronics.
• The Silicon Carbide semiconductor substrate expansion. We
significantly expanded our manufacturing capacity of silicon
carbide substrates, leveraging both capital and RD&E investments
in the introduction of highly innovative manufacturing processes.
Continued investments in innovation of silicon carbide substrate
manufacturing are essential to enabling us to scale and sustain
our rapid growth into the new fiscal year.
• The expansion of our manufacturing operations for CVD
diamond and optical components for CO2 lasers. In 2018,
In Fiscal Year 2018, II-VI’s annual revenues exceeded $1
billion for the first time, an exciting milestone alongside
our many other achievements during the year. With the
manufacturing ramp of our VCSELs for 3D sensing, our
silicon carbide substrates for 5G wireless networks
and electric vehicles, our optics for EUV lithography,
and new military applications, our new growth markets
contributed nearly half our growth in fiscal year 2018.
We also hosted our first-ever Investor Day in November
at the Nasdaq MarketSite to overwhelmingly positive
reviews. Our message about our strategy and how our
technology platforms enable our diversified business in
many growing end markets resonated well. Since then,
six additional equity analysts initiated coverage of II-VI,
bringing our total to 11 covering analysts.
2 II-VI INCORPORATED 2018 ANNUAL REPORT
we relocated approximately 100 staff members from our
We launched smaller and lighter scan lenses by combining zinc
Saxonburg, PA location to new corporate offices in Warrendale,
sulfide and fused silica optics to enable faster micro-materials
PA, in part to free space that can be devoted to meeting the
processing. We also introduced scan lenses for carbon monoxide
demand for EUV lithography. In Fiscal Year 2018, components
lasers, which are particularly advantageous in cutting curved
for EUV lithography grew by 65%.
shapes in glass for the manufacture of consumer electronics
• The investments in manufacturing capacity for VCSELs, micro-
optics and isolator materials for datacom. These investments
displays.
• Optical Coatings. We leveraged our thin film filter coating
enabled us to more than double our sales of datacom products
technology platform to develop products for a broad range of
for transceivers deployed in hyperscale datacenters. In Fiscal
applications. For example, we introduced wide incidence angle
Year 2018, datacom represented 20% of our communications
mirrors for LiDAR, ultraviolet fluorescence filters for a new
revenue, up from 10% in the prior year.
generation of biomedical instruments and colorimeter filters that
• Expansion of our 980 nm pump laser manufacturing production
lines. This included additional capacity for pump laser module
enable calibration of consumer electronics displays.
We ended the year with record cash flow, a record backlog and the
assembly in Shenzhen, China as well as wafer fab and chip on
start of work to simplify the company’s operations. With the new
carrier assembly both in Zurich, Switzerland and in Calamba,
Tax Cuts and Jobs Act, we began to repatriate our cash to better
Philippines. This new capacity should be operational by the
position us to fund strategic and growth opportunities. Now in this
end of calendar year 2018. Our investments were made after
first quarter of Fiscal Year 2019, we look forward to welcoming
reaching two major shipment milestones earlier in the year: three
the team from CoAdna, our latest strategic acquisition. We believe
million pump laser modules and a half a million erbium doped
that their differentiated LightFlow™ wavelength selective switch
fiber amplifiers (EDFAs) shipped. We estimate these components
product series will complement our market-leading portfolio of
enable as much as 50% of all global internet traffic running
communications products for ROADM line cards and enable us to
through the optical transport network.
satisfy our customers’ requirements for more integrated solutions.
In Fiscal Year 2018, we realized 16% organic growth over the
I am excited about the milestones we achieved, our great results
prior year. We also introduced many products and began the
and our prospects for sustained growth. I believe that we are well
investment in future products, setting the stage for more growth
positioned to deliver another successful year. Finally, I want to
in all our end markets. For example:
thank our employees, customers, suppliers, the communities we
• Laser diodes. We leveraged our semiconductor laser technology
platform to introduce multiple products, including edge emitting
lasers for 3D sensing, high power direct diode laser engines
for materials processing, high power laser bars and stacks for
directed energy weapons systems, and low noise laser heads for
life sciences.
• Optics. Using our industry-leading diamond turning capabilities
and optical subsystem design expertise, we introduced freeform
beam shaping laser optics for fiber lasers and direct diode lasers.
operate in around the world and our shareholders for their support
as we position II-VI to continue to enable the world to be safer,
healthier, closer and more efficient.
Dr. Vincent D. (Chuck) Mattera, Jr.
President and Chief Executive Officer
ii-vi.com 3
Cloud Service Providers
Drive Growth in Optical
Communications
Cloud Service Providers’ Rapid Growth
According to Synergy Research Group, cloud services
have generated over $16B in revenue in Q2 2018,
which represents an average annual growth of 50%
[1]. Amazon commands a strong share in this market,
though Microsoft, IBM, Google and Alibaba are
growing their share rapidly. To keep up with the growth,
cloud service providers are investing heavily in their
datacenter infrastructure and expanding their terrestrial
and undersea optical networks globally.
Cloud Providers
Q2 2018
Market Share
Revenue Growth Y/Y
Amazon
34%
Microsoft
14%
IBM
Google
Alibaba
7%
6%
4%
50%
50%
80%
70%
105%
Synergy Research Group
Datacom Transceivers and Active
Optical Cables with VCSELs
Transceivers based on VCSELs offer the
most cost-effective solution for datacenter
links that span from 10 to 300 meters.
VCSEL-based 100 GbE transceivers are
shipping in volume. In FY18, II-VI continued
to increase its production of such high
speed VCSELs and increasingly in pairs
with detectors, which were introduced
more recently in February 2017.
February 23, 2017
March 2, 2017
March 14, 2017
June 19, 2017
II-VI Unveils Miniature Z-block
Optics for 100 Gb/s Datacenter
Transceivers
II-VI Introduces 25 Gb/s
Detector Chip Arrays for Active
Optical Cables Deployed in
Datacenters – and ramps up
production of 25Gb/s VCSELs
4 II-VI INCORPORATED 2018 ANNUAL REPORT
II-VI Unveils 3-pin 980 nm
Uncooled Micro-Pump Laser
Module for Emerging High Bit
Rate Transmission Applications
II-VI Acquires Integrated
Photonics, An Innovator of
Optical Isolator Materials
Undersea Optical Networks
Increasingly, the largest cloud service providers are
driving the deployment of subsea cables to efficiently
connect datacenters on separate continents. II-VI’s
pump lasers are among the very few to be trusted to
be deployed on the ocean floor and operate reliably
for decades.
Datacom Transceiver with Edge Emitting Lasers
For links greater than 300 m, transceivers are largely based on edge emitting
lasers. The CWDM4 format emerged in FY18 as the preferred configuration for
100 GbE over alternatives such as PSM4 and LR4, due to its increasing cost
advantage. Wavelength division multiplexers are a key enabler of CWDM4.
II-VI experienced a significant increase in demand for its wavelength division
multiplexer, a micro-optics assembly based on our thin film filters.
Edge emitting lasers require optical isolators to prevent the undesired effects of
light reflecting off the fiber and back into the laser. In June of 2017, II-VI acquired
Integrated Photonics, which manufactures highly differentiated magneto-optic
materials used in optical isolators. These materials are also at the core of
optical circulators, which enable bidirectional transmission on one fiber instead
of two and thereby significantly reduce the number of fibers in the datacenter.
Communications
Datacom
FY17
FY18
FY17
FY18
II-VI Revenue ($M)
$428.1
$455.3
6% Growth
$42.2
$89.9
113% Growth
FY17 = 10% of Communications
FY18 = 20% of Communications
Intra-datacenter Interconnects
Hyperscale datacenters have created a new class
of equipment called datacenter interconnects (DCI).
II-VI launched in FY18 its optical line subsystem to
extend the reach of transceivers up to 25 km based on
direct-detect technology to interconnect datacenters
collocated on large campuses.
For transmission of hundreds of kilometers and beyond,
DCI use predominantly coherent optics transmitting at
100, 200 and 400 Gb/s. II-VI estimates that 50 to 75% of
such coherent transceivers require optical amplification.
II-VI has the most complete portfolio of products for
transceiver-embedded erbium-doped fiber amplifiers
(EDFAs). Each product stands on its own merits as the
industry’s best in class in terms of size and performance.
September 7, 2017
September 18, 2017
February 27, 2018
II-VI Unveils the FlexSOM EDFA
Platform for Next Generation
High Bit Rate Coherent
Transceivers
II-VI Announces Optical Line
Subsystem Platform for
Datacenter Interconnects
II-VI Introduces Ultra-low
Profile Wide Band Tunable
Optical Filters for Next
Generation Pluggable
Coherent Optics
References
[1] Synergy Research Group, “Cloud
Revenues Continue to Grow by 50% as Top
Four Providers Tighten Grip on Market,”
July 2018
https://www.srgresearch.com/articles/
cloud-revenues-continue-grow-50-top-four-
providers-tighten-grip-market
ii-vi.com 5
Markets for
Silicon Carbide
Electrification Paves the way to Clean Energy
Clean energy from renewable sources such as solar, wind or
hydroelectric energy is converted, stored and distributed in the
form of electrical power. Efficient use and distribution of that
power will enable the electrification of our transportation
systems, including electric vehicles, maglev trains,
and future green energy–powered homes, offices,
factories and power plants. The inherent efficiency
gain of wide bandgap power electronics based on
silicon carbide (SiC) semiconductors will accelerate
the adoption clean energy by offering leading energy
density and system-level cost per watt.
SiC
SiC Power Electronics in Electric Vehicles
Motivated to reduce carbon-dioxide emissions, many
countries across the globe are sponsoring while others
have already passed legislation to require or provide
incentive for zero-emission and low-emission vehicles,
such as electric vehicles (EVs), to be phased in by
2050. Major automotive manufacturers worldwide have
announced plans to electrify their cars and trucks, with
some EVs already on the market with growing sales.
Most credible estimates project that fuel efficiency
can be improved by about 10% by replacing Si power
devices with SiC-based technology that will enable
power converters and inverters in EVs. [1]
6 II-VI INCORPORATED 2018 ANNUAL REPORT
SiC-Based RF Electronics 5G Wireless
To meet the massive growth in consumer demand for bandwidth, wireless service
providers around the world are racing to deploy 5G wireless and exert their influence
to advance the establishment of supply chain ecosystems and technology
standards. The release of an early version of the 5G standard is expected by the
end of 2018, with the full 5G implementation by 2020. The latter will leverage
the high speed capabilities of the millimeter wave band using gallium nitride on
silicon carbide (GaN/SiC) power amplifiers. Concurrently, the widely anticipated
adoption of beam-forming technology is expected to further increase the
demand for GaN/SiC power amplifiers by approximately an order of magnitude.
Strong Portfolio of Intellectual
Property
Since the 90’s II-VI has built a strong
portfolio of now 30 active patents,
including those for the world’s first
200 mm substrate, debuted in 2015.
The strength of II-VI’s technology
platform relies on highly specialized
manufacturing equipment designed
and built in house.
“Data on our mobile network has increased about 250,000% since 2007, and the majority of that traffic
is video. 5G’s promise of greater speed and overall network performance brings huge opportunities not
only for video but in the Internet of Things, 4K video, augmented and virtual reality, smart home and
cities, autonomous vehicles and much more.”
— John Donovan, AT&T chief strategy officer and group president, Technology and Operations (July 2017)
Scaling Up Production of Quality SiC Substrates
FY18 was marked by sharp increases in manufacturing capacity
across the global SiC semiconductor supply chain. To keep pace
with worldwide demand and the industry shift from 100 mm to 150
mm diameter wafers, II-VI increased SiC substrate manufacturing
capacity by 60%. As we enter FY19 with the demand exceeding the
supply, we expect another year of 60% growth.
Technology Roadmap
II-VI also develops and manufactures epitaxial wafers for key
enabling devices, such as GaN HEMT, InP HBT and GaAs BiHEMT
and pHEMT used in wireless handsets and base stations. We are
leveraging these capabilities in our vertically integrated 6-inch
compound semiconductor production platform, with a strong
focus on next generation 5G wireless. These key RF technologies
will be followed by a SiC epitaxial wafer capability enabling the
power electronic devices that serve the HEV and EV market place.
References
[1] Fuel Efficiency Reference: https://
www.toyota-global.com/innovation/
environmental_technology/keytech/
[2] AT&T Quote: http://about.att.com/
story/att_details_5g_evolution.html
SiC Development Timeline
1.38″
2″
3″
100 mm
150 mm
200 mm
2002
2004
2007
2009
2012
2013
2015
2 inch wafer
substrate
manufacturing
3 inch wafer
substrate
manufacturing
Demonstrated
100 mm wafer
substrates
100 mm wafer
substrate
manufacturing
Demonstrated
150 mm wafer
substrates
150 mm wafer
substrate
manufacturing
Demonstrated
world’s first
200 mm wafer
substrates
ii-vi.com 7
ii-vi.com 7
3D Sensing in Consumer
Electronics
3D Sensing in Consumer Devices for Biometric Authentication
In 2017, the world began to experience laser-based face recognition and
identification in a handheld consumer device for the first time. Since then,
several high profile consumer electronics brands have announced products
that feature cameras for face biometrics, using laser-based 3D sensing. II-VI’s
vertical cavity surface emitting lasers (VCSELs), based on a cost-effective,
scalable and vertically integrated 6 inch semiconductor platform, provide
high power infrared illumination for structured light projection and time-of-
flight (TOF) lighting to enable biometrics scans. Our optical filters isolate
the returning VCSEL signal over a wide field of view to improve the sensors’
accuracy and sensitivity, whether in intense sunlight or at night time.
8 II-VI INCORPORATED 2018 ANNUAL REPORT
The Convergence of Laser-based
Sensing, 5G Wireless and the AR Cloud
The convergence of laser-based 3D sensing, millimeter-
wave 5G wireless and the AR cloud has the potential
to be transformative for AR. 5G wireless will enable
connected devices to access in real time a growing
amount of information stored in the cloud, aggregated
from an increasing number of sources. This data will be
made relevant on demand through vast cloud computing
resources increasingly assisted by artificial intelligence
and machine learning techniques. Laser-based depth
cameras will enable cloud-based information to be
blended with greater precision onto our real environment
and provide seamless AR experiences. Depth cameras
have the potential to be integrated into wearable
computers such as smartglasses so AR experiences
can be enjoyed without the inconvenience of holding
devices to scan the environment.
“I don’t think there is any sector or industry that
will be untouched by AR.”
— Tim Cook, Apple CEO - Vogue Interview, October 2017
3D Sensing for Augmented Reality
In biometrics applications, lasers are typically on the front
side of a device and point towards the user. In the future,
lasers could be incorporated into the back side of the
device to scan its surroundings. Such “world facing” depth
cameras could significantly enhance augmented reality
(AR) applications where large investments are already
being made. For instance, this past year, many emerging
AR applications were announced in diverse industries
such as health care, real estate and retail. These AR
programs are aimed at lowering the cost of field training,
reducing the number of service calls or improving
consumers’ experiences while shopping online.
VCSEL Array
Edge Emitting Laser
Low Angle Shift Filters
ii-vi.com 9
Extending Moore’s Law
with EUV Lithography
Year
Process Node
2000
800 nm
2005
65 nm
2010
32 nm
2015
14 nm
2018
7 nm
2020
5 nm
EUV lithography enables the 7 nm process node
Emerging applications such as in augmented reality, artificial
intelligence and blockchains are process intensive and are
driving up the size and complexity of processor chips such
as central processing units (CPUs) and graphics processing
units (GPUs). Extreme ultraviolet (EUV) lithography was
developed to manufacture microchips with 7 nm process
nodes and below and allow microchips with increased
process capabilities to retain their small size.
EUV Lithography
System
“Apple Inc. manufacturing partner Taiwan Semiconductor Manufacturing Co. has started
mass production of next-generation processors for new iPhones launching later this year,
according to people familiar with the matter. The processor, likely to be called the A12
chip, will use a 7-nanometer design that can be smaller, faster and more efficient than the
10-nanometer chips in current Apple devices like the iPhone 8 and iPhone X, the people said.”
— Bloomberg, May 2018
10 II-VI INCORPORATED 2018 ANNUAL REPORT
EUV lithography systems meet
requirements for volume production
EUV lithography systems for manufacturing shipped
in double digit numbers in calendar year 2017 and
production is expected to ramp in 2018 and beyond [1].
These systems have achieved their target throughput
capability of 125 wafers per hour after engineering
improvements that included higher CO2 laser power
and other process optimization [2]. High power CO2
lasers are an important part of EUV Lithography
systems. They are used to excite tin droplets with high
energy laser pulses. This process generates the EUV
radiation, which is directed to wafers using a complex
arrangement of mirrors specially designed for the very
short EUV wavelengths.
Output Couplers
Rear Mirrors
CO2
Laser
Optics
Modulator
II-VI’s Engineered Materials
The value of the II-VI-contributed product
content in this semiconductor fabrication tool
is estimated to be on the order of 1 to 2% of
the commercial value of the EUV lithography
system. II-VI leverages its engineered
materials, designed and manufactured in
house, for a broad range of components that
are designed into the CO2 laser system and
surrounding the EUV optics.
II-VI’s zinc selenide (ZnSe) components and
chemical vapor deposition (CVD) diamond
windows are used for the laser optics, both
within the seed laser and in the optical
system that directs and focusses the laser
beam onto the tin droplets.
CVD Diamond
Towards the 3 nm process node
While production ramp for 7 nm EUV
lithography is still at an early stage,
investments in the next generation tool
around the 5 nm node are already underway,
and the development of even the 3 nm
process node has already begun. Improved
EUV optical system and component
designs will enable these smaller process
nodes. II-VI is collaborating closely with its
partners in the supply chain to advance the
technology with its differentiated engineered
materials and optical components.
References
[1] ASML Earnings Call Presentation, July 18, 2018 – Page 14
[2] Photonics Spectra, “Extreme UV Keeps Pace with Moore’s Law,” July 2018
ii-vi.com 11
Enabling the world to be
safer, healthier, closer
and more efficient.
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, 2018
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 29, 2017, was
approximately $2,867,219,000 based on the closing sale price reported on the Nasdaq Global Select Market. For purposes of this calculation
only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates of the Registrant.
Number of outstanding shares of Common Stock, no par value, at August 22, 2018, was 63,595,874.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2018 Annual Meeting of
Shareholders of II-VI Incorporated, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K (including certain information incorporated herein by reference) contains forward-looking
statements made pursuant to Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The statements in this Annual Report on
Form 10-K that are not purely historical, but are forward-looking statements, including, without limitation, statements regarding our
expectations, assumptions, beliefs, intentions or strategies regarding the future. In some cases, these forward-looking statements can
be identified by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,”
“predicts,” “projects,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Forward-looking
statements address, among other things, our assumptions, our expectations, our assessments of the size and growth rates of our
markets, our growth strategies, our efforts to increase bookings, sales and revenues, projections of our future profitability, cash
generation, success of our research, development and engineering investments, results of operations, capital expenditures, our
financial condition, our ability to integrate acquired businesses or other “forward-looking” information and include statements about
revenues, costs, investments, earnings, margins, or our projections, actions, plans or strategies.
The forward-looking statements in this Annual Report on Form 10-K involve risks and uncertainties, which could cause actual results,
performance or trends to differ materially from those expressed in the forward-looking statements herein or in previous disclosures.
We believe that all forward-looking statements made by us have a reasonable basis, but there can be no assurance that these
expectations, beliefs or projections will actually occur or prove to be correct, at least on the timetable of our expectations. Actual
results could differ materially. We claim the protection of the safe harbor for forward-looking statements contained in the PSLRA for
our forward-looking statements.
The 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 2019 and beyond to differ materially from those expressed or implied in any forward-
looking statements included in this Annual Report on Form 10-K or otherwise made by our management:
•
•
•
•
•
•
•
•
•
•
•
•
•
Investments in future markets of potential significant growth may not result in expected returns.
Our competitive position depends on our ability to develop new products and processes.
Our competitive position may still require significant investments.
Our future success depends on continued international sales, and our global operations are complex to manage, and
present multiple challenges to manage.
Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign
exchange losses.
Any inability to access financial markets from time to time to raise required capital, finance our working capital
requirements or our acquisition strategies, or otherwise to support our liquidity needs could negatively impact our ability
to finance our operations, meet certain obligations or implement our growth strategy.
We may incur substantially more indebtedness.
