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 communications, materials processing, aerospace and defense,
semiconductor capital equipment, life sciences, consumer electronics,
and automotive 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. For
more information, please visit us at www.ii-vi.com.
The potential for the number of connected
machines to overtake the number of connected
people is driving fifth-generation wireless
networks (5G). A large fraction of connected
machines, such as sensors in homes, factories,
and farms, will require modest amounts of
bandwidth. Emerging applications, though, such
as augmented reality and autonomous driving,
will require instant access to large amounts of
cloud computing power to leverage artificial
intelligence and machine learning in real time.
Applications in telemedicine such as remote
surgery will require highly reliable, low latency
connectivity. 5G promises to be the common
internet access infrastructure enabling these
emerging and revolutionary use cases. II-VI offers
a broad range of materials, devices, components,
and subsystems to enable the optical network
infrastructure of the cloud and the coming
large-scale 5G rollout.
The images on the cover, starting from the top
and rotating clockwise, represent:
• Connected factory (Industry 4.0)
• Telemedicine
• 5G wireless antenna
• Farming in the cloud
• Augmented reality
• Autonomous driving
Financial Summary
2019
2018
$ 1,362,496
107,517
$
167,600
$
1.63
$
2.54
$
$ 1,953,773
$ 1,133,209
542,348
$
$ 1,158,794
$
88,002
$ 132,000
1.35
$
2.03
$
$ 1,761,661
$ 1,024,311
$ 525,370
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
$600
$400
$200
$0
16% CAGR
1,158.8
1,362.5
972.0
827.2
741.9
FY15
FY16
FY17
FY18
FY19
$160
$140
$120
$100
$80
$60
$40
$20
$0
178.5
161.0
8% CAGR
129.4
123.0
118.6
FY15
FY16
FY17
FY18
FY19
Revenues ($ in millions)
Cash Flow from Operations ($ in millions)
$240
$220
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
16% CAGR
243.6
221.4
189.2
149.8
136.1
FY15
FY16
FY17
FY18
FY19
$1000
12% CAGR
1,133.2
1,024.3
$800
$600
$400
$200
$0
900.6
782.3
729.1
FY15
FY16
FY17
FY18
FY19
EBITDA ($ in millions)
Total Shareholders’ Equity ($ in millions)
CAGR – Compound Annual Growth Rate
EBITDA – Earnings before interest, income taxes,
depreciation, and amortization
Adjusted net earnings and adjusted diluted earnings per share excludes certain items.
See Financial Reconciliation Tables on the inside back cover of this Annual Report for a
reconciliation of Adjusted Net Earnings to Net Earnings and EBITDA to Net Earnings.
ii-vi.com 1
The Communications Infrastructure in the Cloud
Our business in the communications end market had another
phenomenal year in sales and great customer recognition, having
received numerous supplier awards from communications
equipment vendors in North America, Europe, and China. I am
extremely proud of our global world-class team and excited about
our prospects in this exciting market.
Optical communications provides connectivity from broadband
wireless and wireline access points to the global cloud
infrastructure across metropolitan, long-distance, and undersea
networks. This year saw the first-ever deployment of multicore
fiber technology in undersea cables, which was enabled by
our new 800 mW undersea pump lasers. Other undersea
deployments included our low-port-count wavelength selective
switch (WSS) for the first time.
We also launched this year a new 400 mW version of our
flagship uncooled micro-pump laser, the smallest on the
market. This pump laser enables high-speed fiber-optic
coherent transmission ranging from 100 gigabits per second
(Gbps) to beyond 1 terabit per second (Tbps). Finisar will
complement our portfolio with an impressive set of coherent
transmission technologies based on their world-class indium
phosphide (InP) optoelectronics platform, including monolithic
wavelength-tunable lasers, high-speed modulators, and
coherent receivers.
We remain fully committed to and are very confident in the
secular growth of datacenters driven by the cloud and fifth-
generation (5G) wireless communications. In support of this
market, we introduced our 56 Gbps PAM4 VCSEL arrays for 200
and 400 Gigabit Ethernet short-reach transceivers. We look
forward to adding Finisar’s InP platform to our gallium arsenide
(GaAs) portfolio of optoelectronics to serve the entire datacom
transceiver market as it resumes growth.