We may not be able to settle conversions of our convertible senior notes in cash or to repurchase the notes in accordance
with their terms.
The conditional conversion feature of our outstanding convertible senior notes, if triggered, may adversely affect our
financial condition and operating results.
We may fail to accurately estimate the size and growth of our markets and our customers’ demands.
We may encounter increased competition.
There are limitations on the protection of our intellectual property and we may from time to time be involved in costly
intellectual property litigation or indemnification.
A significant portion of our business depends on cyclical industries.
2
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Changes in laws and regulations governing data privacy and data protection could have a material adverse impact on our
business.
Data breach incidents and breakdown of information and communication technologies could disrupt our operations and
impact our financial results.
Global economic downturns may adversely affect our business, operating results and financial condition.
We are subject to complex and rapidly changing governmental import and export regulations.
Changes in U.S. trade policies could impact the Company’s international operations and the cost of imported goods into
the U.S., which may narrow the size of our markets, materially impact our revenues or increase our operating costs and
expose us to contract litigation.
We have entered into supply agreements which commit us to supply products on specified terms.
We depend on highly complex manufacturing processes that require feeder materials, components and products from
limited sources of supply.
Our global operations are subject to complex legal and regulatory requirements.
We use and generate potentially hazardous substances that are subject to stringent environmental regulations.
We may be adversely affected by climate change regulations.
Some systems that use our products are complex in design, and our products may contain defects that are not known or
detected until deployed which could increase our costs, reduce our revenues, cause us to lose key customers and may
expose us to litigation arising from derivative lawsuits related to consumer products.
Unfavorable changes in tax rates, tax liabilities or tax accounting rules could negatively affect future results.
Increases in commodity prices may adversely affect our results of operations and financial condition.
Natural disasters or other global or regional catastrophic events could disrupt our operations, give rise to substantial
environmental hazards and adversely affect our results.
Our success depends on our ability to attract, retain, and develop key personnel and requires continued good relations with
our employees.
Our stock price has been volatile in the past and may be volatile in the future.
Some anti-takeover provisions contained in our articles of incorporation and by-laws, as well as provisions of
Pennsylvania law, could impair a takeover attempt, which could also reduce the market price of our common stock.
Because we do not currently intend to pay dividends, holders of our common stock will benefit from an investment in our
common stock only if it appreciates in value, and by the intended anti-dilution actions of our share-buyback program.
The foregoing and additional risk factors are described in more detail herein under Item 1A. “Risk Factors”. All such factors, as well
as factors described or referred to in other filings we make with the Securities and Exchange Commission (the “SEC”) from time to
time, should be considered in evaluating our business and prospects. Many of these factors are beyond our reasonable control. In
addition, we operate in a highly competitive and rapidly changing environment, and, therefore, new risk factors can arise and be
present without market players like us knowing until a substantial amount of time has passed. It is not possible for management to
predict all such risk factors, assess the impact of all such risk factors on our business nor estimate the extent to which any individual
risk factor, or combination of risk factors, nor to mitigate them all and therefore they may cause results to differ materially from those
contained in any forward-looking statement. The forward-looking statements included in this Annual Report on Form 10-K speak only
as of the date of this Annual Report on Form 10-K. We do not assume any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or developments, or otherwise, except as may be required by the
securities laws. We caution you not to rely on them unduly.
II-VI Incorporated does communicate with securities analysts from time to time and those communications are conducted in
accordance with applicable securities laws. Investors should not assume that II-VI Incorporated agrees with any statement or report
issued by any analyst, irrespective of the content of the statement or report.
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 headquarters 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 from which II-VI originally designed and produced infrared optics for high-
power CO2 lasers used in materials processing. We address 7 major markets. The majority of our revenues are attributable to the sale
of engineered materials and optoelectronic components, devices and subsystems for the industrial materials processing, optical
communications and military markets. 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; bismuth telluride (“Bi2Te3”); cadmium telluride (“CdTe”); carbon monoxide (“CO”); carbon dioxide (“CO2”); chemical
vapor deposited (“CVD”) materials including diamond; wavelength division multiplexing (“WDM”); dense wavelength division
multiplexing (“DWDM”); extreme ultraviolet (“EUV”) lithography; gallium arsenide (“GaAs”); gallium nitride (“GaN”); gigabit
Ethernet (“GbE”); gigabit per second (“Gb/s”); indium phosphide (“InP”); infrared (“IR”); light detection and ranging (“LiDAR”);
near infrared (“NIR”); nanometers (“nm”); original equipment manufacturer (“OEM”); organic light-emitting diode (“OLED”);
optical time domain reflectometer (“OTDR”); research, development and engineering (“RD&E”); radio frequency (“RF”);
reconfigurable optical add/drop multiplexer (“ROADM”); silicon carbide (“SiC”); ultraviolet (“UV”); vertical cavity surface emitting
laser (“VCSEL”); 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 sciences and automotive
applications and markets. We use advanced engineered materials growth technologies coupled with proprietary high-precision
fabrication, micro-assembly, optical thin-film coating and electronic integration to manufacture complex optoelectronic devices and
modules. Our products are deployed in a variety of applications, including (i) laser cutting, welding and marking operations; (ii) 3D
sensing consumer applications; (iii) optical, data and wireless communication products; (iv) strategic military applications including
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. We believe that the materials that we grow and
fabricate are differentiated by one or a combination of unique optical, electrical, thermal and mechanical properties. II-VI’s optics are
shaped by precision surfacing techniques to meet the most stringent requirements for flat or curved geometries, functionalized with
smooth or structured surfaces, or with patterned metallization. Proprietary processes developed at our global optical coating centers
differentiate our products’ durability against high energy lasers and extreme operating environments. Optical coatings also provide the
desired spectral characteristics ranging from the ultraviolet to the far-infrared. II-VI leverages these capabilities to deliver miniature-
to large-scale precision optical assemblies, including in combination with thermal management components, integrated electronics,
and/or software.
II-VI also offers a broad portfolio of compound semiconductor lasers that are used in a variety of applications in most of our end
markets. These compound semiconductor lasers enable high-power lasers for materials processing, optical signal amplification in
terrestrial and submarine communications networks, high bit rate server connectivity between and within datacenters, fast and accurate
measurements in biomedical instruments, consumer electronics and optical communications network monitoring.
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 and sustainable 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, 2018 are set forth in the Consolidated Statements of Earnings and in Note 12 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, 2018, our bookings were approximately $1.2 billion compared to bookings of approximately $1.1 billion for the
year ended June 30, 2017.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2018,
our backlog was approximately $450 million, compared to approximately $400 million as of June 30, 2017.
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, Switzerland and the United Kingdom. We also utilize contract manufacturers and strategic suppliers. 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 68% of our revenues for the fiscal
year ended June 30, 2018, 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, 2018 in the main functions. We have a long-standing
practice of encouraging active employee participation in areas of operations and quality management. We believe our relations with
our employees are good. We reward substantially all our employees with some form of variable compensation based on achievement
of performance goals. There are approximately 265 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 730 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
8,977
1,513
953
11,443
Percent of
total
79%
13%
8%
100%
Manufacturing Processes
Our success in developing and manufacturing many of our products depends on our ability to manufacture and to tailor the optical and
physical properties of technically-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 high-quality suppliers of many of the
components we manufacture and there are very few industry-standard products.
Our network of worldwide manufacturing sites allows us to manufacture our products in regions that provide cost-effective
advantages. We employ numerous advanced manufacturing technologies and systems at our manufacturing facilities. These include
metal organic chemical vapor deposition and molecular beam epitaxy reactors, automated Computer Numeric Control optical
fabrication, high throughput thin-film coaters, nano-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.
5
Sources of Supply
Among the major feed stock and 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, graphite, GaAs,
InP, copper, germanium, molybdenum, quartz, optical glass, diamond, and other materials.
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 and throughout 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 to our specifications 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 that are 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, direct diode laser modules, sub-systems and systems sold
under the II-VI SUWTECH and II-VI DIRECTPHOTONICS brand names and super-hard materials processing laser systems sold
under the II-VI LASERTECH brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers under
the II-VI EPIWORKS brand name for applications in optical components, wireless devices, and high-speed communication systems
and manufactures 6-inch gallium arsenide wafers allowing for the production of high-performance lasers optoelectronics and
integrated circuits in high volume sold under the II-VI Laser Enterprise, II-VI EpiWorks, II-VI Compound Semiconductor Ltd. and
II-VI OptoElectronic Devices Division brand names.
II-VI Photonics manufactures crystal materials, optics, microchip lasers and optoelectronic modules for use in optical communication
networks and other diverse consumer, life sciences 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
silicon carbide engineered materials for thermoelectric devices and subsystems for silicon carbide applications servicing the
semiconductor equipment, military, communications, automotive and life science markets.
6
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.
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 interconnects and sensing
• VCSELs for 3D sensing in consumer electronics and
automotive
• RF devices for communications
• RF electronic devices for military applications
• 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
Segment:
II-VI Laser Solutions
Group/Division:
II-VI Infrared
II-VI HIGHYAG
II-VI Laser Enterprise
II-VI OEG
II-VI Compound Semiconductor
II-VI EpiWorks
II-VI SUWTECH
II-VI LASERTECH
II-VI DIRECTPHOTONICS
7
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
8
Our Markets
Our market-focused businesses are organized by technology and products. Our businesses are composed of the following primary
markets: Communications, Materials Processing, Military, Semiconductor Equipment, Life Sciences, Consumer Electronics and
Automotive.
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 at
intervals 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 to 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 100 GbE transceivers 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 enable 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. 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 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 integrated circuits for the internet of things computing
devices.
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 electro-
optical targeting and imaging systems. Infrared domes are used on missiles with infrared guidance systems ranging from small,
human-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.
9
Rotary and fixed-wing aircraft also use missile warning systems to protect against shoulder fired human-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 of several of these systems is the ability to filter electro-magnetic interference using micro-fine
conductive mesh patterns. This technology is also applied to non-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 solid
state laser host crystals and laser optics, all manufactured in-house, as well as our competency in short wave infrared and visible optics.
Our thermoelectric 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 and specifically designed variants for law enforcement.
Our precision patterned reticles are embedded in rifle scopes. Our reaction bonded boron carbide materials are shaped into torso plates
and employed as in-aircraft cabin and protective body armor. Our thermo-electric coolers are used to regulate the soldier’s body heat.
They are also used to convert heat produced by battlefield fuel burners into electrical power, for example to extend battery life on the
battlefield.
We maintain engineering and manufacturing facilities in the United States with strictly controlled access that are dedicated to our U.S.
government supported contracts.
Semiconductor Capital 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 weight 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 light. These CO2 lasers and
beam delivery systems leverage our broad portfolio of CO2 laser optics, CdTe Modulators, high power damage resistant
polycrystalline CVD diamond windows to route the powerful laser beam to a tin droplet from which EUV light will emanate. Due to
their very high mechanical and thermal performance characteristics, our reaction bonded SiC are used in structural support systems
that are integral to EUV lithography optics to meet critical requirements for optical system stability.
Life Sciences Market
The majority of our business in the life sciences end market is in analytical tools. Many 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, DNA
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.
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 DNA to reveal its
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, combining our epitaxial wafer growth and wafer fabrication capabilities.
10
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 emerging 3D sensing
market. With our acquisitions of 6-inch epitaxy and wafer capabilities, we have invested significantly to round out our capacity
expansion.
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 thermoelectric modules are used to cool batteries to extend their operating life. They are also more efficient than resistive heaters
when used in heated car seats and extend an electric vehicle’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 direct sales forces 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 is centralizing 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 are significant cooperation,
coordination and synergies among our business units, which capitalize on the most efficient and appropriate marketing channels to
address diverse applications within our markets.
Our sales forces develop effective communications with our OEM and end-user customers worldwide. Products are actively marketed
through targeted mailings, telemarketing, select advertising, 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, 2018, we employed approximately 263 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.
11
Customers
The representative 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 OEG
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.
Laser cutting machines for super-hard
materials.
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.
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.
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
• Lumentum Operations LLC
• Sumitomo Electric Device
Innovations, Inc.
• Showa Denko K. K.
• STMicroelectronics
• IQE PLC
• Infineon Technologies AG
• Aurubis AG
12
Competition
We believe we are a global leader in many of our product families. We compete partly on the basis of our reputation for offering
highly engineered products, product and technology roadmaps, intellectual property, 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 representative groups of our competitors by segment 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, fluorescence
microscopy
Semiconductor laser diodes for the
industrial and consumer markets
II-VI Photonics
Optics, optical components, modules &
subsystems for optical communications
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.
• MKS Instruments
• Wavelength OptoElectronic Pte Ltd.
• SIGMAKOKI Co., LTD.
• Optoskand AB
• Precitec GmbH & Co. KG
• MITSUBISHI CABLE INDUSTRIES, LTD
• Coherent, Inc.
• Pavilion Integration Corporation
• SHIMADZU CORPORATION
• Lumentum Operations LLC
• Finisar Corporation
• Broadcom Ltd.
• Koninklijke Philips N.V
• Jenoptik AG
• Osram Licht AG
• Sony Corporation
• Hamamatsu Photonics K.K.
• Oplink Communications, Inc.
• Lumentum Operations LLC
• Casix, Inc.
• CASTECH Inc.
• Research Electro-Optics, Inc.
• IDEX 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 KGaA Herbert Kubatz GmbH & Co.
• CoorsTek, Inc.
• Japan Fine Ceramics Co. Ltd.
• Cree, Inc.
• Dow Corning Corporation
• SICC Co., Ltd
• TankeBlue CO., LTD.
• SiCrystal AG
• Vital Materials Co., Limited
• 5N Plus Inc.
• RETORTE GmbH Selenium Chemicals & Metals
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.
13
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 and in certain cases components from those materials
that are differentiated from those produced by our competitors. We focus on providing components that are critical to the heart of our
customers’ assembly lines, for products serving the applications mentioned above.
We have grown substantially the number and size of our key accounts. Now, 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 our primary business strategies:
Key Business Strategies:
Our Plan to Execute:
Identify New Products and Markets
Balanced Approach to Research and
Development
Leverage Vertical Integration
Investment in Scalable Manufacturing
Identify new technologies, products and markets to meet evolving customer
requirements for high-performance engineered materials through our dedicated
RD&E programs to increase new product revenue and maximize return on
investment.
Internally and externally funded RD&E expenditures, targeting an overall
investment of between 10% - 15% of revenues, depending on the nature of the
investment in terms of technology platforms or products.
Combine RD&E and manufacturing expertise, operating with a bias to
components and production machines, reducing cost and lead time to enhance
competitiveness, time to market, profitability and quality and enabling our
customers to offer competitive products.
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 that are built into
our customers’ products.
Execute our global quality transformation process, 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, 2018, the Company continued to identify, invest in and focus our research and development on,
new products 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.”
From time to time, the ratio of externally funded contract activity to internally funded contract activity varies due to the unevenness of
government funded research programs and changes in the focus of our internally funded research programs. We are committed to
having the right mix of internally and externally funded research that ties closely to our long-term strategic objectives.
We devote significant resources to RD&E programs directed at the continuous improvement of our existing products and processes
and to the timely development of new 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, 2018, we employed 1,513 people in
RD&E functions, 1,439 of whom are engineers or scientists. In addition, certain manufacturing personnel support or participate in our
research and development efforts on an ongoing basis. We believe this interaction between the development and manufacturing
functions enhances the direction of our projects, reducing costs and accelerating technology transfers.
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During the fiscal year ended June 30, 2018, we focused our RD&E investments in the following areas:
Segment:
II-VI Laser Solutions
Area of Development:
Our Research and Development Investments:
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 diamond for EUV applications.
II-VI Photonics
Photonics Design
Pump Lasers
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 InP growth and processing capability.
Optical Amplifiers and
Subsystems
Investing and broadening the range of amplifiers and integrated
subsystems including ROADMs.
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
SiC Technology
Developing advanced SiC substrate growth technologies to support
emerging markets in GaN RF and SiC power electronics.
Continuous improvements to maintain world-class, high quality,
large diameter substrates and epitaxial wafers.
Thermoelectric Materials and
Devices
Continuing to develop leading Bi2Te3 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 asserted in the past, and expect that we will continue to
assert and vigorously protect our intellectual property rights. We have a total of approximately 800 patents globally.
Internally funded research and development expenditures were $117.2 million, $96.8 million and $60.4 million for the fiscal years
ended June 30, 2018, 2017 and 2016, respectively. For these same periods, externally funded research and development expenditures
were $12.7 million, $8.7 million and $9.5 million, respectively and were included in Cost of goods sold in the Consolidated
Statements of Earnings.
15
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 confidentiality and non-competition agreements with certain personnel. We require that our U.S.
employees sign a confidentiality and non-competition 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 ours. We
may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain such licenses, if
required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted that may adversely
affect our results of operations. In addition, our research and development contracts with agencies of the U.S. Government present a
risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and positions as of June 30, 2018 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. ................................................................................ 62 President and Chief Executive Officer; Director
Mary Jane Raymond ................................................................................... 57 Chief Financial Officer and Treasurer and Assistant
Position
Age
Giovanni Barbarossa ................................................................................... 56 Chief Technology Officer and President II-VI Laser
Solutions
Gary A. Kapusta.......................................................................................... 58 Chief Operating Officer
Jo Anne Schwendinger................................................................................ 62 Chief Legal and Compliance Officer and Secretary
David G. Wagner ........................................................................................ 55 Vice President, Human Resources
Secretary
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
16
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).
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.
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. degree in
Electrical Engineering, and holds a Ph.D. in Photonics from the University of Glasgow, U.K.
Gary A. Kapusta joined II-VI in February 2016 and has served since then as the Company’s Chief Operating Officer. Prior to his
employment with the Company, Mr. Kapusta served in various roles at Coca-Cola, including as President & Chief Executive Officer,
Coca-Cola Bottlers’ Sales & Services L.L.C.; President, Customer Business Solutions; and Vice President, Procurement
Transformation, Coca-Cola Refreshments. He joined Coca-Cola following a 19 year career at Agere Systems, Lucent Technologies,
and AT&T. Mr. Kapusta graduated from The University of Pittsburgh with B.S. and M.S. degrees in Industrial Engineering, and holds
an MBA from Lehigh University.
Jo Anne Schwendinger has served as the Company’s Chief Legal and Compliance Officer and Secretary since March 2017. Ms.
Schwendinger also served as the Company’s General Counsel and Secretary from when she joined the Company in March 2017 until
November 2017. Prior to her employment with the Company, Ms. Schwendinger practiced law with the law firm Blank Rome, LLP
from August 2016 until February 2017. Previously, Ms. Schwendinger served in various legal roles at Deere & Company from
February 2000 until August 2016, including Regional General Counsel-Asia-Pacific and Sub-Saharan Africa 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, and a Juris Doctor degree from the University of Pittsburgh Law School.
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. Mr. Wagner has announced his intention to retire from the Company, effective in 2019, as of a date to be determined.
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 10% beneficial
owners pursuant to Section 16 of the Exchange Act. In addition, all filings are available via the SEC’s website (www.sec.gov). 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 our board committees. All such documents are located on the Investors page of our
website and are available free of charge.
17
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 have initiated investment programs with the goal of gaining a greater share of end markets using semiconductor lasers and other
components including those used for 3D sensing. We cannot guarantee that our investments in capital and capabilities will be
sufficient. The potential end markets, as well as our ability to gain market share in such markets, may not materialize on the timeline
anticipated or at all. We cannot be sure of the end market price, specification or yield for products incorporating our technologies.
Our technologies could fail to fulfill, partially or completely our target customers’ finalized specifications. We cannot guarantee the
end market customers’ acceptance of our technologies. Further, we may be unable to fulfill the terms of our contracts with our target
customers, which could result in penalties of a material nature, including consequential damages, loss of market share and loss of
reputation.
Our Competitive Position 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, high-quality 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 RD&E to achieve our goals.
There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products and
processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could have a material
adverse effect on our ability to grow our business and maintain our competitive position and on our results of operations and/or
financial condition.
Our Competitive Position May Still Require Significant Investments
We continuously monitor the marketplace for strategic opportunities, and our business strategy includes expanding our product lines
and markets through both internal product development and acquisitions. Consequently, we expect to continue to consider strategic
acquisition of businesses, products or technologies complementary to our business. This may require significant investments of
management time and financial resources. If market demand is outside our organic capabilities, if a strategic acquisition is required
and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the
expected return on investment, expose us to unforeseen liabilities or jeopardize our ability to comply with our credit facility covenants
due to any inability to integrate the business, adjust to operating a larger and more complex organization, adapt to additional political
and other requirements associated with the acquired business, retain staff, or work with the customers or otherwise we could suffer a
material adverse effect on our business, results of operations or financial condition.
Our Future Success Depends on Continued International Sales, and Our Global Operations are Complex, and Present
Multiple Challenges to Manage
Sales to customers in countries other than the United States accounted for approximately 68%, 69% and 63% of revenues during the
years ended June 30, 2018, 2017 and 2016, respectively. We anticipate that international sales will continue to account for a
significant portion of our revenues for the foreseeable future. If 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.
We manufacture products in the United States, China, Singapore, Vietnam, the Philippines, Germany, Switzerland, and the United
Kingdom and through a contract manufacturer in Thailand. We also maintain direct sales offices in Hong Kong, Japan, Germany,
China, Switzerland, Belgium, the United Kingdom, China, Italy, South Korea, and Taiwan. Our operations vary by location and are
influenced on a location-by-location basis by local customs, languages and work practices, as well as different local weather
conditions, management styles and education systems. In addition, multiple complex issues may arise concurrently in different
countries, potentially hampering our management’s ability to respond in an effective and timely manner. Any inability to respond in
an effective and timely manner to issues in our global operations could have a material adverse effect on our business, results of
operations or financial condition.
18
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 Required Capital, Finance Our Working Capital
Requirements or Our Acquisition Strategies, or Otherwise to Support our Liquidity Needs Could Negatively Impact our
Ability to Finance our Operations, Meet Certain Obligations or Implement our Growth Strategy
We occasionally borrow under our existing credit facilities to fund operations, including working capital investments, and to finance
our acquisition strategies. In the past, market disruptions experienced in the United States and abroad have materially impacted
liquidity in the credit and debt markets, making financing terms for borrowers less attractive, and, in certain cases, have resulted in the
unavailability of certain types of financing. Uncertainty in the financial markets may negatively impact our ability to access additional
financing or to refinance our existing credit facilities or existing debt arrangements on favorable terms or at all, which could
negatively affect our ability to fund current and future 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 Incur Substantially More Indebtedness
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, including secured indebtedness, subject
to the restrictions contained in our debt instruments. We are not restricted under the terms of the indenture governing our outstanding
convertible senior notes from incurring additional indebtedness, securing existing or future indebtedness, recapitalizing our debt
obligations or taking a number of other actions that are not limited by the terms of the indenture. Our credit facility currently restricts
our ability to incur additional indebtedness, including secured indebtedness, but if our credit facility matures or is repaid, we may not
be subject to such restrictions under the terms of any subsequent indebtedness.
We May Not Be Able to Settle Conversions of Our Convertible Senior Notes in Cash or to Repurchase the Notes in
Accordance with Their Terms
Holders of our outstanding convertible senior notes have the right to require us to repurchase all or a portion of their notes upon the
occurrence of a fundamental change (as defined in the indenture governing the notes) at a repurchase price equal to 100% of the
principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the notes,
unless we elect to deliver solely shares of our common stock to settle such conversions (other than paying cash in lieu of delivering
any fractional share), we will be required to make cash payments in respect of the notes being converted. However, we may not have
enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor or
pay cash with respect to notes being converted.
In addition, our ability to repurchase or to pay cash upon conversion of the notes may be limited by law, regulatory authority or
agreements governing our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the
governing indenture or to pay any cash upon conversion of the notes as required would constitute a default under the indenture. A
default under the indenture or the fundamental change itself also could lead to a default under agreements governing our credit facility
and any of our future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or
grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes or to pay cash upon conversion of
the notes.
19
The Conditional Conversion Feature of Our Outstanding Convertible Senior Notes, if Triggered, May Adversely Affect Our
Financial Condition and Operating Results
In the event the conditional conversion feature of the notes is triggered, holders of notes will be entitled to convert the notes at any
time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our
conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional
share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely
affect our liquidity.
We May Fail to Accurately Estimate the Size and Growth of Our Markets and Our Customers’ Demands
We make significant decisions based on our estimates of customer requirements. We use our estimates to determine the levels of
business we seek and accept, production schedules, personnel needs and other resource requirements.
Customers may require rapid increases in production on short notice. We may not be able to purchase sufficient supplies or allocate
sufficient manufacturing capacity to meet such increases in demand. Rapid customer ramp-up and significant increases in demand
may strain our resources or negatively affect our margins. Inability to satisfy customer demand in a timely manner may harm our
reputation, reduce our other opportunities, damage our relationships with customers, reduce revenue growth, and/or incur contractual
penalties.
Alternatively, downturns in the industries in which we compete may cause our customers to significantly reduce their demand. With
respect to orders we initiate with our suppliers to address anticipated demand from our customers, certain suppliers may have required
non-cancelable purchase commitments or advance payments from us, and those obligations and commitments could reduce our ability
to adjust our inventory or expense levels to declining market demands. Unexpected decline in customer demands can result in excess
or obsolete inventory and result in additional charges. Because certain of our sales, research and development and internal
manufacturing overhead expenses are relatively fixed, a reduction in customer demand likely would decrease our gross margins and
operating income.
We May Encounter Increased Competition
We may encounter substantial competition from other companies in the same market, including established companies with significant
resources. Some of our competitors may have financial, technical, marketing or other capabilities that are more extensive than ours.
They may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not
be able to compete successfully against our present or future competitors. Our failure to effectively compete could have a material
adverse effect on our business, results of operations or financial condition.
There Are Limitations on the Protection of Our Intellectual Property and We May From Time to Time be Involved in Costly
Intellectual Property Litigation or Indemnification
We rely on a combination of trade secret, patent, copyright and trademark laws combined with employee confidentiality,
noncompetition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps
taken by us will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no
assurance that third-parties will not assert infringement claims against us in the future.
Asserting our intellectual property rights or defending against third-party claims could involve substantial expense. In the event a
third-party were successful in a claim that one of our processes infringed its proprietary rights, we could be required to pay substantial
damages or royalties, or spend substantial amounts in order to obtain a license or modify processes so that they no longer infringe such
proprietary rights. Any such events could have a material adverse effect on our business, results of operations or financial condition.
A Significant Portion of Our Business is Dependent on Cyclical Industries
Our business is dependent on the demand for products produced by end-users of industrial lasers, optical communication products and
components for 3D sensing. Many of these end-users are in industries that have historically experienced a highly cyclical demand for
their products. As a result, demand for our products is subject to these cyclical fluctuations. Fluctuations in demand could have a
material adverse effect on our business, results of operations or financial condition.
20
Changes in Laws and Regulations Governing Data Privacy and Data Protection Could Have a Material Adverse Impact on
our Business
We are subject to many data privacy, data protection, and data breach notification laws, including the European Union General Data
Protection Regulation (“GDPR”), which became effective in May of 2018. While we have taken measures to assess the requirements
of, and to comply with, the GDPR, as well as new and existing data-related laws and regulations of other jurisdictions, these measures
may be challenged, including by authorities that regulate data-related compliance. We could incur significant expense in facilitating
and responding to investigations, and if the measures we have taken prove to be inadequate, we could face fines, penalties or damages,
and incur reputational harm, which could have a material adverse impact on our business.
Data Breach Incidents and Breakdown of Information and Communication Technologies Could Disrupt our Operations and
Impact Our Financial Results
In the course of our business, we collect and store sensitive data, including intellectual property (both our own and that of our
customers), as well as proprietary business information. We could be subject to service outages or breaches of security systems which
may result in disruption, unauthorized access, misappropriation, or corruption of this information. Security breaches of our network or
data, including physical or electronic break-ins, vendor service outages, computer viruses, attacks by hackers or similar breaches can
create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Although we have not experienced an
incident, if we are unable to prevent such security or privacy breaches, our operations would be disrupted or we could suffer legal
claims, loss of reputation, financial loss, property damage, or regulatory penalties because of lost or misappropriated information.
Global Economic Downturns May Adversely Affect Our Business, Operating Results and Financial Condition
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the
level of growth or contraction 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 slowdowns
in the European and Chines economies, slowdown in the Chinese economy, reductions or limited growth in consumer spending or
consumer credit, global trade tariffs and other adverse economic conditions that may be specific to the Internet, e-commerce and
payments industries.
These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, the cost
and availability of financing, and costs associated with manufacturing and distributing products. Any economic downturn could have a
material adverse effect on our business, results of operations or financial condition.
We Are Subject to Complex and Rapidly Changing Governmental Import and Export Regulations
We are subject to the passage of and changes in the interpretation of regulation by U.S. government entities at the federal, state and
local levels and non-U.S. agencies, including, but not limited to, the following:
•
•
We are required to comply with import laws and export control and economic sanctions laws, which may affect our
transactions with certain customers, business partners and other persons, including dealings with or between our
employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the
export of certain products, services and technologies. We may be required to obtain an export license before exporting a
controlled item. Compliance with the import 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.
21
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.
Changes in U.S. Trade Policies Could Impact the Company’s International Operations and the Cost of Imported Goods into
the U.S., Which May Narrow the Size of Our Markets, Materially Impact Our Revenues or Increase Our Operating Costs and
Expose Us to Contract Litigation
On March 23, 2018, President Trump announced new steel and aluminum tariffs, and on April 15, 2018, the U.S. Department of
Commerce issued a denial order against two companies in the telecommunications market. Other international trade actions and
initiatives also have been announced, notably the imposition by the U.S. of additional tariffs on products of Chinese origin, and
China’s imposition of additional tariffs on U.S.-origin goods. If we cannot obtain relief from, or if we cannot take other action to
mitigate the impact of, these additional duties, our business and profits may be materially and adversely affected. Further changes in
U.S. trade policy, or additional sanctions, could result in retaliatory actions by other countries that could materially and negatively
impact the volume of economic activity in the U.S., which, in turn, may decrease our access to customers and markets, reduce our
revenues, and increase our operating costs.
We Have Entered into Supply Agreements which Commit Us to Supply Products on Specified Terms
We have supply agreements with some customers which require us to supply products and to allocate sufficient capacity to make these
products. We have also agreed to pricing schedules and methodologies which could result in penalties if we fail to meet development,
supply, capacity and quality commitments. Failure to do so may cause us to be unable to generate the amount of revenue or the level
of profitability we expect from these arrangements. Our ability to realize a profit under some of these agreements will be subject to
the level of customer demand, the cost of maintaining facilities and manufacturing capacity, and supply chain capability.
If we fail to fulfill our commitments under these supply agreements, our business, after using all remedies available, financial
conditions and results of operations may suffer a material adverse effect.
We Depend on Highly Complex Manufacturing Processes That Require Feeder Materials, Components and Products from
Limited Sources of Supply
Our operations are dependent upon a supply chain of difficult-to-make or difficult-to-refine products and materials. Some of our
product inflow is subject to yield reductions from growth or fabrication losses, and thus the quantities we may receive are not
consistently predictable. Customers may also change the specification for a product that our suppliers cannot meet.
We also make products for which the Company is one of the world’s largest suppliers. We use high-quality, optical grade ZnSe in the
production of many of our IR optical products. We are a leading producer of ZnSe for our internal use and for external sale. The
production of ZnSe is a complex process requiring a highly controlled environment. A number of factors, including defective or
contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high quality ZnSe. Lack of
adequate availability of high quality ZnSe could have a material adverse effect upon our business. There can be no assurance that we
will not experience manufacturing yield inefficiencies which could have a material adverse effect on our business, results of
operations or financial condition.
We produce hydrogen selenide gas which is used in our production of ZnSe. There are risks inherent in the production and handling of
such material. Our lack of proper handling of hydrogen selenide could 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, Switzerland, and the United
Kingdom and through a contract manufacturer in Thailand. We also maintain direct sales offices in Hong Kong, Japan, Germany,
China, Switzerland, Belgium, the United Kingdom, Italy, South Korea and Taiwan. Operations outside of the United States are
subject to many legal and regulatory requirements, some of which are not aligned with others. These include tariffs, quotas, taxes and
other market barriers, restrictions on the export or import of technology, potentially limited intellectual property protection, customs
22
import and export requirements, anti-corruption and anti-bribery laws, foreign exchange controls and cash repatriation restrictions,
foreign investment rules and regulations, data privacy requirements, anti-competition laws, employment and labor laws, pensions and
social insurance, and environmental health, and safety laws and regulations.
Compliance with these laws and regulations can be onerous and expensive, and requirements differ among jurisdictions. New laws,
changes in existing laws and abrogation of local regulations by national laws result in significant uncertainties in how they will be
interpreted and enforced. Failure to comply with any of these foreign laws and regulations could have a material adverse effect on our
business, results of operations or financial condition.
We Use and Generate Potentially Hazardous Substances that Are Subject to Stringent Environmental Regulations
Hazardous substances used or generated in some of our research and manufacturing facilities are subject to stringent environmental
regulation. We believe that our handling of such substances is in material compliance with applicable local, state and federal
environmental, safety and health regulations at each operating location. We invest substantially in proper personal protective
equipment, process controls including monitoring and specialized training to minimize risks to employees, surrounding communities
and the environment that could result from the presence and handling of such hazardous substances. When exposure problems or
potential exposure problems have been uncovered, corrective actions have been implemented and re-occurrence has been minimal or
non-existent.
We have in place an emergency response plan with respect to our generation and use of the hazardous substances Hydrogen Selenide,
Hydrogen Sulfide, Arsine and Phosphine. Special attention has been given to all procedures pertaining to this gaseous material to
minimize the chances of its accidental release into the atmosphere.
With respect to the manufacturing, use, storage and disposal of the low-level radioactive material Thorium Fluoride, our facilities and
procedures have been inspected and licensed by the Nuclear Regulatory Commission. Thorium-bearing by-products are collected and
shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah.
The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy
metals or airborne particulates, are believed by us to be in material compliance with regulations. We believe that we have obtained all
of the permits and licenses required for operation of our business.
We do not carry environmental impairment insurance. Although we do not know of any material environmental, safety or health
problems in our properties or processes or products, there can be no assurance that problems will not develop in the future which
could have a material adverse effect on our business, results of operations or financial condition.
We May Be Adversely Affected by Climate Change Regulations
In many of the countries in which we operate, government bodies are increasingly enacting legislation and regulations in response to
potential impacts of climate change. These laws and regulations may be mandatory. They have the potential to impact our operations
directly or indirectly as a result of required compliance by our customers or our supply chain. Inconsistency of regulations may also
affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change legislation,
regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in
which we operate.
We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations, added
costs to purchase or lower profits from sales of our products, allowances or credits under a “cap and trade” system, increased
insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position
relative to industry peers, and changes to profit or loss arising from increased or decreased demand for goods produced by us and
indirectly, from changes in costs of goods sold.
Some Systems That Use our Products Are Complex in Design, and Our Products May Contain Defects that Are Not Detected
Until Deployed Which Could Increase Our Costs, Reduce Our Revenues, Cause Us to Lose Key Customers and May Expose
Us to Litigation Arising From Derivative Lawsuits Related to Consumer Products
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.
23
The occurrence of any one or more of the foregoing factors could have a material adverse effect on our business, results of operations
or financial condition.
Unfavorable Changes in Tax Rates, Tax Liabilities or Tax Accounting Rules Could Negatively Affect Future Results
As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. As such, we must
exercise a level of judgment in determining our worldwide tax liabilities. Our future tax rates could be affected by changes in the
composition of earnings in countries with differing tax rates or changes in tax laws. Changes in tax laws or tax rulings may have a
significantly adverse impact on our effective tax rate. For example, proposals for fundamental U.S. international tax reform, if enacted,
could have a significant adverse impact on our effective tax rate.
The enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017 significantly affected U.S. tax law by changing how the
U.S. imposes tax on multinational corporations. The U.S. Department of Treasury has broad authority under the Act to issue
regulations and interpretive guidance. We have applied available guidance to estimate our tax obligations, but new guidance issued by
the U.S. Treasury Department may cause us to make adjustments to our tax estimates in future periods. The Securities and Exchange
Commission has issued Staff Accounting Bulletin No. 118 (“SAB 118”) acknowledging that companies will potentially encounter
situations for which the analysis of certain income tax effects of the Act will be incomplete by the time financial statements are
required to be issued for reporting periods that include the enactment date. In these situations, SAB 118 provides that reasonable
estimates may be made for certain effects of the Act. We have recorded provisional amounts using reasonable estimates based on the
guidance in SAB 118 and we anticipate adjustments to such estimates as additional analysis is completed and new regulations and
guidance are issued.
In addition, we are subject to regular examination of our income tax returns by the 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.
Natural Disasters or Other Global or Regional Catastrophic Events Could Disrupt Our Operations, Give Rise to Substantial
Environmental Hazards and Adversely Affect Our Results
We may be exposed to business interruptions due to 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 Attract, Retain and Develop Key Personnel and Requires Continued Good Relations
With Our Employees
We are highly dependent upon the experience and continuing services of certain scientists, engineers, production and management
personnel. Competition for the services of these personnel is intense. There can be no assurance that we will be able to retain or
attract the personnel necessary for our success. The loss of the services of our key personnel could have a material adverse effect on
our business, results of operations or financial condition.
Our Stock Price Has Been Volatile in the Past and May Be Volatile in the Future
The market price for our common stock on The Nasdaq Global Select Market varied between a high of $53.08 and a low of $34.00 in
the fiscal year ended June 30, 2018. 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, sales of our common stock or equity-linked securities and issuance of shares of our common stock in connection with
conversions of our outstanding convertible senior notes.
24
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).
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 non-consenting 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, and by the Intended Anti-Dilution Actions of Our Share-Buyback
Program
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.
25
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Information regarding our principal U.S. properties at June 30, 2018 is set forth below:
Location
Saxonburg, PA ................................. Manufacturing and Research
Primary Use(s)
and Development
Warren, NJ ....................................... Manufacturing and
Research and Development
Primary Business Segment(s)
II-VI Laser Solutions and
II-VI Performance
Products
II-VI Laser Solutions
Murrieta, CA .................................... Manufacturing and
Research and Development
Newark, DE ...................................... Manufacturing and
Research and Development
Champaign, IL.................................. Manufacturing and
Dallas, TX ........................................ Manufacturing and
Research and Development
Research and Development
II-VI Performance
Products
II-VI Performance
Products
II-VI Laser Solutions
II-VI Performance
Products
Warrendale, PA ................................ Corporate Administrative
N/A
Offices
Pine Brook, NJ ................................. Manufacturing and
Research and Development
Monroe, CT ...................................... Manufacturing and
Research and Development
Easton, PA........................................ Manufacturing and
Research and Development
Santa Rosa, CA ................................ Manufacturing and
Research and Development
Starkville, MS................................... Manufacturing
Tustin, CA ........................................ Manufacturing and
Research and Development
Philadelphia, PA............................... Manufacturing and
Research and Development
Hillsborough, NJ .............................. Manufacturing and
Research and Development
II-VI Performance
Products
II-VI Performance
Products
II-VI Laser Solutions and
II-VI Performance
Products
II-VI Photonics
II-VI Performance
Products
II-VI Performance
Products
II-VI Performance
Products
II-VI Photonics
Approximate
Square
Footage
230,000
159,000
111,000
163,000
69,000
68,000
63,000
54,000
48,000
48,000
39,000
32,000
31,000
30,000
23,000
Ownership
Owned
and
Leased
Leased
Leased
Leased
Leased
Owned
and
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.
26
Information regarding our principal foreign properties at June 30, 2018 is set forth below:
Location
China ................................................
United Kingdom...............................
Philippines ........................................
Primary Use(s)
Manufacturing, Research and
Development, and
Distribution
Manufacturing, Research and
Development
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 Photonics
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 and
II-VI Performance
Products
Approximate
Square
Footage
1,556,000
319,000
314,000
176,000
117,000
81,000
Ownership
Leased
Owned and
Leased
Leased
Owned and
Leased
Leased
Owned and
Leased
38,000
Leased
We also maintain some additional small distribution facilities in leased space in Belgium, Italy, Japan, South Korea, Taiwan, and the
United Kingdom.
The square footage listed for each of the above properties represents facility square footage, except in the case of the Philippines
location, which includes land.
Item 3.
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various claims and lawsuits incidental to its business. The resolution of each of these
matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company.
Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such legal proceedings
will not materially affect the Company’s financial condition, liquidity or results of operations.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
27
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 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
High
41.43
52.55
53.08
49.30
24.46
32.45
41.10
36.35
$
$
$
$
$
$
$
$
Low
34.00
39.60
36.60
38.05
17.76
23.80
29.10
27.25
$
$
$
$
$
$
$
$
On August 22, 2018, the last reported sale price for the Company’s common stock was $47.15 per share. As of such date, there were
approximately 806 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 2017, in conjunction with the Company’s offering and sale of our outstanding convertible notes, the Company’s Board of
Directors authorized the Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from
the offering and sale of the Notes. The shares that were purchased by the Company pursuant to this authorization were retained as
treasury stock and are available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for
approximately $49.9 million pursuant to this authorization.
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions
from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the
Company are retained as treasury stock and are available for general corporate purposes. As of June 30, 2018, the Company has
cumulatively purchased 1,316,587 shares of its common stock pursuant to the Program for approximately $19.0 million. The dollar
value of shares as of June 30, 2018 that may yet be purchased under the Program is approximately $31.0 million.
The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended June
30, 2018.
Period
April 1, 2018 to April 30, 2018
May 1, 2018 to May 31, 2018
June 1, 2018 to June 30, 2018
Total Number of Average Price Paid
Shares Purchased
Per Share
516 (1) $
860 (2) $
52,947 (3) $
40.40
44.61
46.55
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs (a)
Dollar Value of
Shares That May
Yet be Purchased
Under the
Program
-
-
-
$
$
$
30,906,904
30,906,904
30,906,904
(1)
(2)
(3)
Includes 516 shares of our common stock transferred to the Company from employees in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted share awards.
Includes 860 shares of our common stock transferred to the Company from employees in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted share awards.
Includes 52,947 shares of our common stock transferred to the Company from employees in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted share awards.
28
The information incorporated by reference in Item 12 of this Annual Report on Form 10-K, from our 2018 Proxy Statement under the
heading “Equity Compensation Plan Information,” is hereby also incorporated by reference into this Item 5.
PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on the Company’s common stock with the cumulative total
shareholder return of the Nasdaq Composite Index and with a peer group of companies constructed by the Company for the period
from June 30, 2013, through June 30, 2018. 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.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among II-VI Incorporated, the Nasdaq Composite Index,
and a Peer Group
$300
$250
$200
$150
$100
$50
$0
6/13
6/14
6/15
6/16
6/17
6/18
II-VI Incorporated
Nasdaq Composite
Peer Group
*$100 invested on 6/30/13 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
29
Item 6.
SELECTED FINANCIAL DATA
Five-Year Financial Summary
The following selected financial data for the five fiscal years presented are derived from the Company’s audited Consolidated
Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements and the related notes thereto
included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30,
($000 except per share data)
Statement of Earnings
Net revenues from continuing operations
Earnings from continuing operations
Earnings from discontinued operation
Net earnings
Basic earnings per shares:
Continuing operations
Discontinued operation
Consolidated
Diluted earnings per shares:
Continuing operations
Discontinued operation
Consolidated
Diluted weighted average shares outstanding
June 30,
($000)
Balance Sheet
Working capital
Total assets
Long-term debt
Total debt
Retained earnings
Shareholders' equity
2018
2017
2016
2015
2014
$ 1,158,794 $ 972,046 $ 827,216 $ 741,961 $ 683,261
38,316
133
38,449
95,274
-
95,274
65,486
-
65,486
65,975
-
65,975
88,002
-
88,002
1.41
-
1.41
1.52
-
1.52
1.07
-
1.07
1.08
-
1.08
0.62
-
0.62
1.35
-
1.35
65,133
1.48
-
1.48
64,507
1.04
-
1.04
62,909
1.05
-
1.05
62,586
0.60
-
0.60
63,686
2018
2017
2016
2015
2014
$ 525,370 $ 517,344 $ 411,721 $ 373,812 $ 370,666
1,070,753
220,787
240,787
521,327
675,043
1,057,273
155,066
175,066
587,302
729,081
1,211,981
215,307
235,307
652,788
782,338
1,477,297
322,022
342,022
748,062
900,563
1,761,661
419,013
439,013
836,064
1,024,311
30
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
II-VI Incorporated (“II-VI,” the “Company,” “we,” “us” or “our”), a worldwide leader in engineered materials and optoelectronic
components, is a vertically integrated manufacturing company that develops innovative products for diversified applications in the
industrial materials processing, optical communications, military, consumer electronics, semiconductor equipment, life science and
automotive applications . The Company produces a wide variety of application-specific photonic and electronic materials and
components, and deploys them in various forms, including integration with advanced software.
The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing engineered materials and
optoelectronic components and 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.
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.
As we grow, we are focused on scaling our Company and deriving the benefits of vertical integration as we strive to be a best in class
competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company operates or is
organized in the future to enable the most efficient implementation of its strategy.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the
United States (“U.S. GAAP”) and the Company’s discussion and analysis of its financial condition and results of operations requires
the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its Consolidated
Financial Statements and accompanying notes. Note 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, inventory valuation,
business combinations, impairment of goodwill and indefinite-lived intangible assets, accrual of income taxes and accounting for
share-based compensation. Management believes these estimates to be critical because they are both important to the portrayal of the
Company’s financial condition and results of operations, and they require management to make judgments and estimates about matters
that are inherently uncertain.
Management has discussed the development and selection of 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
consolidated 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 consolidated 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.
31
The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical
locations. Further, for the periods covered herein, we did not have post shipment obligations such as training or installation, customer
acceptance provisions, credits and discounts, rebates and price protection or other similar privileges. Our distributors and agents are
not granted price protection. Our distributors and agents, who generate less than 10% of consolidated revenue, have no additional
product return rights beyond the right to return defective products covered by our warranty policy. We believe that our revenue
recognition practices are consistent with Staff Accounting Bulletin 104 and that we have adequately considered the requirements of
Accounting Standards Codification 605 Revenue Recognition. Revenues generated from transactions other than product shipments are
contract-related and have historically accounted for approximately 1% of the Company’s consolidated revenues.
Inventory
The Company generally records an inventory adjustment 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 charge may be recorded for products on hand that are in excess of product sold to customers over the same
periods noted above. If actual market conditions are less favorable than projected, additional inventory adjustments may be required.
The Company’s inventory adjustments have historically been 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 for impairment annually, and when events or changes in
circumstances indicate that goodwill or indefinite-lived intangible assets might be impaired. Other intangible assets are amortized over
their estimated useful lives. The determination of the estimated useful lives of other intangible assets and whether goodwill or
indefinite-lived intangibles are impaired requires us to make judgments based on long-term projections of future performance.
Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit, considering
historical and anticipated results and general economic and market conditions and their projections. 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, 2018, no reporting units are at risk for impairment, as
the fair value of the reporting units substantially exceeds the carrying values.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative assessment described
above, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the quantitative assessment.
Otherwise, the Company will forego the quantitative assessment process and does not need to perform any further testing. The
Company did not use the optional qualitative assessment during the years ended June 30, 2018 and 2017.
As a result of the purchase price allocations from our acquisitions, and due to our decentralized structure, our goodwill is included in
multiple reporting units which are the same as the Company’s operating segments. Due to the cyclical nature of our business, and the
other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our
individual reporting units may periodically be affected by downturns in customer demand, operational challenges and other factors.
These factors may have a relatively more pronounced impact on the individual reporting units as compared to the Company as a whole,
and might adversely affect the fair value of the individual reporting units. If material adverse conditions occur that impact one or more
of our reporting units, our determination of future fair value might 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, 2018.
32
0.25% Convertible Senior Notes
Our 0.25% convertible senior notes are accounted for in accordance with ASC 470, Accounting for Convertible Debt Instruments That
May be Settled in Cash upon Conversion (Including Partial Cash Settlement). ASC Subtopic 470-20 requires the issuer of convertible
debt that may be settled in shares or cash upon conversion at the issuer’s option, such as these notes, to account for the liability (debt)
and equity (conversion option) components separately. The value assigned to the debt component is the estimated fair value as of the
issuance date of a similar debt instrument without the conversion option. The amount of the equity component is calculated by
deducting the fair value of the liability component from the principal amount of the convertible debt instrument. The resulting debt
discount is amortized as additional non-cash interest expense over the expected life of the notes utilizing the effective interest method.
Although ASC 470 has no impact on our actual past or future cash flows, it requires us to record non-cash interest expense as the debt
discount is amortized.
Income Taxes
The Company prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on
these judgments and interpretations. In the normal course of business, the Company’s tax returns are subject to examination by various
taxing authorities, which may result in future tax, interest and penalty assessments by these authorities. Inherent uncertainties exist in
estimates of many tax positions due to changes in tax law resulting from legislation, regulation and/or as concluded through the
various jurisdictions’ tax court systems. The Company recognizes the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for
changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the
issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of
an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments
that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to
unrecognized tax benefits in income tax expense.
Management evaluates the realizability of deferred tax assets for each jurisdiction in which it operates. If the Company experiences
cumulative pretax income in a particular jurisdiction in a three-year period including the current and prior two years, management
normally concludes that the income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless
known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the
Company experiences cumulative pretax losses in a particular jurisdiction in a three year period, management then considers a series
of factors in the determination of whether the deferred tax assets can be realized. The Company has recorded valuation allowances
against certain of its deferred tax assets, primarily those that have been generated from net operating losses in certain foreign taxing
jurisdictions and acquired U.S. carryforwards. In evaluating whether the Company would more likely than not recover these deferred
tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carry-
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 2018 Compared to Fiscal Year 2017
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.
33
The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 2018 and June
30, 2017 ($ in millions except per share information):
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, 2018
% of
Revenues
Year Ended
June 30, 2017
% of
Revenues
$
1,158.8
697.5
461.3
100.0% $
60.2
39.8
117.2
208.8
13.1
122.2
34.2
88.0
$
10.1
18.0
1.1
10.5
3.0
7.6% $
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%
Diluted earnings per share
$
1.35
$
1.48
Executive Summary
Net earnings for fiscal year 2018 were $88.0 million ($1.35 per-share diluted), compared to $95.3 million ($1.48 per-share diluted) for
the same period last fiscal year. The decrease in net earnings during current fiscal year from fiscal year 2017 was primarily driven by
provisions under the Act and the Company’s related actions. Under the Act, the Company’s effective tax rate for fiscal year 2018 was
28.0% compared to 19.8% in fiscal year 2017; the Company recorded an additional $8.0 million of income tax expense, primarily
relating to withholding taxes on future repatriation of foreign earnings. The Company also increased its investment in internal
research and development relating to its new optoelectronic laser platform with the acquisition of Kaiam Laser Limited, and it ramped
up its investment in other operations to address market shifts to new technologies driven by advanced engineered materials. Fiscal
year 2017 was favorably impacted by other income relating to earn-out and technology transfer income the Company received as part
of the sale of the RF business of ANADIGICS. The Company recognized $7.0 million or $0.09 per share diluted of other income
related to these transactions in fiscal year 2017.
Consolidated
Revenues. Revenues for the year ended June 30, 2018 increased 19% to $1,158.8 million, compared to $972.0 million for the prior
fiscal year. The increase in revenues during the current fiscal year was driven by strong demand from customers across all of the
Company’s business segments. In particular, II-VI Laser Solution realized a 26% revenue growth from the prior year, driven by
increased demand from industrial based customers for CO2, fiber and direct diode optics and components. This segment also recorded
increased shipments of its VCSELs products addressing the growing consumer electronics, datacom and other developing end markets.
II-VI Performance Products recorded a 24% revenue increase during the current fiscal year, driven by strengthening demand for SiC
substrate products addressing RF electronics and high-power switching and power conversion systems for automotive, communication
and military markets.
Gross margin. Gross margin for the year ended June 30, 2018 was $461.3 million, or 39.8%, of total revenues, compared to $388.3
million, or 39.9%, of total revenues for the same period last fiscal year. Gross margin as a percentage of revenues was consistent with
the prior fiscal year due to a balance of operating efficiencies and investments to expand capacity. The Company’s II-VI Photonic’s
gross margin was negatively impacted by both product mix and the effects of foreign currency.
Internal research and development. Company-funded internal research and development (“IR&D”) expenses for the fiscal year
ended June 30, 2018 were $117.2 million, or 10.1% of revenues, compared to $96.8 million, or 10.0% of revenues, last fiscal year.
The increase in IR&D expenses is primarily the result of the current year acquisition of Kaiam Laser Limited, acquired in August
2017, which contributed $14.6 million of expense. The Company continues to ramp its investment in new material-based
technologies addressing growing market trends in consumer electronics, communications and automotive markets.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2018 were
$208.8 million, or 18.0% of revenues, compared to $176.0 million, or 18.1% of revenues, last fiscal year. SG&A expenses includes
$3.7 million and $2.5 million, respectively, for the combined acquisitions of II-VI Integrated Photonics Inc. (“IPI”), acquired in June
2017, and Kaiam Laser Limited, acquired in August 2017. Exclusive of these acquisitions, the increase in SG&A is primarily due to
increased operating costs to support the Company’s growing revenue and infrastructure base, as well as its ongoing merger and
acquisition strategy. The Company is working to identify and capitalize on synergies created from the Company’s recent acquisitions
and is working to improve the SG&A leverage in the upcoming fiscal 2019 and beyond.
34
Interest and other, net. Interest and other, net for the year ended June 30, 2018 was expense of $13.1 million compared to income of
$3.3 million last fiscal year. Included in interest and other, net were interest expense on long-term borrowings, earnings from equity
investments, interest income on excess cash reserves, unrealized gains and losses on the Company’s deferred compensation plan, and
foreign currency gains and losses. Interest expense increased $11.5 million due to the higher levels of the Company’s outstanding debt.
The majority of the interest expense increase was related to the Company’s $345.0 million convertible debt issued in August 2017.
The Company recognized $10.8 million of interest and amortization of debt discounts and issuance costs. Other income last fiscal year
included approximately $7.0 million of income from earn-out and technology transfer agreements from the Company’s sale of its
ANADIGICS’ RF business.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2018 was 28.0%, compared to an effective tax rate of
19.8% last fiscal year. The variation between the Company’s effective tax rate and the U.S. statutory rate was primarily due to the
Company’s foreign operations, which are subject to income taxes at lower statutory rates. The increase in the current fiscal year’s
effective tax rate is the result of approximately $8.0 million of increased income tax expense relating to repatriation on foreign source
earnings.
Segment Reporting
Revenues and operating income for each of the Company’s reportable segments are discussed below. Operating income differs from
income from operations in that operating income excludes certain operational expenses included in other expense (income) – net, as
reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance
over which management has direct control and is used by management in its evaluation of segment performance. See “Note 12.
Segment and Geographic Reporting,” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for
further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is
incorporated herein by reference.
II-VI Laser Solutions ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2018
2017
$
$
428.0 $
36.8 $
339.3
30.9
26%
19%
The Company’s II-VI Laser Solutions segment includes the combined operations of II-VI Infrared Optics, II-VI HIGHYAG, II-VI
Laser Enterprise, II-VI Laser Systems Group, II-VI OED, II-VI EpiWorks, and Kaiam Laser Limited (now operating under II-VI
Compound Semiconductors, Ltd.). The Company acquired II-VI Compound Semiconductors, Ltd. in August 2017.
Revenues for the fiscal year ended June 30, 2018 for II-VI Laser Solutions increased 26% to $428.0 million, compared to revenues of
$339.3 million last fiscal year. The increase in revenues during the current fiscal year was the result of increased demand from
industrial based customers for the Company’s CO2, fiber and direct diode laser optics and components. In addition, the segment has
also seen increased demand for its CVD diamond optics used in the EUV lithography markets, as well as VCSELs used in consumer
electronics, datacom and other end markets.
Operating income for the fiscal year ended June 30, 2018 for II-VI Laser Solutions increased 19% to $36.8 million, compared to $30.9
million last fiscal year. The increase in operating income during the current fiscal year was the result of incremental margins realized
from increased capacity utilization, increase in mix of higher margin products, offset somewhat by greater investment in growth
markets.
II-VI Photonics ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2018
2017
$
$
464.4 $
67.7 $
418.5
63.0
11%
7%
35
The Company’s II-VI Photonics segment includes the combined operations of II-VI Photop and II-VI Optical Communications. The
above operating results for the year ended June 30, 2018 include the Company’s recent acquisition of IPI which was acquired in June
2017.
Revenues for the year ended June 30, 2018 for II-VI Photonics increased 11% to $464.4 million, compared to $418.5 million for last
fiscal year. Included in the current year’s revenues were $19.3 million of revenues from the above acquisition. Exclusive of IPI, the
increase in revenues was primarily attributed to increased demand of optics and optic assemblies for applications for industrial laser
products. In addition, the segments realized increase demand for transport and amplification component products, including its 980
nm pumps.
Operating income for the year ended June 30, 2018 for II-VI Photonics increased 7% to $67.7 million, compared to an operating
income of $63.0 million last fiscal year. The increase in operating income was primarily due to incremental margin realized on
increased revenues but significantly offset by mix shifts and negative foreign exchange effects.
II-VI Performance Products ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2018
2017
$
$
266.4 $
30.8 $
214.2
21.6
24%
43%
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.
Revenues for the year ended June 30, 2018 for II-VI Performance Products increased 24% to $266.4 million, compared to $214.2
million for last fiscal year. The increase in revenues during the current fiscal year was primarily driven by increased demand for SiC
products addressing RF electronics and high-power switching and power conversion systems for automotive and communication
markets. In addition, the segment has seen increased demand for products and components for the semiconductor capital equipment
and military markets.
Operating income for the year ended June 30, 2018 for II-VI Performance Products increased 43% to $30.8 million, compared to
$21.6 million for last fiscal year. The increase in operating income during the current fiscal year was primarily driven by incremental
margin realized by increased sales volume, as well as favorable product mix toward higher margin products.
Fiscal Year 2017 Compared to Fiscal Year 2016
The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 2017 and 2016.
($ millions, except per share information):
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
% of
Revenues
Year Ended
June 30, 2016
% 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
90.0
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 shares
$
1.48
$
1.04
36
Consolidated
Revenues. Revenues for the year ended June 30, 2017 increased 18% to $972.0 million, compared to $827.2 million for the fiscal year
ended June 30, 2016. The Company had seen continued increased demand from the optical communications customer base as a result
of the continuation of the China broadband initiative, datacenter and U.S. metro upgrade cycles (including cable television). In
addition, the Company’s II-VI Laser Solutions segment saw increased demand for its products addressing CO2, laser optics, one-
micron laser and diamond optic products.
Gross margin. Gross margin as a percentage of revenues for the year ended June 30, 2017 was $388.3 million or 39.9%, compared to
$312.8 million or 37.8% for the fiscal year ended June 30, 2016. The improvement in gross margin was primarily driven by
incremental margins realized 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 year ended June 30, 2017
were $96.8 million, or 10.0% of revenues, compared to $60.4 million, or 7.3% of revenues, for the fiscal year ended June 30, 2016.
The increase in internal research and development expense for fiscal year 2017 was 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.
Selling, general and administrative. SG&A expenses for the fiscal year ended June 30, 2017 were $176.0 million, or 18.1% of
revenues, compared to $160.6 million, or 19.4% of revenues, for the fiscal year ended June 30, 2016. The increase in SG&A in
absolute dollars was the result of a higher revenue base requiring more SG&A support. The Company experienced favorable leverage
as a result of capitalizing on synergies created from the Company’s acquisitions over the past several years.
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 for the year ended June 30, 2016. 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 fiscal year ended June 30, 2016 expense of $1.9 million included $3.1 million of interest expense on the
Company’s outstanding borrowings, offset by $1.2 million of interest income on the Company’s excess cash reserves. The increase in
interest expense in fiscal year 2017 was the result of higher levels of outstanding borrowings.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2017 was 19.8%, compared to an effective tax rate of
27.3% for the fiscal year ended June 30, 2016. The variation between the Company’s effective tax rate and the U.S. statutory rate of
35% was primarily due to the Company’s foreign operations, which are subject to income taxes at lower statutory rates. The lower
year-to-date effective tax rate was primarily driven by the reversal of certain valuation allowances triggered by the acquisition of IPI,
which generated deferred tax liabilities that offset the previously reserved deferred tax asset.