We also look forward to leveraging Finisar’s InP-based
optoelectronics for the 5G optical infrastructure buildout. We
believe that 5G deployments will spur the development of new
economies based on innovative services, including telemedicine
and autonomous driving, and will lift our entire communications
In Fiscal Year 2019, II-VI had another great
year. Annual revenues reached a record of
nearly $1.4 billion and we ended the year with
record cash flows from operations. One of
the major highlights this fiscal year was our
announcement in November 2018 of our intent
to acquire Finisar Corporation, a company
about the size of II-VI in terms of revenue
and number of employees and a leader in
optical communications. Combined, we will be
one of the leaders in photonic solutions and
compound semiconductors.
2 II-VI INCORPORATED 2019 ANNUAL REPORT
Shareholder Letter
business. To meet the initial demand in China, Korea, and Japan,
we inaugurated in November 2018 our new 300,000 sq. ft.
facilities in Fuzhou to expand manufacturing and host our new
Asia Regional Headquarters.
Our silicon carbide (SiC) substrates played an important role
in our Fiscal Year 2019 growth. In the wireless base station
ecosystem, II-VI supplies 100 mm and 150 mm SiC substrates
for RF electronics used in advanced gallium nitride (GaN)
device technology. In 2018, II-VI entered into an agreement with
Sumitomo Electric Device Innovations (SEDI) to manufacture RF
electronics on our 150 mm GaN-on-SiC device manufacturing
platform in Warren, NJ. SEDI is the market leader in these GaN
RF devices for wireless applications, and we are on track to be
qualified for production in the second half of 2020, in time for
the global ramp-up of 5G.
Improving the Efficiency of Electric Vehicles
Consistent with our views of our addressable growing and
transformative markets and the ability of engineered materials
to offer sustainable differentiation for our customers, we are
continuing to invest for the long-term. It has now been 20 years
since we began working on SiC. Our innovations led to the
introduction in 2015 of the world’s first 200 mm substrates.
This year, we began to ship these large area substrates for a
program funded by the European Union tasked with developing
an ecosystem for SiC-based power electronic devices produced
on 200 mm wafers to serve various markets, including electric
vehicles (EVs), which are expected to proliferate around the
world during this decade. These power electronic devices based
on SiC are more efficient than those based on silicon, enabling
EVs to achieve a target driving range with a smaller and lighter-
weight battery, which lowers cost and reduces CO2 emissions.
Other II-VI products also help vehicle manufacturers make
lighter and therefore more fuel-efficient vehicles. For example,
our advanced laser processing heads produce welds with
minimal excess materials in vehicle chassis, closures, and
battery assemblies. We expect that ultrahigh-strength and
lightweight parts will increasingly be produced by laser-based
additive manufacturing, a growing market for our products.
3D Sensing and Augmented Reality
We remain committed to our investments around 3D sensing.
We believe that this large and transformative market is in
the early stages of its growth cycle and will continue to grow
rapidly over multiple years. The convergence of computing,
communications, and sensing is expected to enable consumers
to experience high-quality, real-time augmented reality on
smartphones, automotive heads-up displays, smart glasses,
and other types of wearable electronics. These applications are
driving the demand for vertical cavity surface emitting laser
(VCSEL) arrays that enable depth sensing cameras. A typical
design for 3D sensing requires on the order of a hundred VCSEL
elements per chip in order to scale up the optical power required,
for example, for facial biometrics applications. We have been in
volume production of high-quality VCSEL arrays for 3D sensing
for almost two years and intend to build on that momentum
to achieve more efficient designs for new opportunities in the
consumer electronics market.
We are eager to leverage Finisar’s broad range of capabilities in
InP-based optoelectronics, diffractive optics, liquid crystal on
silicon (LCoS) technology, integrated circuit design, and high-
volume automated assembly manufacturing to address all of
these new exciting opportunities.
We have begun Fiscal Year 2020 with a streamlined company
structure that will be able to substantially scale, commensurate
with our opportunities and aspirations, and still enable us to react
quickly to any changes in the global economy. II-VI continues
to be an exciting place to work, learn, and grow with a sense
of purpose. This, along with our shared values, pervades the
company and underpins the fabric of our enterprise-wide culture.
Our employees care deeply about the positive impact that they
can have on many of the challenges that the world is confronting.
We remain as committed as ever to our mission to enable the
world to be safer, healthier, closer, and more efficient.
Dr. Vincent D. (Chuck) Mattera, Jr.