II-VI Laser Solutions ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
(Decrease)
2017
2016
$
$
339.3 $
30.9 $
303.0
36.2
12%
(15%)
Revenues for the year ended June 30, 2017 for II-VI Laser Solutions increased 12% to $339.3 million, compared to $303.0 million for
fiscal year ended June 30, 2016. Revenues included $24.0 million for fiscal 2017 and $13.9 million for fiscal year 2016, respectively,
attributed to the 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 year ended June 30, 2017 for II-VI Laser Solutions decreased 15% to $30.9 million, compared to $36.2
million for fiscal year June 30, 2016. Operating income was impacted by the segment’s ongoing internal research and development
investments for its new optoelectronic laser platform. During fiscal year 2017, this expense increased approximately $30.2 million
over fiscal year 2016.
37
II-VI Photonics ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2017
2016
$
$
418.5 $
63.0 $
325.9
37.8
28%
67%
Revenues for the year ended June 30, 2017 for II-VI Photonics increased 28% to $418.5 million, compared to $325.9 million for the
fiscal year ended June 30, 2016. The Company realized increased revenues from the broadband China initiative as China continued
expansion of its geographical broadband networks. In addition, increased market share gains in the datacenter communications market
and undersea fiber optic networks and new product introductions fueled the higher revenues during the fiscal year ended June 30,
2017.
Operating income for the year ended June 30, 2017 for II-VI Photonics increased 67% to $63.0 million, compared to an operating
income of $37.8 million for the fiscal year ended June 30, 2016. The increase in operating income was primarily due to incremental
margin realized on the higher revenue volume as well as higher margin product mix, including terrestrial and submarine 980nm pumps
and amplifiers, and new product introductions which have higher margin profiles.
II-VI Performance Products ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2017
2016
$
$
214.2 $
21.6 $
198.3
17.8
8%
21%
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 fiscal year June 30, 2016. The increase in revenues for the year ended June 30, 2017 was driven by continued growth in the
4G base station market which was expanding geographically. Revenue growth was also driven by increasing demand for 150mm
power device products as the market entered 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 ramped 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 fiscal year June 30, 2016. Incremental margins on higher segment revenues led by SiC substrate revenues
contributed to the increased operating income.
38
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,
2018
2017
2016
Net cash provided by operating activities
Net proceeds on long-term borrowings
Proceeds from exercises of stock options
Additions to property, plant & equipment
Purchases of businesses, net of cash acquired
Purchases of equity investments
Purchases of treasury stock
Debt issuance costs
Payments in satisfaction of employees' minimum tax
obligations
Payment on earnout consideration
Proceeds from the sale of business
Other financing activities
Effect of exchange rate changes on cash and cash
equivalents and other
$
161.0 $
153.0
10.5
(153.4)
(80.5)
(52.1)
(49.9)
(10.1)
118.6 $
104.0
15.1
(138.5)
(40.0)
-
-
-
(6.6)
-
-
-
(4.1)
(2.0)
-
-
123.0
59.5
9.7
(58.2)
(122.2)
-
(6.3)
-
(2.0)
-
45.0
0.6
3.2
0.3
(4.3)
Net cash provided by operating activities:
Net cash provided by operating activities was $161.0 million and $118.6 million for the fiscal years ended June 30, 2018 and 2017,
respectively. The increase in cash provided by operations during the current fiscal year was due to a combination of higher non-cash
items such as depreciation, amortization, and share-based compensation expense and better working capital management of accounts
payable, income tax payable and other operating net assets.
Net cash provided by operating activities was $118.6 million and $123.0 million for the fiscal years ended June 30, 2017 and 2016,
respectively. The decrease in cash provided by operating activities during the fiscal year 2017 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 used in investing activities:
Net cash used in investing activities was $285.0 million and $177.2 million for the fiscal years ended June 30, 2018 and 2017,
respectively. The increase in cash used in investing activities was the result of a higher level of investments in property, plant &
equipment to continue to build capacity to meet the growing demand for the Company’s product portfolio. In addition, the Company
completed several strategic investments in both wholly- and majority-owned investments during the current fiscal year, totaling
approximately $132.6 million.
Net cash used in investing activities was $177.2 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 IPI, located in Hillsborough, New Jersey, for $39.4 million, net of cash
acquired and certain assets of DirectPhotonics Industries GmbH, located in Berlin, Germany, for $0.6 million.
39
Net cash provided by financing activities:
Net cash provided by financing activities was $97.0 million for the year ended June 30, 2018 compared to net cash provided by
financing activities of $111.6 million for the year ended June 30, 2017. During the current fiscal year, the Company completed its
offering and sale of $345 million aggregate principal amount of convertible notes. In addition, the Company borrowed $100 million
on its revolving credit facility to fund its investments in capital expenditures and research and development to address new and
growing technology platforms. The net proceeds from the convertible debt offering as well as cash generated from operations was
used to repay $272 million on the revolver, $20 million on the term loan and $10.1 million of convertible debt issuance costs. The
Company also utilized $49.9 million of convertible debt proceeds to repurchase 1,414,900 of its common stock. The Company
realized $10.5 million of proceeds received from the exercise of stock options offset, by $6.6 million of cash payments in satisfaction
of employees’ minimum tax obligations on the vesting of the Company’s restricted and performance shares during the current fiscal
year.
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.
0.25% Convertible Senior Notes
On August 24, 2017, the Company entered into a purchase agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
representative of the several initial purchasers named therein (collectively, the “Initial Purchasers”), to issue and sell $300 million
aggregate principal amount of our 0.25% convertible senior notes due 2022 (the "Notes") in a private placement to qualified
institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. In addition, we granted the Initial
Purchasers a 30-day option to purchase up to an additional $45 million aggregate principal amount of the Notes (the “Over-Allotment
Option”).
On August 29, 2017, the Initial Purchasers exercised their Over-Allotment Option to purchase the entire $45 million in aggregate
principal amount of additional Notes. The Notes mature on September 1, 2022, unless earlier repurchased by the Company or
converted by holders in accordance with the terms of the Notes. Interest is payable semi-annually in arrears on March 1 and
September 1 of each year, beginning on March 1, 2018.
The sale of the Notes to the Initial Purchasers settled on August 29, 2017, and resulted in approximately $336 million in net proceeds
to the Company after deducting the initial purchasers’ discount and the offering expenses. The net proceeds from the offering and sale
of the Notes were used, in part, to repurchase approximately $49.9 million of our common stock. The Company used the remaining
net proceeds to repay $252 million on its revolving credit facility and to pay debt issuance costs of $10.1 million.
The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes
are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in
right of payment to the Notes; equal in right of payment to any of our indebtedness that is not so subordinated; effectively junior in
right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally
junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation,
reorganization or other winding up, our assets that secure secured debt will be available to pay obligations on the Notes only after all
indebtedness under such secured debt has been repaid in full from such assets. Upon conversion, the Company will pay or deliver, as
the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s
election.
As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a
debt discount. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the
conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of
similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the Notes
using the effective interest method with an effective interest rate of 4.5% per annum.
The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion
rate is 21.25 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of
$47.06 per share of common stock. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of
40
certain events. The if-converted value of the Notes amounted to $318.5 million as of June 30, 2018 (based on the Company’s closing
stock price on the last trading day of the year ended June 30, 2018).
Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued
but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.
Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only upon
satisfaction of at least one of the conditions as follows:
a)
b)
During any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock for at
least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading
day of the immediately preceding quarter is greater than or equal to 130% of the conversion price on each applicable
trading day;
During the five business day period after any five consecutive trading day period (the “measurement period”) in which the
trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
c)
Upon the occurrence of specified corporate events.
On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert
all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing
circumstances.
As of June 30, 2018, the Notes are not convertible. The Notes will become convertible upon the satisfaction of at least one of the
above conditions. In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount of
offering costs incurred to the debt and equity components based on their relative values. Offering costs attributable to the debt
component, totaling $8.4 million, are being amortized as non-cash interest expense over the term of the Notes, and offering costs
attributable to the equity component, totaling $1.7 million, were recorded within Shareholders' equity.
The Company was in compliance with all the covenants set forth under the indenture.
The following table sets forth total interest expense recognized related to the Notes for the fiscal year ended June 30, 2018
(representing an effective interest rate of 4.5%):
Year ended June 30,
0.25% contractual coupon
Amortization of debt discount and debt issuance costs including initial purchaser discount
Interest expense
$
$
2018
731
10,058
10,789
The unamortized discount amounted to $49.3 million as of June 30, 2018 and is being amortized over 4 years.
Amended Credit Facility
On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit
Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 million, as well as a $100 million term
loan. The term loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July
and October, with the first payment having commenced on October 1, 2016, as follows: (i) twenty consecutive quarterly installments
of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 27, 2021. Amounts
borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but
is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic 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 27, 2021 and has an interest rate of either a Base
Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility. If
the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.25% and if the Euro-Rate Option is selected for
a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the ratio of the Company’s consolidated
indebtedness to consolidated EBITDA. Additionally, the Credit Facility is subject to certain covenants, including those relating to
minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company was in compliance with all financial
covenants under its Amended Credit Facility.
41
Yen Loan
The Company’s yen denominated line of credit is a 500 million Yen ($4.5 million) facility. The Yen line of credit matures in August
2020. The interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.75%. At June 30, 2018 and 2017, the
Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including
those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company had $2.7 million
outstanding and was in compliance with all covenants under its Yen facility.
Aggregate Availability
The Company had aggregate availability of $246.4 million and $73.5 million under its lines of credit as of June 30, 2018 and 2017,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30,
2018 and 2017, total outstanding letters of credit supported by the credit facilities were $0.4 million and $1.3 million, respectively.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1.3% and 2.2% for the years ended June 30, 2018 and 2017, respectively.
The weighted average of total borrowings for the fiscal years ended June 30, 2018 and 2017 was $476.6 million and $272.1 million,
respectively.
Share Repurchase Programs
In August 2017, in conjunction with the Company’s offering and sale of the Convertible Notes, the Company’s Board of Directors
authorized the Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from the
offering and sale of the Notes. The shares that were purchased by the Company pursuant to this authorization were retained as treasury
stock and are available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for
approximately $49.9 million pursuant to this authorization.
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common Stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions
from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the
Company are retained as treasury stock and available for general corporate purposes. As of June 30, 2018, the Company has
cumulatively purchased 1,316,587 shares of its common stock pursuant to the Program for approximately $19.0 million
Our cash position, borrowing capacity and debt obligations are as follows (in millions):
Cash and cash equivalents
Available borrowing capacity
Total debt obligations
June 30,
2018
June 30,
2017
$
247.0 $
246.4
439.0
271.9
73.5
342.0
The Company believes cash flow from operations, existing cash reserves and available borrowing capacity from its credit facilities
will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and capital
lease obligations, investments in internal research and development, share repurchases, internal and external growth objectives at least
through fiscal year 2019. The Company expects to complete its acquisition of CoAdna, Inc., a publically traded company on the
Taiwan Stock Exchange, on or about September 1, 2018. The purchase price will be approximately $85.0 million, net of any cash
acquired and will be financed by a combination of cash on hand and borrowings on the Company’s Amended Credit Facility.
The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including
amounts held outside the United States. As of June 30, 2018, the Company held approximately $218 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. The
recently enacted Act created significant changes to the taxation of undistributed foreign earnings and has changed our future intentions
regarding repatriation of earnings. The Company is currently evaluating the full impact of the Act and may update future cash
repatriation intentions.
42
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the operating lease obligations and the purchase obligations disclosed in the
contractual obligations table below, as well as letters of credit as discussed in Note 7 to the Company’s Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K. 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)(5)
Total
Payments Due By Period
Less
Than 1
1-3
3-5
More
Than 5
Total
Year
Years
Years
Years
$ 496,548 $ 20,000 $ 46,548 $ 430,000 $
3,591
7,368
28,181
2,703
579
24,940
21,500
127,900
20,100
118,351 114,307
-
$ 795,920 $ 162,354 $ 98,604 $ 457,794 $
12,244
2,168
33,600
4,044
-
4,978
19,490
52,700
-
77,168
(1)
(2)
Interest payments represent both variable and fixed rate interest obligations based on the interest rate in place at June 30, 2018,
relating to the Amended Credit Facility, the Notes and interest relating to the Company’s capital lease obligation.
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 on II-VI EpiWorks and IPI for the achievement of certain agreed-upon financial and
operational targets.
Includes the Company’s intention to acquire CoAdna Inc., during the first quarter of fiscal year 2019, in a cash transaction
valued at approximately $85.0 million, net of any cash acquired.
(4)
(5)
Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $2.7
million in 2019. Estimated funding obligations are determined by asset performance, workforce and retiree demographics, tax and
employment laws and other actuarial assumptions which may change the annual funding obligations. The funded status of our defined
benefit plans is disclosed in Note 15 to the Company’s Consolidated Financial Statements.
The gross unrecognized income tax benefits at June 30, 2018, which are excluded from the above table, were $10.3 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. No significant changes have
occurred in the techniques and instruments used other than those described below.
Foreign Exchange Risks
In the normal course of business, the Company enters into foreign currency forward exchange contracts with its financial institutions.
The purpose of these contracts is to hedge ordinary business risks regarding foreign currencies on product sales and other transactions
denominated in currencies other than the U.S. dollar. Foreign currency exchange contracts are used to limit transactional exposure to
changes in currency rates.
43
Japanese Yen
The Company enters into foreign currency forward contracts that permit it to sell specified amounts of Japanese Yen expected to be
received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the
same foreign currencies in which export sales are denominated. These contracts provide the Company with an economic hedge in
which settlement will occur in future periods, thereby limiting the Company’s exposure. These contracts had a total notional amount
of $12.0 million and $12.7 million at June 30, 2018 and 2017, respectively.
A 10% change in the yen to U.S. dollar exchange rate would have changed revenues in the range from a decrease of approximately
$8.1 million to an increase of approximately $9.9 million for the year ended June 30, 2018.
During June 2018, the Company entered into a $7.0 million month-to-month forward contract that matured on June 29, 2018, to limit
exposure to the Yen. Upon expiration of this contract, the Company recorded a loss of $0.2 million in the Consolidated Statement of
Earnings.
Chinese Renminbi
During June 2018, the Company entered into a $43.5 million month-to-month forward contract that matured on June 29, 2018, to limit
exposure to the Chinese Renminbi. Upon expiration of this contract, the Company recorded a loss of $1.2 million in the Consolidated
Statement of Earnings.
Euro
The Company has short-term intercompany notes that are denominated in U.S. dollars with certain European subsidiaries. A 10%
change in the Euro to dollar exchange rate would have changed net earnings in the range from a decrease of $0.5 million to an
increase of $0.6 million for the year ended June 30, 2018.
The Company monitors its positions and the credit ratings of the parties to these contracts. While the Company may be exposed to
potential losses due to risk in the event of non-performance by the counterparties to these financial instruments, it does not currently
anticipate such losses.
Assets and liabilities of foreign operations are translated into U.S. dollars using the period-end exchange rates, while income and
expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated
other comprehensive income within shareholders’ equity.
Interest Rate Risks
As of June 30, 2018, the Company’s total borrowings of $496.5 million consisted of $147.7 million variable rate debt borrowings
from a line of credit of $80.0 million denominated in U.S. dollars, a term loan denominated in U.S. dollars of $65.0 million, a line of
credit borrowing of $2.7 million denominated in Japanese yen. As such, the Company is exposed to changes in interest rates. A
change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of
$1.5 million for the fiscal year ended June 30, 2018.
Discount Rate Risks
As of June 30, 2018, a 10% change in the Company’s discount rate used to determine the pension benefit obligation of the Switzerland
Defined Benefit Plan would have had an immaterial impact on the Consolidated Financial Statements.
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 consolidated financial statements included in this Annual Report on Form 10-K.
The consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United
States of America and include amounts that are based on the best estimates and judgments of management. The other financial
information contained in this Annual Report on Form 10-K is consistent with the consolidated financial statements.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control system is designed to provide reasonable assurance concerning the reliability of the financial data used in the
preparation of the Company’s consolidated financial statements, as well as reasonable assurance with respect to safeguarding the
Company’s assets from unauthorized use or disposition.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement presentation and other results of such systems.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30,
2018. 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 Kaiam Laser
Limited, Inc., which was acquired in August 2017. The recent acquisition excluded from management’s assessment of internal
controls over financial reporting represented approximately $107.2 million and $98.1million of total assets and net assets, respectively,
as of June 30, 2018 and approximately $3.4 million and $12.5 million of total revenues and net loss, respectively, for the fiscal year
then ended. Based on the evaluation, management concluded that as of June 30, 2018, the Company’s internal controls over financial
reporting were effective.
Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal control
over financial reporting as of June 30, 2018. Its report is included herein.
45
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, II-VI Incorporated and Subsidiaries (the Company) maintained, in
all material respects, effective internal control over financial reporting as of June 30, 2018, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of
and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Kaiam Laser
Limited, Inc., which is included in the June 30, 2018 consolidated financial statements of the Company and constituted $107.2 million
and $98.1 million of total and net assets, respectively, as of June 30, 2018 and $3.4 million and $12.5 million of revenues and net loss,
respectively, for the fiscal year then ended. Our audit of internal control over financial reporting of the Company also did not include
an evaluation of the internal control over financial reporting of Kaiam Laser Limited, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of June 30, 2018 and 2017, the related consolidated statements of earnings,
comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2018, and the
related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 28, 2018 expressed
an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
August 28, 2018
46
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries (the Company) as of June 30,
2018 and 2017, the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each
of the three years in the period ended June 30, 2018, and the related notes and the financial statement schedule listed in the Index at
Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at June 30, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our
report dated August 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Pittsburgh, Pennsylvania
August 28, 2018
47
2018
2017
$
247,038 $
271,888
215,032
248,268
7,845
43,654
761,837
524,890
270,678
125,069
69,215
2,046
7,926
1,761,661 $
20,000 $
89,774
66,322
17,392
42,979
236,467
419,013
27,241
54,629
737,350
-
351,761
(3,780)
836,064
1,184,045
(159,734)
1,024,311
1,761,661 $
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
15,345
54,415
576,734
-
269,638
(13,778)
748,062
1,003,922
(103,359)
900,563
1,477,297
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 $837 at June 30, 2018 and
$1,314 at June 30, 2017
Inventories
Prepaid and refundable income taxes
Prepaid and other current assets
Total Current Assets
Property, plant & equipment, net
Goodwill
Other intangible assets, net
Investments
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
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 - 75,692,683 shares at June
30, 2018; 74,081,451 shares at June 30, 2017
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost - 12,395,791 shares at June 30, 2018 and 10,940,062 shares at June 30,
2017
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
See Notes to Consolidated Financial Statements.
48
II-VI Incorporated and Subsidiaries
Consolidated Statements of Earnings
Year Ended June 30,
($000, except per share data)
Revenues
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.
2018
2017
2016
$
1,158,794 $
972,046 $
827,216
697,506
117,244
208,757
18,352
(5,259)
1,036,600
583,693
96,810
176,002
6,809
(10,056)
853,258
122,194
118,788
34,192
23,514
514,403
60,354
160,646
3,081
(1,223)
737,261
89,955
24,469
$
$
$
88,002 $
95,274 $
65,486
1.41 $
1.52 $
1.35 $
1.48 $
1.07
1.04
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 $763, $674, and ($1,886) for the years ended
June 30, 2018, 2017, and 2016, respectively
Other comprehensive income (loss)
Comprehensive income
See Notes to Consolidated Financial Statements.
2018
2017
2016
$
$
88,002 $
95,274 $
65,486
7,152
(2,275)
(15,651)
2,846
9,998
98,000 $
2,514
239
95,513 $
(7,031)
(22,682)
42,804
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
(000)
Balance - June 30, 2015
Share-based and deferred compensation activities
Net earnings
Purchases of treasury stock
Foreign currency translation adjustments
Pension adjustment, net of taxes of ($1,886)
Tax deficiency from share-based compensation expense
Balance - June 30, 2016
Share-based and deferred compensation activities
Net earnings
Foreign currency translation adjustments
Pension adjustment, net of taxes of $674
Balance - June 30, 2017
Share-based and deferred compensation activities
Net earnings
Purchases of treasury stock
Foreign currency translation adjustments
Equity portion of convertible debt, net of issuance costs of
$1,694
Pension adjustment, net of taxes of $763
Balance - June 30, 2018
71,780 $ 226,609 $
1,060 17,790
-
-
-
-
-
-
-
-
(587)
-
72,840 $ 243,812 $
1,241 25,826
-
-
-
-
-
-
74,081 $ 269,638 $
1,612 25,717
-
-
-
-
-
-
- 56,406
-
-
75,693 $ 351,761 $
(466)
-
(6,284)
-
-
-
-
-
- 65,486
-
-
-
(15,651)
-
(7,031)
-
-
8,665 $ 587,302 (10,565) $ (93,495) $ 729,081
17,324
(20)
65,486
-
(6,284)
(381)
(15,651)
-
(7,031)
-
(587)
-
(14,017) $ 652,788 (10,966) $ (100,245) $ 782,338
22,712
95,274
(2,275)
2,514
(13,778) $ 748,062 (10,940) $ (103,359) $ 900,563
19,217
88,002
(49,875)
7,152
(6,500)
(41)
-
-
- (1,415) (49,875)
-
-
-
-
-
- 88,002
-
7,152
-
-
- 95,274
-
-
(3,114)
-
-
-
26
-
-
-
(2,275)
2,514
56,406
-
2,846
2,846
(3,780) $ 836,064 (12,396) $ (159,734) $ 1,024,311
-
-
-
-
-
-
See Notes to Consolidated Financial Statements.
51
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
($000)
Cash Flows from Operating Activities
2018
2017
2016
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
88,002 $
95,274 $
65,486
Depreciation
Amortization
Share-based compensation expense
Losses (gains) on foreign currency remeasurements and transactions
Earnings from equity investments
Deferred income taxes
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
Purchases of equity investments
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 issuance of 0.25% convertible senior notes due 2022
Proceeds from borrowings under Credit Facility
Payments on borrowings under Credit Facility
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
Other financing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
Non cash transactions:
Purchases of 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.
$
$
$
$
$
66,202
14,568
15,312
850
(3,594)
945
(21,044)
(38,732)
17,436
7,380
13,689
161,014
(153,438)
(52,056)
-
(80,503)
1,047
(284,950)
345,000
100,000
(292,000)
-
10,469
(6,564)
(10,061)
(49,875)
-
96,969
2,117
(24,850)
271,888
247,038 $
- $
- $
- $
12,313 $
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
(20,770)
(8,650)
5,715
13,416
538
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
-
-
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 components 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.
Inventories. Inventories are valued at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis.
Inventory costs include material, labor and manufacturing overhead. In evaluating the net realizable value of inventory, management
also considers, if applicable, other factors, including known trends, market conditions, currency exchange rates and other such issues.
The Company generally records an inventory adjustment 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 charge may be recorded for product on hand that is in excess of product sold to customers over the same
periods noted above. The cumulative adjustments to the carrying value of inventory totaled $22.5 million and $18.5 million at June 30,
2018 and 2017, respectively.
Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair value upon acquisition. Major
improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its 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.
53
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 value allocated to identifiable tangible and intangible net assets of businesses
acquired is reported as goodwill in the accompanying Consolidated Balance Sheets. The Company tests goodwill for impairment at
least annually as of April 1, or when events or changes in circumstances indicate that goodwill might be impaired. The evaluation of
impairment involves comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill).
The Company uses a discounted cash flow (“DCF”) model and/or a market analysis to determine the current fair value of its reporting
units. A number of significant assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model,
including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates.
Management considers historical experience and all available information at the time the fair values of the reporting units are
estimated. Goodwill impairment is now measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not
to exceed the carrying amount of goodwill.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative assessment described
above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the quantitative assessment.
Otherwise, the Company will forego the quantitative assessment and does not need to perform any further testing. As of April 1 of
fiscal years 2018 and 2017, the Company completed its annual impairment tests of its reporting units using the quantitative assessment.
Based on the results of these analyses the Company’s goodwill was not impaired.
Intangibles. Intangible assets are initially recorded at their cost or fair value upon acquisition. Finite-lived intangible assets are
amortized for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from 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.
Investments in Other Entities. In the normal course of business, the Company enters into various types of investment arrangements,
each having unique terms and conditions. These investments may include equity interests held by the Company in business entities,
including general or limited partnerships, contractual ventures, or other forms of equity participation. The Company determines
whether such investments involve a variable interest entity (“VIE”) based on the characteristics of the subject entity. If the entity is
determined to be a VIE, then management determines if the Company is the primary beneficiary of the entity and whether or not
consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct
the activities of a VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. When the Company is
deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a
noncontrolling interest.
The Company generally accounts for investments it makes in VIEs in which it has determined that it does not have a controlling
financial interest but has significant influence over and holds at least a 20% ownership interest using the equity method. Any such
investment not meeting the parameters to be accounted under the equity method would be accounted for using the cost method unless
the investment had a readily determinable fair value, at which it would then be reported.
If an entity fails to meet the characteristics of a VIE, management then evaluates such entity under the voting model. Under the voting
model, management consolidates the entity if they determine that the Company, directly or indirectly, has greater than 50% of the
voting shares and determines that other equity holders do not have substantive participating rights.
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, 2018 related to commitments and contingencies.
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 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.
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 approximately 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, 2018, 2017 and 2016.
Research and Development. Internal research and development costs and costs not related to customer and government funded
research and development contracts are 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.
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 (loss) income is a component of shareholders’ equity and consists of accumulated foreign currency translations
adjustments and pension adjustments.
Fair Value Measurements. The Company applies fair value accounting for all financial assets and liabilities that are required to be
recognized or disclosed at fair value in the financial statements. 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.
55
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 other liabilities, respectively, in the Consolidated Balance Sheet. Capital lease assets are
included in property, plant & equipment and are generally depreciated over the term of the lease. Interest expense on capital leases are
included in interest expense in the Consolidated Statements of Earnings.
Recently Issued Financial Accounting Standards
Adopted Pronouncements
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 has adopted this standard for any impairment test that is performed after July 1, 2017 as
permitted under the standard.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. This update simplifies several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, and classification in
the statement of cash flows. Under this ASU, excess tax benefits or deficiencies are recognized in income tax expense in the
Consolidated Statement of Earnings. Upon adoption of this ASU, the Company had a valuation allowance for its U.S. deferred tax
assets and did not recognize any tax benefit. Had the Company not had a valuation allowance, the Company would have recognized a
tax benefit of $2.4 million. The impact to the Company’s dilutive shares under this new standard was immaterial.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update
simplifies the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated
selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The
adoption of this standard did not 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 adoption of this standard did not have a material
effect on the Company’s Consolidated Financial Statements.
Revenue Recognition Pronouncement
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09: Revenue
from Contracts with Customers (Topic 606), that outlines a five-step revenue recognition model based on the principle that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods and services. This new standard became effective for the
Company on July 1, 2018, and will be adopted using the modified retrospective transition method.
Based on review and analysis of our contracts, the standard primarily impacts our II-VI Performance Product segment, which has
long-term production contracts with customers that sell to the U.S. Government. Prior to adoption of the new standard, revenue was
generally recognized for these contracts at a point-in-time as units were shipped, while under the new standard, revenue will be
recognized over time, principally under the units-of-delivery method which faithfully depicts the transfer of control to the customers.
This change will result in an immaterial change in revenue for these contracts and no transition adjustment is anticipated for July 1,
2018.
We have updated the accounting policies affected by this standard, redesigned our related internal controls over financial reporting
and are expanding the disclosures to be included in our first quarter 2019 Condensed Consolidated Financial Statements to meet the
new requirements.
Other Pronouncements Currently Under Evaluation
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies
the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on
such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The
standard will be effective for the Company’s 2020 fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date
of Topic 606. The Company is evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
56
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally
requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged
item. The standard will be effective for the Company’s 2019 fiscal year. The adoption of this ASU is not expected to have a material
effect on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, Compensation (Topic 715): Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. This update affects employers’ presentation of defined benefit retirement plan costs.
Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year. The adoption of this ASU is not
expected to have a material effect on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This
update changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
Early adoption is permitted. The standard will be effective for the Company’s 2019 fiscal year. The adoption of this ASU is not
expected to have a material effect on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.
This update requires that when intra-entity asset transfers occur, the entity must recognize tax effects in the period in which the
transfer occurs. The standard will be effective for the Company’s 2019 fiscal year. Early adoption is permitted. The adoption of this
ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash
flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have
aspects of more than one class of cash flow. The update will be effective for the Company’s 2019 fiscal year. Early adoption is
permitted. The adoption of the ASU is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. This update is intended to provide financial statement users with more decision-useful information about
expected credit 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update modifies lease accounting for lessees to increase
transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about
leasing arrangements. The new standard will become effective for the Company’s fiscal year 2020, which begins on July 1, 2019. The
Company will adopt the new guidance utilizing the modified retrospective transition method. We have reviewed the requirements of
this standard and have formulated a plan for implementation. We are currently working on accumulating a complete population of
leases from all of our locations and have selected a software repository to track all of our lease agreements and to assist in the
reporting and disclosure requirements required by the standard. We will continue to assess and disclose the impact that this new
guidance will have on our consolidated financial statements, disclosures and related controls, when known.
Note 2.
Acquisitions
CoAdna, Inc.
In March 2018, the Company announced its intention to acquire CoAdna, Inc. (“CoAdna”), a publically traded company on the
Taiwan Stock Exchange and based in Sunnyvale, CA, in a cash transaction valued at approximately $85.0 million, net of any cash
acquired. The transaction is expected to close during the first quarter of fiscal year 2019 and will be subject to regulatory approvals
and customary closing conditions.
Kaiam Laser Limited, Inc.
In August 2017, the Company acquired Kaiam Laser Limited, Inc. (“Kaiam”), a privately held company based in Newton Aycliffe,
United Kingdom. Under the terms of the merger agreement, the consideration consisted of cash paid at the acquisition date of $79.5
million, net of cash acquired and an adjustment for a purchase price reduction of $0.5 million. The acquisition of Kaiam provides the
Company with a 150mm wafer fabrication platform to significantly expand the Company’s capacity for the production of vertical
cavity surface emitting lasers (“VCSELs”) for the 3D sensing market and broadens the capability to address new market opportunities
in other compound semiconductor materials. Kaiam now operates under the name II-VI Compound Semiconductor Ltd., within the
Company’s II-VI Laser Solutions operating segment.
57
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
$
$
$
$
79
4,559
1,246
63,899
4,046
18,956
92,785
751
2,486
10,555
13,792
78,993
The goodwill of $19.0 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the
assembled workforce of II-VI Compound Semiconductor Ltd. None of the goodwill is deductible for income tax purposes. The
Company expensed transaction costs of $0.6 million for the year ended June 30, 2018.
The amount of revenues of II-VI Compound Semiconductor Ltd. included in the Company’s Consolidated Statement of Earnings for
the year ended June 30, 2018 was $3.4 million. The amount of net losses of II-VI Compound Semiconductor Ltd. included in the
Company’s Consolidated Statements of Earnings for the year ended June 30, 2018 was $12.5 million.
Integrated Photonics, Inc.
In June 2017, the Company acquired Integrated Photonics, Inc. (“IPI”), a privately held company based in New Jersey. IPI is a leader
in engineered magneto-optic materials that enable high-performance directional components such as optical isolators for the optical
communications market. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition
date of $40.1 million, net of cash acquired and a final working capital adjustment of $0.8 million. In addition, the agreement provides
up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving certain agreed-upon financial and
transitional objectives, which if earned would be payable in the amount of $2.5 million for the achievement of the annual target.
The following table presents the final purchase price at the date of acquisition ($000):
Net cash paid at acquisition
Working capital adjustment
Fair value of cash earnout arrangement
Purchase price
$
$
40,098
848
2,215
43,161
58
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
Long-term debt assumed
Deferred tax liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
2,083
3,968
322
11,235
23,554
17,514
58,676
847
1,032
3,834
9,802
15,515
43,161
The goodwill of $17.5 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled
workforce of IPI. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1
million, with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the
accounts receivable. The Company expensed transaction costs of $0.3 million during the year ended June 30, 2017.
The amount of revenues of IPI included in the Company’s Consolidated Statements of Earnings for the years ended June 30, 2018 and
2017 was $19.3 million and $1.3 million, respectively. The amount of net earnings of IPI included in the Company’s Consolidated
Statements of Earnings for the years ended June 30, 2018 and 2017 was $3.8 million and $0.1 million, respectively.
Note 3.
Other Investments
Purchase of Equity Investment
In November 2017, the Company acquired a 93.8% equity investment in a privately-held company for $51.5 million. In addition, the
Company paid $0.2 million for a working capital adjustment to that purchase price. The Company’s pro-rata share of earnings from
this investment since the acquisition date was $2.4 million for the year ended June 30, 2018 and was recorded in other expense
(income), net in the Consolidated Statement of Earnings.
This investment is accounted for under the equity method of accounting (“Equity Investment”). The following table summarizes the
Company's equity in this nonconsolidated investment:
Location
USA
Interest
Type
Equity Investment
Ownership % as of
June 30, 2018
93.8%
Equity as of
June 30, 2018 ($000)
$
56,331
The Equity Investment has been determined to be a variable interest entity because the Company has an overall 93.8% economic
position in the investee, comprising a significant portion of its capitalization, but has only a 25% voting interest. The Company’s
obligation to receive rewards and absorb expected losses is disproportionate to its voting interest. The Company is not the primary
beneficiary because it does not have the power to direct the activities of the equity investment that most significantly impact its
economic performance. Certain business decisions, including decisions with respect to operating budgets, material capital
expenditures, indebtedness, significant acquisitions or dispositions, and strategic decisions, require the approval of owners holding a
majority percentage in the Equity Investment. Beginning on the date it was acquired, the Company accounted for its interest as an
equity method investment as the Company has the ability to exercise significant influence over operating and financial policies of the
Equity Investment.
As of June 30, 2018, the Company’s maximum financial statement exposure related to the Equity Investment was approximately
$56.3 million, which is included in Investments on the Consolidated Balance Sheet as of June 30, 2018.
59
The Company has the right to purchase all of the outstanding interest of each of the minority equity holders and the minority equity
holders have the right to cause the Company to purchase all of their outstanding interests at any time on or after the third anniversary
of the investment, or earlier upon certain events. The purchase price is equal to the greater of: (a) (i) the product of the aggregate
trailing 12-month revenues of the equity investment preceding the date of purchase, multiplied by (ii) a factor of 2.9 multiplied by (iii)
a factor of 0.723, multiplied by (iv) the percentage interest owned by each minority equity holder and (b) $966,666. The Company
performed a Monte Carlo simulation to estimate the fair value of the net put option at the investment date and recorded a liability of
$2.2 million in Other long-term liabilities in the Consolidated Balance Sheet in accordance with ASC 815-10, Derivatives and
Hedging. The fair value of the net put option is adjusted as necessary on a quarterly basis, with any changes in the fair value recorded
through earnings. The change in fair value of the net purchase option from the investment date to June 30, 2018 was not material.
Guangdong Fuxin Electronic Technology Equity Investment
The Company has an equity investment of 20.2% in Guangdong Fuxin Electronic Technology, based in Guangdong Province, China,
which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at June 30, 2018
and June 30, 2017 was $12.9 million and $11.7 million, respectively. During the years ended June 30, 2018, 2017 and 2016, the
Company’s pro-rata share of earnings from this investment was $1.2 million, $0.7 million and $0.1 million, respectively, and was
recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years ended June 30, 2018, 2017 and
2016, the Company received dividends from this equity investment of $0.4 million, $0.4 million and $0.6 million, respectively.
Note 4.
Inventories
The components of inventories were as follows:
June 30,
($000)
Raw materials
Work in progress
Finished goods
Note 5.
Property, Plant & Equipment
Property, plant & equipment consist of the following:
June 30,
($000)
Land and land improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation
2018
2017
$
$
97,502 $
83,002
67,764
248,268 $
78,979
61,679
63,037
203,695
2018
2017
$
$
9,072 $
216,507
633,934
88,350
947,863
(422,973)
524,890 $
5,667
144,293
492,042
88,458
730,460
(362,732)
367,728
Depreciation expense was $66.2 million, $50.9 million and $44.3 million for the fiscal years ended June 30, 2018, 2017 and 2016,
respectively.
Note 6.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable
intangible assets acquired in business combinations are recorded based upon fair value at the date of acquisition.
60
Changes in the carrying amount of goodwill were as follows ($000):
II-VI Laser
Solutions
Year Ended June 30, 2018
II- VI
Performance
Products
II-VI
Photonics
Balance-beginning of period
Goodwill acquired
Goodwill adjustment for prior year acquisition - IPI
Foreign currency translation
Balance-end of period
$
$
84,180 $
18,956
-
254
103,390 $
113,272 $
-
407
719
114,398 $
52,890 $
-
-
-
52,890 $
Balance-beginning of period
Goodwill acquired
Foreign currency translation
Balance-end of period
II-VI Laser
Solutions
Year Ended June 30, 2017
II- VI
Performance
Products
II-VI
Photonics
$
$
84,105 $
-
75
84,180 $
96,760 $
17,107
(595)
113,272 $
52,890 $
-
-
52,890 $
Total
250,342
18,956
407
973
270,678
Total
233,755
17,107
(520)
250,342
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2018
and 2017 were as follows ($000):
Gross
Carrying
Amount
June 30, 2018
Accumulated
Amortization
Net
Book
Value
Gross
Carrying
Amount
June 30, 2017
Accumulated
Amortization
Net
Book
Value
Technology and Patents
Trade Names
Customer Lists
Other
Total
$
$
66,812 $
15,882
127,603
1,573
211,870 $
(32,979) $
(1,471)
(50,792)
(1,559)
(86,801) $
33,833 $
14,411
76,811
14
125,069 $
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
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2018, 2017 and 2016 was $14.6 million,
$12.7 million, and $12.3 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 91 months. The customer lists are being amortized over 60 to 240 months with a
weighted-average remaining life of approximately 140 months.
In conjunction with the acquisition of II-VI Compound Semiconductor Ltd., the Company recorded $0.4 million attributed to the value
of technology and patents and $3.6 million of customer lists. The intangibles were recorded based on the Company’s final purchase
price allocation utilizing either a discounted cash flow or relief from royalty method to derive the fair value.
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade
names of $14.3 million as of June 30, 2018 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 2018 and 2017. Based on the results of
these tests, the trade names were not impaired in fiscal years 2018 and 2017.
The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows ($000):
Year Ending June 30,
2019
2020
2021
2022
2023
$
12,400
14,000
12,600
10,900
10,700
61
Note 7.
Debt
The components of debt were as follows ($000):
June 30,
0.25% Convertible senior notes
Convertible senior notes unamortized discount attributable to cash conversion
option and debt issuance costs including initial purchaser discount
Term loan, interest at LIBOR, as defined, plus 1.75% and 1.50%, respectively
Line of credit, interest at LIBOR, as defined, plus 1.75% and 1.50%,
respectively
Credit facility unamortized debt issuance costs
Yen denominated line of credit, interest at LIBOR, as defined, plus 1.75% and
0.625%, respectively
Note payable assumed in IPI acquisition
Total debt
Current portion of long-term debt
Long-term debt, less current portion
2018
2017
$
345,000
$
-
(56,409)
65,000
80,000
(1,126)
2,714
3,834
439,013
(20,000)
419,013 $
-
85,000
252,000
(1,491)
2,679
3,834
342,022
(20,000)
322,022
$
0.25% Convertible Senior Notes
On August 24, 2017, the Company entered into a purchase agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
representative of the several initial purchasers named therein (collectively, the “Initial Purchasers”), to issue and sell $300 million
aggregate principal amount of our 0.25% convertible senior notes due 2022 (the "Notes") in a private placement to qualified
institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. In addition, we granted the Initial
Purchasers a 30-day option to purchase up to an additional $45 million aggregate principal amount of the Notes (the “Over-Allotment
Option”).
On August 29, 2017, the Initial Purchasers exercised their Over-Allotment Option to purchase the entire $45 million in aggregate
principal amount of additional Notes. The Notes mature on September 1, 2022, unless earlier repurchased by the Company or
converted by holders in accordance with the terms of the Notes. Interest is payable semi-annually in arrears on March 1 and
September 1 of each year, beginning on March 1, 2018.