Chief Executive Officer
ii-vi.com 3
The New II-VI
Organization in 2020
At the beginning of fiscal year 2020, we
announced a new company structure and
leadership team. II-VI is now organized around
two operating segments, each with very large
addressable markets. Within these two new
segments, we constructed new business units
around existing divisions, product lines, and
technology platforms. With this new structure,
we are consolidating the corporate activities of
the company to achieve simplicity, efficiency,
speed, and scalability.
Our new streamlined organization is a major leap forward for
II-VI. We are confident that it will help fuel our long-term growth
and allow us to take a longer-term view, clearly linking our
innovation programs to large-market megatrends. Furthermore,
it will ensure that our technology investments are strategically
allocated at all levels of the value chain, from engineered
materials to devices, components, and subsystems.
The Photonic Solutions Segment will include the
following business units:
• ROADM Business Unit
• Advanced Optics Business Unit
The Compound Semiconductors Segment will
include the following business units:
• Wide-Bandgap Semiconductors Business Unit
• Optoelectronic and RF Devices Business Unit
• Engineered Materials and Laser Optics Business Unit
• Laser Devices and Systems Business Unit
• Aerospace and Defense Business Unit
Based on the FY19 numbers, the revenue divides approximately
equally between the two segments. Almost all the revenue in
the Photonic Solutions Segment is for optical communications,
whereas in the Compound Semiconductors Segment, the
revenue is diversified across multiple end markets. II-VI remains
strongly committed to all of our end markets, and we expect that
over time our revenue will return to being more evenly distributed
across those markets.
4 II-VI INCORPORATED 2019 ANNUAL REPORT
II-VI FY2019 at a Glance
Segments
Photonic
Solutions
45%
55%
Compound
Semiconductors
Regions
North America
Europe
20%
40%
22%
China
8%
9%
Japan
ROW
Markets
Industrial
25%
45%
Optical
Communications
Life Sciences
4%
Semiconductor Capital
Equipment
11%
8%
7%
Other
Military
Founded: 1971
IPO 1987: IIVI
Worldwide Employees: 12,500+
World Locations: 53
Countries: 14
FY2019 Revenue: $1,362M
PHOTONIC
SOLUTIONS
SEGMENT
BUSINESS UNITS
Advanced
Optics
Consumer
Optics
Communications
Optics
ROADM
Laser Optics
Advanced
Components
Amplifiers and
Linecards
Wavelength
Selective Switch
PRODUCT LINES
Pump Lasers
BUSINESS UNITS
Wide-Bandgap
Semiconductors
Silicon Carbide
Substrates
Epitaxial
Wafers
Magneto-optic
Materials
Optoelectronic
and RF Devices
GaAs
Photonics
GaAs
Electronics
PRODUCT
PLATFORMS
COMPOUND
SEMICONDUCTORS
SEGMENT
Aerospace
and Defense
Laser Devices
and Systems
Laser Systems
Laser
Processing
Heads
Engineered
Materials and
Laser Optics
GaAs
Optoelectronics
IR Optics and
Materials
GaN
Electronics
Ceramics and
Metal Matrix
Composites
Performance
Metals
Thermoelectrics
ii-vi.com 5
ii-vi.com 5
Differentiated Materials
for Growing End Markets
II-VI’s core competency in engineered materials is foundational, as
emphasized by our company tag line MATERIALS THAT MATTER.
II-VI’s broad portfolio of engineered materials are grown and
fabricated in-house. They are differentiated by unique optical,
electrical, thermal, and mechanical properties, which we leverage
to successfully compete in our end markets. We build on these
differentiated materials to develop market-leading devices,
components, and subsystems.
Reaction Bonded
Boron Carbide
Si/B4C
Lead Magnesium
Niobate - Lead
Titanate
(PMN-PT)
Pb(Mg1/3Nb2/3)O3-
PbTiO3
Automotive
Life Sciences
Bismuth Telluride
Bi2Te3
Silicon Carbide
SiC
Indium Phosphide
InP
Potassium Niobate
KNbO3
Potassium Nickel
Sulfate Hexahydrate
(KNSH)
K2Ni (SO4)2·6H2O
Calcium Fluoride
CaF2
Aluminum Oxide/
Sapphire
Al2O3
Yttrium Vanadate
YVO4
Indium Phosphide
InP
Bismuth-Doped Iron
Garnet (BIG)
Bi3Fe5O12
Datacom,
Telecom and
Wireless
Communications
Aerospace
and Defense
Germanium
Ge
Reaction Bonded
Silicon Carbide
Si/SiC
Yttrium Aluminum
Garnet (YAG)
Y3Al5O12
Yttrium Lithium
Fluoride (YLF)
YLiF4
Gallium Arsenide
GaAs
3D Sensing/
Consumer
Boron Carbide
Reinforced Aluminum
Al/B4C
Silicon Carbide
Reinforced Aluminum
Al/SiC
Carbon Fiber
Reinforced Silicon
Carbide
Cf/SiC
Zinc Selenide
ZnSe
Zinc Sulfide
ZnS
Terbium Gallium
Garnet (TGG)
Tb3Ga5O12
Reaction Bonded
Silicon Carbide and
Diamond
Si/SiC/C
Diamond
C
Beta Barium Borate
(BBO)
BaB2O4
Materials
Processing
Lithium Triborate
(LBO)
LiB3O5
Semiconductor
Equipment
6 II-VI INCORPORATED 2019 ANNUAL REPORT
II-VI takes the long term view with respect to its investments
in engineered materials and technology platforms. These
investments are both for today’s exciting market megatrends
and for future opportunities that have yet to emerge. Early
investments in technology platforms that we are convinced
will be needed in the future have been, and will continue to be,
at the core of II-VI’s strategy.
Each business unit in II-VI’s Compound Semiconductors
Segment hosts a series of highly differentiated product,
technology, and manufacturing platforms:
Wide-Bandgap Semiconductors Business Unit
• High quality single crystal silicon carbide (SiC) substrates
• GaAs- and InP-based epitaxial wafers
• Magneto-optic materials
Optoelectronic and RF Devices Business Unit
• GaAs photonics, including the 150 mm VCSEL manufacturing
line for 3D sensing
• GaAs electronics platform, including RF devices for
consumer electronics
• GaN electronics platform, including RF devices for 5G wireless
Engineered Materials and Laser Optics Business Unit
• Laser optics for materials processing
• Engineered ceramics and metal matrix composites
• Thermoelectric coolers
• Rare specialty metals
Laser Devices and Systems Business Unit
• Semiconductor laser components and modules for high power
and high speed applications
• Laser processing heads for materials processing
• Ultra-hard materials laser processing systems
Aerospace and Defense Business Unit
• Ultraviolet to long wavelength infrared materials and optics
• High energy lasers and optics
ii-vi.com 7
Cloud Computing Today
Cloud computing is driving the buildout of all segments of the
optical network. Within datacenters, it is increasing the bandwidth
requirements between servers, switches, and routers. Between
megascale datacenters, cloud computing is also driving a massive
buildout in metro, regional, long-haul, and submarine networks.
II-VI’s products enable advances in many parts of the
optical network:
Intra-datacenter communications: Inside the cloud operators’ hyperscale
datacenters, optical transceivers are expected to transition from 100 to
400 Gigabit Ethernet (GbE) to lower the cost per bit of transmission. At
the March 2019 Optical Fiber Conference (OFC), II-VI introduced its new
4- and 8-channel VCSEL arrays that operate at 56 Gbps using 4-level pulsed
amplitude modulation (PAM4) to enable 200 GbE and 400 GbE transceivers.
Datacenter interconnects: The demand for communications between
datacenters has grown so rapidly that it has driven a new class of purpose-
built equipment called datacenter interconnects (DCIs). These optical
links can span thousands of kilometers to connect global datacenters.
II-VI offers a complete portfolio of best-in-class amplifier components and
subsystems, including the smallest pump lasers on the market, to enable
amplification of coherent transceivers operating at 100 Gbps to beyond
1 Tbps. In submarine networks, II-VI’s undersea pump lasers achieve the
highest commercially available output power of 800 mW, with record-
high electrical-to-optical conversion efficiency, enabling a significantly
lower cost per bit of undersea transmission. Moreover, II-VI’s liquid-crystal
technology now enables low-port-count wavelength selective switch (WSS)
modules to be deployed at branching points in undersea networks.
8 II-VI INCORPORATED 2019 ANNUAL REPORT
Farming in the Cloud
Farmers are increasing their yields with cloud
technologies that enable them to merge a wide
range of information, including soil data, satellite
images, climate patterns, and precipitation levels.
Farmers are increasingly relying on the processing
power of the cloud for predictive analysis to allow
them to take preventive action more quickly during
the growing season to maximize crop output.