The sale of the Notes to the Initial Purchasers settled on August 29, 2017, and resulted in approximately $336 million in net proceeds
to the Company after deducting the initial purchasers’ discount and the estimated offering expenses. The net proceeds from the
offering and sale of the Notes were used, in part, to repurchase approximately $49.9 million of our common stock. The Company used
the remaining net proceeds to repay $252 million on its revolving credit facility and to pay debt issuance costs of $10.1 million.
The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes
are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in
right of payment to the Notes; equal in right of payment to any of our indebtedness that is not so subordinated; effectively junior in
right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally
junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation,
reorganization or other winding up, our assets that secure secured debt will be available to pay obligations on the Notes only after all
indebtedness under such secured debt has been repaid in full from such assets. Upon conversion, the Company will pay or deliver, as
the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s
election.
As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a
debt discount. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the
conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of
similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the Notes
using the effective interest method with an effective interest rate of 4.5% per annum.
The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion
rate is 21.25 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of
$47.06 per share of common stock. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of
certain events. The if-converted value of the Notes amounted to $318.5 million as of June 30, 2018 (based on the Company’s closing
stock price on the last trading day of the year ended June 30, 2018).
62
Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued
but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.
Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only upon
satisfaction of at least one of the conditions as follows:
a)
b)
During any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock for at
least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading
day of the immediately preceding quarter is greater than or equal to 130% of the conversion price on each applicable
trading day;
During the five business day period after any five consecutive trading day period (the “measurement period”) in which the
trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
c)
Upon the occurrence of specified corporate events.
On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert
all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing
circumstances.
As of June 30, 2018, the Notes are not yet convertible. The Notes will become convertible upon the satisfaction of at least one of the
above conditions. In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount of
offering costs incurred to the debt and equity components based on their relative values. Offering costs attributable to the debt
component, totaling $8.4 million, are being amortized as non-cash interest expense over the term of the Notes, and offering costs
attributable to the equity component, totaling $1.7 million, were recorded within Shareholders' Equity.
The Company was in compliance with all the covenants set forth under the indenture.
The following table sets forth total interest expense recognized related to the Notes for the fiscal year ended June 30, 2018
(representing an effective interest rate of 4.5%):
Year ended June 30,
0.25% contractual coupon
Amortization of debt discount and debt issuance costs including initial purchaser discount
Interest expense
$
$
2018
731
10,058
10,789
The unamortized discount amounted to $49.3 million as of June 30, 2018 and is being amortized over 4 years.
Amended Credit Facility
On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit
Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 million, as well as a $100 million term
loan. The term loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July
and October, with the first payment having commenced on October 1, 2016, as follows: (i) twenty consecutive quarterly installments
of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 27, 2021. Amounts
borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but
is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic 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 27, 2021 and has an interest rate of either a Base
Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility. If
the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.25% and if the Euro-Rate Option is selected for
a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the ratio of the Company’s consolidated
indebtedness to consolidated EBITDA. Additionally, the Credit Facility is subject to certain covenants, including those relating to
minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company was in compliance with all financial
covenants under its Amended Credit Facility.
Yen Loan
The Company’s yen denominated line of credit is a 500 million Yen ($4.5 million) facility. The Yen line of credit matures in August
2020. The interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.75%. At June 30, 2018 and 2017, the
Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including
63
those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2018, the Company had $2.7 million
outstanding and was in compliance with all covenants under its Yen facility.
Note Payable
In conjunction with the acquisition of IPI, the Company assumed a non-interest bearing note payable owed to a major customer of IPI.
The agreement, if not terminated early by either party, is payable in full in January 2020.
Singapore Line of Credit
The Company has a line of credit facility with a Singapore bank which permits maximum borrowings in the local currency of
approximately $0.6 million for the fiscal years ended June 30, 2018 and 2017, respectively. Borrowings are payable upon demand
with interest charged at the rate of 1.00% above the bank’s prevailing prime lending rate. The interest rate was 5.25% at June 30, 2018
and June 30, 2017. At June 30, 2018 and 2017, there were no outstanding borrowings under this facility. The Company had $0.3
million and $0.2 million of letters of credit supported by the Singapore line of credit facility as of June 30, 2018 and 2017,
respectively.
Aggregate Availability
The Company had aggregate availability of $246.4 million and $73.5 million under its lines of credit as of June 30, 2018 and 2017,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. As of June 30,
2018 and 2017, total outstanding letters of credit supported by the credit facilities were $0.4 million and $1.3 million, respectively.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1.3% and 2.2% for the years ended June 30, 2018 and 2017, respectively.
The weighted average of total borrowings for the fiscal years ended June 30, 2018 and 2017 was $476.6 million and $272.1 million,
respectively.There are no interim maturities or minimum payment requirements related to the credit facilities before their respective
expiration dates. Interest and commitment fees paid during the fiscal year ended June 30, 2018, 2017 and 2016 were $6.6 million, $6.1
million and $3.1 million, respectively.
Remaining Annual Principal Payments
Remaining annual principal payments under the Company’s existing credit facilities and notes payable as of June 30, 2018 were as
follows ($000):
Term
Loan
Yen Line
of Credit
U.S.
Dollar
Line of
Credit
Note
Payable
Convertibles
Notes
Total
20,000
20,000
20,000
5,000
-
65,000
$
$
-
-
2,714
-
-
2,714
$
$
-
-
-
80,000
-
80,000
$
$
-
3,834
-
-
-
3,834
$
$
-
-
-
-
345,000
345,000
$
$
$
$
$
$
20,000
23,834
22,714
85,000
345,000
496,548
Period
June 30, 2019 $
June 30, 2020
June 30, 2021
June 30, 2022
June 30, 2023
$
Total
Note 8.
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
2018
2017
2016
$
$
(15,207) $
137,401
122,194 $
(6,944) $
125,732
118,788 $
(5,809)
95,764
89,955
64
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
Convertible debt
Other
Total deferred income tax liabilities
Net deferred income taxes
2018
2017
2016
$
$
$
$
$
699 $
401
32,147
33,247 $
(3,064) $
1,615
2,394
945 $
34,192 $
$
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
2018
2017
$
$
$
$
$
5,267 $
1,125
7,614
48,738
7,925
3,242
(21,797)
52,114 $
(24,174) $
(24,649)
(13,090)
(11,376)
(4,020)
(77,309) $
(25,195) $
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)
The reconciliation of income tax expense at the statutory U.S. federal rate to the reported income tax expense is as follows:
Year Ended June 30,
($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 and
credits
Stock compensation
Repatriation tax
Impact of U.S. tax rate change on deferred balances
Other
2018
%
2017
%
2016
%
$
34,284
28 $
41,576
35
$
31,484
1
(13)
(5)
(641)
(12,907)
(806)
-
(11)
(1)
864
(13,860)
8,464
(6)
(3)
30
(3)
(1)
28 $
(5,681)
1,770
-
-
203
23,514
(5)
2
-
-
-
20
$
(4,374)
702
-
-
1,189
24,469
1,426
(16,058)
(6,008)
(7,024)
(4,103)
36,777
(4,209)
(893)
34,192
$
65
35
1
(15)
9
(5)
1
-
-
1
27
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs
Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering
U.S. corporate income tax rates and implementing a territorial tax system. As the Company has a June 30 fiscal year end, the lower
corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of approximately 28% for the Company’s fiscal year
ending June 30, 2018, and 21% for subsequent fiscal years. As part of the transition to the new territorial tax system, the Tax Act
imposes a one-time repatriation tax on total post-1986 earnings and profits (“E&P”) of foreign subsidiaries that were previously
deferred from U.S. income taxes.
At June 30, 2018, the Company has not finalized its accounting for the tax effects of the Tax Act; however, as described below,
management has made a reasonable estimate of the effects on existing deferred tax balances and has recorded an estimated amount for
its one-time repatriation tax, resulting in an increase in income tax expense. The Company has yet to complete its calculation of the
total post-1986 foreign E&P and therefore may change.
The impact of the repatriation tax is expected to be offset by available net operating loss and credit carryforwards which currently
have a valuation allowance. Thus the tax expense reported is reduced by the release of the valuation allowance on U.S. deferred tax
assets. The reduction of the U.S. corporate tax rate caused the Company to adjust the U.S. deferred tax assets and liabilities to the
lower U.S. statutory federal rate of 21%. However, the Company will continue to analyze certain aspects of the Tax Act which could
affect the measurement of these balances or give rise to new deferred tax amounts. In addition, the Company has recorded withholding
taxes on planned repatriation due to the change to a territorial tax system. The transitional impacts described above resulted in a
cumulative provisional net charge to income tax expense of $8.0 million for the year ended June 30, 2018.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the estimates
recorded during the year ended June 30, 2018, possibly materially, due to, among other things, changes in interpretations of the Tax
Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income
taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to
calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of
foreign subsidiaries. The Securities and Exchange Commission has issued rules that allow for a measurement period of up to one year
after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company currently anticipates
finalizing and recording any resulting adjustments by the end of the quarter ending December 31, 2018.
During the fiscal years ended June 30, 2018, 2017, and 2016, net cash paid by the Company for income taxes was $21.3 million, $23.6
million, and $18.5 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
0.17%, 0.31% and 0.37% for the fiscal years ended June 30, 2018, 2017 and 2016, respectively, and the impact of the tax holidays on
diluted earnings per share is immaterial.
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2018:
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
$
$
13,913 June 2019-June 2038
251 June 2024-June 2028
5,594 June 2019-June 2038
68,661 June 2020-June 2038
47,756 June 2019-June 2038
16,347 June 2019-June 2028
The Company has recorded a valuation allowance against the majority of the loss and credit carryforwards. The Company’s U.S.
federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulting from the
Company’s acquisitions are subject to various annual limitations under Section 382 of the U.S. Internal Revenue Code.
66
Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2018, 2017 and 2016 were as follows:
2018
2017
2016
($000)
Beginning balance
Increases in current year tax positions
Increases in prior year tax positions
Decreases in prior year tax positions
Settlements
Expiration of statute of limitations
Ending balance
$
$
7,577 $
2,536
224
(9)
-
(436)
9,892
$
$
5,559
895
2,605
-
(1,143)
(339)
7,577
$
4,022
2,146
190
(67)
-
(732)
5,559
The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal year 2018 and 2017, there
was $0.3 million and $0.5 million of interest and penalties within income tax expense, respectively. During the fiscal year 2016, there
was no interest or penalties within income tax expense. The Company had $0.6 million and $0.3 million of interest and penalties
accrued at June 30, 2018 and 2017, respectively. The Company has classified the uncertain tax positions as non-current income tax
liabilities, as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that
the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the
technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate, was
approximately $1.6 million and $1.3 million at June 30, 2018 and 2017, respectively. The Company expects a decrease of $3.4 million
of unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.
Fiscal years 2015 to 2018 remain open to examination by the Internal Revenue Service, fiscal years 2013 to 2018 remain open to
examination by certain state jurisdictions, and fiscal years 2008 to 2018 remain open to examination by certain foreign taxing
jurisdictions. The Company is currently under examination for the U.S. Federal income tax return for the year ended June 30, 2016;
certain subsidiary companies in the Philippines for the year ended June 30, 2017; and Germany for the years ended June 2012 through
June 2015. The Company believes its income tax reserves for these tax matters are adequate.
Note 9.
Earnings Per Share
The following table sets forth the computation of earnings per share for the periods indicated. Basic net income per share has been
computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share
has been computed using the weighted average number of common shares outstanding during the period plus dilutive potential shares
of common stock from (1) stock options, performance and restricted shares (under the treasury stock method) and (2) convertible debt
(under the If-Converted method) outstanding during the period. The Company’s convertible debt calculated under the If-Converted
method was antidilutive for the fiscal year 2018 and was excluded from the calculation of earnings per share.
Year Ended June 30,
($000 except per share)
Net earnings
Divided by:
Weighted average shares
2018
2017
2016
$ 88,002 $ 95,274 $ 65,486
62,499
62,576
61,366
Basic earnings per common share
$
1.41 $
1.52 $
1.07
Net earnings
Divided by:
Weighted average shares
Dilutive effect of common stock equivalents
Diluted weighted average common shares
$ 88,002 $ 95,274 $ 65,486
62,499
2,634
65,133
62,576
1,931
64,507
61,366
1,543
62,909
Diluted earnings per common share
$
1.35 $
1.48 $
1.04
67
The following table presents potential shares of common stock excluded from the calculation of diluted net income per share, as their
effect would have been antidilutive ($000):
Year Ended June 30,
Stock options and restricted shares
0.25% Convertible Senior Notes due 2022
Total anti-dilutive shares
2018
2017
2016
135
7,331
7,466
140
-
140
153
-
153
Note 10. 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, 2018 are as follows:
Year Ending June 30,
($000)
2019
2020
2021
2022
2023
Thereafter
$
20,100
19,100
14,500
11,700
9,800
52,700
Rent expense was approximately $17.0 million, $14.7 million, and $14.2 million for the fiscal years ended June 30, 2018, 2017 and
2016, respectively.
Note 11.
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 as amended. 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, 2018, there were approximately 955,000 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, 2018, 2017 and 2016 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
2018
2017
2016
$
6,605
$
5,611
$
7,850
6,799
$
5,221
19,676
$
3,626
16,036
$
4,309
4,401
2,196
10,906
The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and
administrative expense in the Consolidated Statements of Earnings, based on the employee classification of the grantee. Share-based
compensation expense associated with liability awards was $4.4 million, $4.3 million, and $1.2 million, in the fiscal years ended June
30, 2018, 2017 and 2016, respectively.
68
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, 2018, 2017 and 2016, the weighted-average fair value of options granted under the stock option plan was $14.23,
$8.88 and $7.35, respectively, per option using the following assumptions:
Year Ended June 30,
Risk-free interest rate
Expected volatility
Expected life of options
Dividend yield
2018
2017
2016
2.00%
37%
1.43%
37%
6.43 years
None
6.28 years
None
1.68%
38%
6.43 years
None
The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect
at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted average rate for
all options granted during the fiscal year. Expected volatility is based on the historical volatility of the Company’s common stock over
the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to post-
vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero is based on the fact that the Company has
never paid cash dividends and has no current intention to pay cash dividends in the future. The estimated annualized forfeitures are
based on the Company’s historical experience of option pre-vesting cancellations and are estimated at a rate of 17.6%. The Company
will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future
periods if the actual forfeitures are higher than estimated.
Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2018 was as follows:
Stock Options
Number of
Shares
Weighted Average Number of
Exercise Price
Cash-Based Stock Appreciation
Rights
Weighted Average
Exercise Price
Rights
Outstanding - July 1, 2017
Granted
Exercised
Forfeited and Expired
Outstanding - June 30, 2018
Exercisable - June 30, 2018
4,080,915 $
474,270 $
(573,004) $
(53,473) $
3,928,708 $
2,288,266 $
18.15
35.54
18.27
27.67
20.07
17.24
214,467 $
47,800 $
(30,467) $
(26,352) $
205,448 $
59,766 $
19.17
35.46
18.44
23.14
22.56
18.47
As of June 30, 2018, 2017 and 2016, the aggregate intrinsic value of stock options and cash-based stock appreciation rights
outstanding and exercisable was $96.1 million, $69.3 million and $10.1 million, respectively. Aggregate intrinsic value represents the
total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30,
2018, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on June 30, 2018. This amount varies based on the fair market value of the
Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years
ended June 30, 2018, 2017, and 2016 was $14.7 million, $12.3 million, and $4.5 million, respectively. As of June 30, 2018, total
unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $13.9 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, 2018 were as follows:
Range of
Exercise Prices
$10.04 - $15.38
$15.47 - $23.50
$25.91 - $39.65
$41.50 - $45.24
Stock Options and Cash-Based Stock
Appreciation Rights Outstanding
Weighted
Average Remaining
Contractual Term
(Years)
Weighted
Average
Exercise
Price
Number of
Shares or
Rights
902,022
2,647,015
569,559
15,560
4,134,156
4.21 $
5.58 $
9.00 $
9.55 $
5.77 $
13.25
19.29
34.79
42.87
20.20
69
Stock Options and Cash-Based Stock
Appreciation Rights Exercisable
Weighted
Average Remaining
Contractual Term
(Years)
Weighted
Average
Exercise
Price
3.54 $
4.40 $
7.14 $
- $
4.18 $
12.99
18.80
31.23
-
17.27
Number of
Shares or
Rights
667,878
1,657,129
23,025
-
2,348,032 $
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 tranche vesting provision and an estimated
forfeiture rate of 10.2%.
Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2018, 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, 2017
Granted
Vested
Forfeited
Nonvested - June 30, 2018
811,833 $
166,348 $
(370,571) $
(12,091) $
595,519 $
19.45
35.58
18.15
28.71
24.58
Grant Date Fair Value
19.12
35.43
17.45
24.97
25.57
140,927 $
46,012 $
(55,189) $
(14,424) $
117,326 $
As of June 30, 2018, total unrecognized compensation cost related to non-vested restricted share and cash-based restricted share unit
awards was $9.7 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
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, 2018, 2017 and 2016, was $7.5 million, $7.8 million and $6.3 million, respectively. The total fair
value of restricted shares and cash-based restricted share unit awards vested was $17.0 million, $6.2 million and $5.5 million during
fiscal years 2018, 2017 and 2016, 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, 2018, 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, 2018, was as follows:
Nonvested - June 30, 2017
Granted
Vested
Forfeited
Nonvested - June 30, 2018
Performance Share Awards
Number of Weighted Average
Shares
Grant Date Fair Value
19.52
35.25
14.84
17.84
24.57
377,710 $
99,168 $
(70,210) $
(24,398) $
382,270 $
Cash-Based Performance Share Units
Number of
Units
Weighted Average
Grant Date Fair Value
19.37
35.25
15.42
25.88
25.71
17,152 $
9,120 $
(2,221) $
(6,772) $
17,279 $
As of June 30, 2018, total unrecognized compensation cost related to non-vested performance share and cash-based performance share
unit awards was $4.7 million. This cost is expected to be recognized over a weighted-average period of approximately one year. The
total fair value of the performance share and cash-based performance share unit awards granted during the fiscal years ended June 30,
2018, 2017 and 2016 was $3.8 million, $5.3 million and $2.4 million, respectively. The total fair value of performance shares vested
during the fiscal years ended June 30, 2018, 2017 and 2016 was $3.6 million, $5.9 million and $1.5 million, respectively.
70
For our relative Total Shareholder Return (“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 12.
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 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 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 GaAs wafers
allowing for the production of high performance lasers and integrated circuits in high volume sold under the II-VI EpiWorks and II-VI
OptoElectronic Devices Division brand names.
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 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 manufactures pump
lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers, for both terrestrial and submarine applications
within the optical communications market.
The II-VI Performance Products segment is located in the United States, Vietnam, Japan, China, Germany and the Philippines. II-VI
Performance Products is further divided into production and administrative units that are directed by managers. II-VI Performance
Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical
and commercial laser imaging applications. In addition, the segment designs, manufactures and markets unique engineered materials
for thermoelectric and silicon carbide applications servicing the semiconductor, military and medical markets.
On August 7, 2017, the Company completed its acquisition of II-VI Compound Semiconductor Ltd. See Note 2. Acquisitions. The
operating results of this acquisition have been reflected in the selected financial information of the Company’s II-VI Laser Solutions
segment.
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.
71
The following tables summarize selected financial information of the Company’s operations by segment:
($000)
2018
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 investments
Goodwill
($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
($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
$
$
$
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
$
$
427,968
34,661
36,797
-
-
-
-
38,552
82,478
760,988
-
103,390
$
464,457
14,542
67,732
-
-
-
-
24,984
39,162
595,909
-
114,398
266,369
5,609
30,758
-
-
-
-
17,234
39,683
404,764
69,215
52,890
-
(54,812)
-
-
-
-
-
-
-
-
-
-
$ 1,158,794
-
135,287
(18,352)
5,259
(34,192)
88,002
80,770
161,323
1,761,661
69,215
270,678
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
-
115,540
(6,809)
10,056
(23,514)
95,274
63,637
142,945
1,477,297
11,727
250,342
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
Total
$
$
303,002
24,290
36,184
-
-
-
-
17,222
25,620
$
325,879
12,081
37,849
-
-
-
-
19,855
21,096
198,335
7,274
17,780
-
-
-
-
19,586
11,454
-
(43,645)
-
-
-
-
-
-
-
$ 827,216
-
91,813
(3,081)
1,223
(24,469)
65,486
56,663
58,170
72
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
Korea
United Kingdom
Singapore
Belgium
Philippines
Taiwan
Total Non-United States
June 30,
($000)
United States
Non-United States
China
United Kingdom
Switzerland
Germany
Vietnam
Philippines
Hong Kong
Other
Total Non-United States
2018
Revenues
2017
2016
$
373,735
$
294,200
$
266,347
253,672
186,978
132,161
89,153
49,557
26,898
11,458
9,757
9,359
5,941
4,511
3,909
1,705
785,059
$ 1,158,794
$
208,595
190,702
88,304
76,212
50,497
22,497
10,791
6,584
8,473
3,913
7,503
3,057
718
677,846
972,046
$
172,292
140,821
72,070
57,287
54,760
24,267
10,160
3,887
8,154
3,039
6,026
8,106
-
560,869
827,216
2018
Long-Lived Assets
2017
2016
$
309,062
$
240,029
$
137,521
81,175
65,357
37,155
14,876
10,042
6,628
2,818
598
218,649
527,711
$
62,024
396
36,795
15,323
8,272
6,115
1,914
704
131,543
371,572
$
51,824
203
38,202
15,162
8,895
4,399
1,765
943
121,393
258,914
$
Note 13.