Manufacturing in the Cloud
Factories commonly utilize robotics to achieve
a high level of uniformity in the manufacturing
process. Factory robots are increasingly networked
to leverage advanced computing processes in the
cloud to improve efficiency and yield. These smart
factories are part of what is referred to as the
fourth industrial revolution, or Industry 4.0, where
manufacturing lines have greater autonomy to
improve processes on the fly. They also have greater
visibility into the upstream and downstream supply
chains to adapt to demand variations in real time.
5G Wireless Tomorrow
Fifth-generation wireless networks (5G) promise to provide
consumers and machines on-demand access to cloud computing
power, enabling computationally-intensive applications such as
big data analytics, blockchain transactions, machine learning, and
artificial intelligence.
In mobile wireless use cases, 5G will allow subscribers to instantly access
information about their surroundings from data collected by sensors—such
as those embedded in smartphones, wearables, and automobiles. This data is
processed in real time in the cloud.
In fixed wireless use cases, 5G is expected to deliver internet access
at speeds much higher than wired technologies for broadband cable or
fiber-to-the-home. However, the number of machines on the network is
expected to dwarf the number of consumers on the network, ushering in
the era of the internet of things (IoT). 5G has the potential to cost-effectively
network our homes, cities, energy grids, and factories to improve efficiencies.
Connecting consumers and machines to the cloud through 5G will require
upgrading the radio and optical access networks that provide connectivity
between the optical backbone network and the antennas.
5G radio access networks (RANs): Cell tower antenna technology is evolving
to support the higher bandwidth requirements that industry analysts predict
will reach full potential by mid-2020. In fiscal year 2019, II-VI announced its
strategic partnership with Sumitomo Electric Device Innovations (SEDI), a
market leader in radio-frequency (RF) devices based on gallium nitride (GaN),
to produce GaN-on-silicon carbide RF devices on a vertically integrated
150 mm technology platform. II-VI is on track to be qualified by mid-2020, in
time for the deployment ramp-up of the 5G RAN.
5G optical access networks (OANs): Fiber-optic links to 5G antennas will
require 25 Gbps links, up from 10 Gbps links for 4G antennas. This increase
in bandwidth, combined with the requirement for a higher density of 5G base
stations, is driving for the first time the broad deployment of dense wavelength
division multiplexing (DWDM) transmission in the optical access network. In
fiscal year 2019, II-VI ramped up its production capacity of industry-leading
wavelength management filters and modules for network buildouts in Japan
and Korea. II-VI also introduced an edge wavelength selective switch (WSS)
cost-optimized for access networks.
Connected to the Cloud with 5G
The demand for cloud-based services has
been growing steadily with the rise in social
media, online shopping, video streaming, and
the migration of mission-critical enterprise
functions to the cloud. Access to the internet
through mobile consumer electronics with
increasing screen size and computing power
spurred the growth of datacenters and drove
multiple generations of upgrades over the
last 15 years. The potential for the number of
connected machines to overtake the number
of connected people is driving 5G. A large
fraction of connected machines, such as street
lamps in smart cities or sensors in homes
and factories, will require modest amounts of
bandwidth. Emerging applications, though, such
as augmented reality and autonomous driving,
will require instant access to large amounts of
cloud computing power to leverage artificial
intelligence and machine learning in real time.
5G promises to be the common internet access
infrastructure enabling these emerging and
revolutionary use cases.
ii-vi.com 9
A Broad Portfolio of Products
for 5G Access Networks
5G, which is set to revolutionize global connectivity and enable
landscape-changing innovations and applications, is in its early
stages. Standards are continuing to evolve. Countries worldwide
are still auctioning off 5G spectrum bands to wireless service
providers. The 5G optical and radio access infrastructure is just
beginning deployment in various countries worldwide. The first
5G phones are already on the market, and 5G services have been
launched with great fanfare in countries such as Korea, the U.S.,
the U.K., and Finland, although coverage is often still limited.
II-VI offers a broad range of materials, devices, components,
and subsystems to enable the coming large-scale 5G rollout.
II-VI’s Compound Semiconductors Segment enables the
5G radio access network with silicon carbide RF devices in
base stations and gallium arsenide epitaxial wafers for RF
devices in consumer electronics. II-VI’s Photonic Solutions
Segment, especially when combined with the product
portfolio from the pending acquisition with Finisar, will offer
a powerful array of wavelength management solutions and
transceivers for the optical access infrastructure and the
optical backbone network.