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.
73
At June 30, 2018, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments
were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued
by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts.
In February 2016, the Company entered into 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 year ended June 30, 2017.
In June 2017, the Company entered into a contingent earnout arrangement which provides up to a maximum of $2.5 million of
additional cash earnout opportunities based upon IPI achieving certain agreed-upon financial and transitional objectives relating to
finance, information technology and human resources, which if earned, would be payable for the achievement of each specific annual
target over the next year.
In November 2017, the Company acquired a 93.8% equity investment in a privately held company. The Company has the right to
purchase all of the outstanding interest of each of the minority equity holders and the minority equity holders have the right to cause
the Company to purchase all of their outstanding interests at any time on or after the third anniversary of the investment, or earlier
upon certain events. The Company performed a Monte Carlo simulation to estimate the fair value of the net put option at the
investment date and recorded a liability of $2.2 million in “Other Liabilities” in the Consolidated Balance Sheet as of the acquisition
date in accordance with ASC 815-10, Derivatives and Hedging. The fair value of the net put option is adjusted as necessary on a
quarterly basis with any changes in the fair value recorded through earnings. The change in fair value of the net purchase option from
the investment date to June 30, 2018 was not material.
The fair values of these contingent earnout arrangements and the net put option were measured using valuations based on other
unobservable inputs that are significant to the fair value measurement (Level 3).
The Company estimated the fair value of the 0.25% convertible notes based on quoted market prices as of the last trading day prior to
June 30, 2018; however, the convertible notes have only a limited trading volume and, as such, this fair value estimate is not
necessarily the value at which the convertible notes could be retired or transferred. The Company concluded that this fair value
measurement should be categorized within Level 2. The carrying value of the convertible notes is net of unamortized discount and
issuance costs. See Note 7. Debt for details on the Company’s debt facilities. The fair value and carrying value of the convertible notes
were as follows at June 30, 2018 ($000):
Convertible notes
Fair Value
388,125
$
Carrying
Value
$
288,591
The following tables provide a summary by level of the fair value of financial instruments that are measured on a recurring basis as of
June 30, 2018 and 2017 ($000):
Fair Value Measurements at June 30, 2018 Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2018
Assets:
Foreign currency forward contracts
Liabilities:
Contingent earnout arrangements
Net put option
$
$
$
121
$
5,405
2,024
$
$
-
$
-
-
$
$
121
$
-
-
-
$
$
5,405
2,024
74
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
The Company’s policy is to report transfers into and out of Levels 1 and 2 of the fair value hierarchy at fair values as of the beginning
of the period in which the transfers occur. There were no transfers in and out of Levels 1 and 2 of the fair value hierarchy during fiscal
years 2018 and 2017.
The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s level 3
contingent earnout arrangements related to the acquisitions of II-VI EpiWorks and IPI and the net put option relating to the purchase
of the equity investment in November 2017. ($000):
Significant
Unobservable Inputs
(Level 3)
Balance at July 1, 2017
Activity:
Purchase price adjustment - IPI
Net put option
Changes in fair value recorded in other expense (income), net
Balance at June 30, 2018
$
$
5,795
(35)
2,233
(564)
7,429
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because
of the short-term maturity of those instruments. The Company’s borrowings includes both variable and fixed interest rates, 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 14. Derivative Instruments
The Company, from time to time, purchases foreign currency forward exchange contracts, primarily in Japanese Yen, that permit it to
sell specified amounts of these foreign currencies expected to be received from its export sales, for pre-established U.S. dollar
amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of
export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the
basis of its aggregate net cash flows in respective currencies, to foreign currency risk.
The Company has recorded the fair value of these contracts in the Company’s financial statements. These contracts had a total
notional amount of $12.0 million and $12.7 million at June 30, 2018 and 2017, respectively. As of June 30, 2018, these forward
contracts had expiration dates ranging from July 2018 through October 2018, with Japanese Yen denominations individually between
250 million and 500 million Yen. The Company does not account for these contracts as hedges as defined by U.S. GAAP and records
the change in the fair value of these contracts in Other expense (income), net in the Consolidated Statements of Earnings as they occur.
The fair value measurement takes into consideration foreign currency rates and the current creditworthiness of the counterparties to
these contracts, as applicable, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments and thus
represents a Level 2 measurement. These contracts are recorded in prepaid and other current assets in the Company’s Consolidated
Balance Sheets as of June 30, 2018. The change in the fair value of these contracts for the fiscal year ended June 30, 2018, 2017 and
2016 was insignificant.
75
Note 15.
Employee Benefit Plans
Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at
the discretion of the Company’s board of directors and were $5.0 million, $4.3 million, and $3.4 million for the years ended June 30,
2018, 2017 and 2016, 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 462,798 and
477,949 shares of common stock available for purchase under the plan at June 30, 2018 and 2017, 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 years ended June 30, 2018 and 2017 were $2.7 million and $2.4 million, respectively. Expected employer contributions in
fiscal year 2019 are $2.7 million.
The changes in the funded status of the Swiss Plan during the fiscal years ended June 30, 2018 and 2017 were as follows:
Year Ended June 30,
Change in projected benefit obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Benefits accumulated, net of benefits paid
Plan amendments (Reduction of the conversion rate 6.8% to
6.2%)
Actuarial (gain) loss on obligation
Participant contributions
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 accumulated, net of benefits paid
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
2018
2017
59,518
3,766
424
1,474
(4,068)
1,606
1,415
(1,581)
62,554
42,990
1,566
2,731
1,415
1,474
(1,142)
49,034
$
$
$
54,094
3,689
163
1,743
-
(2,777)
1,262
1,344
59,518
35,857
805
2,432
1,262
1,743
891
42,990
2,859
$
3,496
13,520
16,528
2,846
59,800
$
$
2,514
56,457
$
$
$
$
$
$
$
76
Net periodic pension cost associated with the Swiss Plan included the following components:
Year Ended June 30,
Service cost
Interest cost
Expected return on plan assets
Net actuarial loss and prior service credit
Net periodic pension cost
2018
2017
2016
$
$
3,766 $
424
849
203
5,242 $
3,689
163
(742)
594
3,704
$
$
2,680
434
(1,097)
(234)
1,783
The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 2018 and 2017 using the
following assumptions:
June 30,
Discount rate
Salary increase rate
2018
2017
0.9%
2.0%
0.8%
2.0%
The net periodic pension cost for the Swiss Plan was calculated during the fiscal years ended June 30 2018, 2017, and 2016 using the
following assumptions:
Year Ended June 30,
Discount rate
Salary increase rate
Expected return on plan assets
2018
2017
2016
0.8%
2.0%
2.0%
0.3%
2.0%
2.0%
1.1%
2.0%
2.0%
The discount rate is based on assumed pension benefit maturity and estimates developed using the rate of return and yield curves for
high quality Swiss corporate and government bonds. The salary increase rate is based on our best assessment for on-going increases
over time. The expected long-term rate of return on plan assets is based on the expected asset allocation, taking into consideration
historical long-term rates of return for the relevant asset categories.
As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no
investment authority over the assets of the plan, which are held and invested by a Swiss insurance company. The investment strategy
of the Swiss Plan is managed by an independent asset manager with the objective of achieving a consistent long-term return which
will provide sufficient funding for future pension obligations while limiting risk.
The Swiss Plan is legally separate from II-VI, as are the assets of the plan. As of June 30, 2018, the Swiss Plan’s asset allocation was
as follows (all of which are categorized as Level 2 in the fair value hierarchy):
June 30,
Fixed income investments
Equity investments
Real estate
Cash
Other
Estimated future benefit payments under the Swiss Plan are estimated to be as follows:
Year Ending June 30,
($000)
2019
2020
2021
2022
2023
Next five years
77
2018
2017
12.0%
50.0%
31.0%
4.0%
3.0%
100.0%
10.0%
52.0%
26.0%
9.0%
3.0%
100.0%
$
5,100
1,800
2,700
2,900
3,200
22,400
Other Employee Benefit Plans
The Company has no program for post-retirement health and welfare benefits.
The II-VI Incorporated Deferred Compensation Plan (the “Compensation Plan”) is designed to allow officers and key employees of
the Company to defer receipt of compensation into a trust fund for retirement purposes. Under the Compensation Plan, as it is
currently implemented by the Company, eligible participants can elect to defer up to 100% of certain discretionary incentive
compensation and certain equity awards into the Compensation Plan. The Compensation Plan is a nonqualified, defined contribution
employees’ retirement plan. At the Company’s discretion, the Compensation Plan may be funded by the Company making
contributions based on compensation deferrals, matching contributions and discretionary contributions. Compensation deferrals will
be based on an election by the participant to defer a percentage of compensation under the Compensation Plan. All assets in the
Compensation Plan are subject to claims of the Company’s creditors until such amounts are paid to the Compensation Plan
participants. Employees of the Company made contributions to the Compensation Plan in the amounts of approximately $1.1 million,
$0.8 million, and $1.2 million for the fiscal years ended June 30, 2018, 2017, and 2016, respectively. There were no employer
contributions made to the Compensation Plan for the fiscal year ended June 30, 2016.
Note 16. Other Accrued Liabilities
The components of other accrued liabilities were as follows:
June 30,
($000)
Deferred revenue
Warranty reserve
Earnout arrangements
Other accrued liabilities
2018
2017
$
$
3,384 $
4,679
5,405
29,511
42,979 $
2,345
4,546
3,930
18,235
29,056
The following table summarizes the change in the carrying value of the Company’s warranty reserve included in Other Accrued
Liabilities as of and for the years ended June 30, 2018 and 2017.
Year Ended June 30,
($000)
Balance-Beginning of Year
Settlements during the period
Additional warranty liability recorded
Balance-End of Year
2018
2017
$
$
4,546 $
(3,688)
3,821
4,679 $
3,908
(4,212)
4,850
4,546
Note 17. Commitments and Contingencies
The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the
commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase
commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature
of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early termination.
The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred under these
commitments based upon historical experience and current expectations. The Company also has commitments relating to earnout
arrangements on its prior year acquisitions of $5.4 million and $85.0 million for the planned acquisition of CoAdna. Inc., for fiscal
year 2019. Total future commitments are as follows:
Year Ending June 30,
($000)
2019
2020
2021
2022
2023
$
114,307
3,477
567
-
-
78
Note 18.
Share Repurchase Programs
In August 2017, in conjunction with the Company’s offering and sale of the Notes, the Company’s Board of Directors authorized the
Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from the offering and sale of
the Notes. The shares that were purchased by the Company pursuant to this authorization were retained as treasury stock and are
available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for approximately $49.9
million pursuant to this authorization in fiscal 2018.
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions
from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the
Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase shares
pursuant to this Program during the fiscal years ended June 30, 2018 and 2017. During the fiscal year ended June 30, 2016, the
Company purchased 380,538 shares of its common stock for $6.3 million under this program. Through June 30, 2018, the Company
has cumulatively purchased 1,316,587 shares of its common stock pursuant to the Program for approximately $19.0 million.
Note 19. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2018,
2017, and 2016 were as follows ($000):
Foreign
Currency
Translation
Adjustment
Defined
Benefit
Pension Plan
Total
Accumulated Other
Comprehensive
Income
$
9,466
$
(801)
$
(15,651)
-
(15,651)
(6,185)
(2,275)
-
(2,275)
(8,460)
7,152
-
7,152
(1,308)
$
$
$
$
(6,805)
(226)
(7,031)
(7,832)
1,920
594
2,514
(5,318)
2,643
203
2,846
(2,472)
$
$
8,665
(22,456)
(226)
(22,682)
(14,017)
(355)
594
239
(13,778)
9,795
203
9,998
(3,780)
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
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2018
Note 20. Capital Lease
During fiscal 2017, the Company’s OptoElectronic Devices subsidiary entered into a capital lease related to a building in Warren,
New Jersey. The following table shows the future minimum lease payments due under the non-cancelable capital lease ($000):
Fiscal Year Ending June 30,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of capitalized payments
79
Amount
2,292
2,355
2,419
2,486
2,554
24,740
36,846
11,906
24,940
$
$
$
The current and long-term portion of the capital lease obligation was recorded in Other accrued liabilities and Other liabilities,
respectively, in the Company’s Consolidated Balance Sheets as of June 30, 2018 and 2017. The present value of the minimum capital
lease payments at inception was $25.0 million recorded in Property, Plant & Equipment, net, in the Company’s Consolidated Balance
Sheet, with associated depreciation being recorded over the 15 year life of the lease. During the fiscal year ended June 30, 2018, the
Company recorded $1.7 million of depreciation expense associated with the capital leased asset.
Quarterly Financial Data (unaudited)
Fiscal Year 2018
Quarter Ended
($000)
2018
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 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
September 30, December 31, March 31,
2017
2017
2018
June 30,
2018
$
$
$
$
261,503 $
155,528
25,574
50,624
3,645
(767)
26,899
5,758
21,141 $
281,470 $
172,037
27,764
49,122
4,644
(1,965)
29,868
20,272
9,596 $
294,746 $
176,361
30,560
53,087
5,014
(1,496)
31,220
1,122
30,098 $
0.34 $
0.15 $
0.48 $
0.32 $
0.15 $
0.45 $
321,075
193,580
33,346
55,924
5,049
(1,031)
34,207
7,040
27,167
0.44
0.42
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
80
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2018, 2017, AND 2016
(IN THOUSANDS OF DOLLARS)
YEAR ENDED JUNE 30, 2018:
Allowance for doubtful accounts
Warranty reserves
Deferred tax asset valuation allowance
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
Balance at
Beginning
of Year
Charged
to
Expense
Charged
to Other
Accounts
Deduction
from
Reserves
Balance
at End
of Year
$
$
$
$
$
$
$
$
$
1,314
4,546
42,562
2,016
3,908
42,641
1,048
3,251
2,713
$
$
$
$
$
$
$
$
$
(129)
3,821
(4,602)
(134)
4,850
(79)
1,123
4,648
8,464
$
$
$
$
$
$
$
$
$
$
-
-
$
(16,163) (5) $
(348) (2) $
$
$
(3,688)
-
837
4,679
21,797
-
-
-
$
$
$
(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
(1)
(2)
(3)
(4)
(5)
Relates to the warranty reserve acquired from 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.
Primarily relates to the Company’s deferred taxes on the conversion feature of the convertible debt.
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, 2018, the Company’s disclosure controls and procedures are effective.
81
Management’s Report on Internal Control Over Financial Reporting
Refer to Management’s Report on Internal Control Over Financial Reporting included in Item 8.
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 2018 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 2018,” “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, 2018 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
4.01
Indenture, dated as of August 29, 2017, by and between II-IV
Incorporated and U.S. Bank, National Association, as Trustee
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 August 29,
2014.
Incorporated herein by reference to Exhibit 4.1
to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on November 14,
2017.
4.02
10.01
10.02
10.03
10.04
10.05
10.06
Form of 0.25% Convertible Senior Notes due 2022.
Included in Exhibit 4.01.
Third Amended and Restated Credit Agreement, by and among II-VI
Incorporated, each of the Guarantors party thereto, the Lenders party
thereto, and PNC Bank, National Association, as Administrative and
Documentation Agent, and Bank of America, N.A., as Syndication
Agent, dated as of July 28, 2016.
Incorporated herein by reference to Exhibit
10.1 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on August 2, 2016.
First Amendment to Third Amended and Restated Credit Agreement,
dated as of August 17, 2017, by and among II-VI Incorporated, the
Guarantors party thereto, the Lenders party thereto and PNC Bank,
National Association, as Administrative Agent.
Incorporated herein by reference to Exhibit
10.1 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on August 22,
2017.
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.
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
Employment Agreement, dated February 1, 2016, by and between II-
VI Incorporated and Gary A. Kapusta*
84
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
10.01 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on February 1,
2016.
10.10
10.11
10.13
10.14
10.15
10.16
10.17
10.18
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*
10.12
Form of Employment Agreement* (P)
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 (P)
II-VI Incorporated Amended and Restated Employees’ Stock
Purchase Plan (P)
First Amendment to the II-VI Incorporated Amended and Restated
Employees’ Stock Purchase Plan
10.19
II-VI Incorporated Amended and Restated Employees’ Profit-Sharing
Plan and Trust Agreement, as amended (P)
10.20
Description of Bonus Incentive Plan*
10.21
Description of Discretionary Incentive Plan (now known as the Goal/
Results Incentive Program)*
10.22
Description of Management-By-Objective Plan*(P)
10.23
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods prior to January 1, 2015)*
10.24
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods after January 1, 2015)*
10.25
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.
10.26
II-VI Incorporated 2009 Omnibus Incentive Plan*
10.27
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.28
Form of Restricted Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.29
Form of Performance Share Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.30
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.31
Form of Performance Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.32
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated 2009 Omnibus Incentive Plan*
10.33
II-VI Incorporated Amended and Restated 2012 Omnibus Incentive
Plan*
10.34
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.35
Form of Restricted Share Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.36
Form of Performance Share Award Agreement (Consolidated
Revenue) under the II-VI Incorporated Amended and Restated 2012
Omnibus Incentive Plan*
10.37
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.38
Form of Performance Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit 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
10.39
Form of Restricted Share Unit Award Agreement under the II-VI
Incorporated Amended and Restated 2012 Omnibus Incentive Plan*
10.40
10.41
10.42
10.43
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*
10.44
II-VI Incorporated Second Amended and Restated Omnibus Incentive
Plan*
10.45
10.46
10.47
10.48
10.49
10.50
10.51
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
10.52
10.53
10.54
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.
(P) Denotes filed via paper copy.
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the issuance
of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.
Item 16.
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 28, 2018
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 28, 2018
Date: August 28, 2018
Date: August 28, 2018
Date: August 28, 2018
Date: August 28, 2018
Date: August 28, 2018
Date: August 28, 2018
Date: August 28, 2018
Date: August 28, 2018
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:
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
/s/ Enrico Digirolamo
Enrico Digirolamo
Director
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Corporate Information
Board of Directors
Executive Officers
Annual Meeting
Joseph J. Corasanti
Retired President, CEO and Director
CONMED Corporation
Dr. Vincent D. Mattera, Jr.
President and Chief Executive
Officer
Gary A. Kapusta
Chief Operating Officer
Mary Jane Raymond
Chief Financial Officer
Dr. Giovanni Barbarossa
Chief Technology Officer and
President Laser Solutions
David G. Wagner
Vice President, Human Resources
Jo Anne Schwendinger
Chief Legal and Compliance
Officer and Secretary
Enrico Digirolamo
Retired CFO and Sr. Vice President
Covisint Corporation
Francis J. Kramer, Chairman
Retired CEO
II-VI Incorporated
Dr. Vincent D. Mattera, Jr.
President and Chief Executive
Officer
II-VI Incorporated
Marc Y. E. Pelaez, Lead
Independent Director
Rear Admiral
United States Navy (retired)
Dr. Shaker Sadasivam
Co-Founder, President and CEO
Auragent Bioscience, LLC
William A. Schromm
Executive Vice President and Chief
Operating Officer
ON Semiconductor Corporation
Dr. Howard H. Xia
Retired General Manager
Vodafone China Limited
Friday, November 9, 2018
At 3:00 PM EST
Meeting to be webcast from:
II-VI Incorporated Corporate
Offices
5000 Ericsson Drive
Warrendale, PA 16086
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
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