Photonic Solutions Segment
Backbone Network
Coherent TRx
HPC WSS
Line Cards
Amplifiers
OCM/OTDR
WSS: Wavelength Selective Switch; HPC/LPC: High/Low Port Count
OCM: Optical Channel Monitor
OTDR: Optical Time Domain Reflectometer
TRx: Transceiver; FH: Fronthaul; BH: Backhaul; RF: Radio Frequency
BiDi: Bidirectional; DWDM: Dense Wavelength Division Multiplexing
10 II-VI INCORPORATED 2019 ANNUAL REPORT
2017
2018
2019
2020
Global backbone
buildouts in
anticipation of
5G traffic
II-VI signs agreement
with SEDI to develop
GaN/SiC on 150 mm
5G mmWave standard
to drive GaN/SiC RF
demand
II-VI to complete
qualification and to
begin production of
GaN/SiC
5G optical access
deployments begin
in Asia to support
5G New Radio
5G Smartphones and
IoT to drive 5G GaAs RF
demand, 5G Optical Access
deployments continue
5G service to become
broadly available
Compound Semiconductors Segment
Fronthaul and Backhaul Network
Base Stations
Handsets
LPC WSS
25G FH TRx
Bidi DWDM TRx
DWDM Filters
Subsystems
100G BH TRx
GaN/SiC RF
GaAs RF
ii-vi.com 11
Enabling the world to be
safer, healthier, closer,
and more efficient.
12 II-VI INCORPORATED 2019 ANNUAL REPORT
12 II-VI INCORPORATED 2019 ANNUAL REPORT
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended June 30, 2019
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
Trading Symbol(s)
IIVI
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, every Interactive Data File required to be submitted 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 such
files). Yes No
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:
Large accelerated filer
Non-accelerated filer
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 31, 2018, was
approximately $2,023,369,000 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 12, 2019, was 63,610,824.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2019 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 2020 and beyond to differ materially from those expressed or implied in any forward-
looking statements included in this Annual Report on Form 10-K or otherwise made by our management:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Investments in future markets of potential significant growth may not result in the expected return.
Our competitive position depends on our ability to develop new products and processes.
Global economic downturns may adversely affect our business, operating results and financial condition.
Some systems that use our products are complex in design, and our products may contain defects that are not detected
until deployed, which could increase our costs, reduce our revenues, cause us to lose key customers and may expose us
to litigation arising from derivative lawsuits related to consumer products.
Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign
exchange losses.
To retain our competitive position may require significant investments.
We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel
with existing operations.
Our future success depends on continued international sales, and our global operations are complex and present multiple
challenges to manage.
We are subject to complex and rapidly changing governmental import and export regulations.
Changes in U.S. trade policies could impact our international operations and the cost of goods imported into the United
States, which may narrow the size of our markets, materially impact our revenues or increase our operating costs and
expose us to contract litigation.
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 not be able to settle conversions of our convertible senior notes in cash or to repurchase the notes in accordance
with their terms.
We may fail to accurately estimate the size and growth of our markets and our customers’ demands.
We may encounter increased competition.
2
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
There are limitations on the protection of our intellectual property, and we may from time to time be involved in costly
intellectual property litigation or indemnification.
A significant portion of our business is dependent on cyclical industries.
Our global operations are subject to complex legal and regulatory requirements.
Changes in laws and regulations governing data privacy and data protection could 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.
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.
Increases in commodity prices may adversely affect our results of operations and financial condition.
We use and generate potentially hazardous substances that are subject to stringent environmental regulations.
Unfavorable changes in tax rates, tax liabilities or tax accounting rules could negatively affect future results.
Natural disasters or other global or regional catastrophic events could disrupt our operations, give rise to substantial
environmental hazards and adversely affect our results.
Our success depends on our ability to attract, retain and develop key personnel 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.
We contract with a number of large end-user service providers and product companies that have considerable bargaining
power, which may require us to agree to terms and conditions that could have an adverse effect on our business or ability
to recognize revenues.
We may be adversely affected by climate change regulations.
We depend on large purchases from a few significant customers, and any loss, cancellation, reduction or delay in
purchases by these customers could harm our business.
The manufacturing of our products may be adversely affected if we are unable to manufacture certain products in our
manufacturing facilities.
Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or non-
cancelable purchase commitments.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability
to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
Risk Factors Relating to Our Pending Acquisition of Finisar Corporation (“Finisar”)
•
•
•
•
•
Although we expect that our acquisition of Finisar will result in cost savings, synergies and other benefits, the combined
company may not realize those benefits because of market conditions, trade and tariff changes, integration difficulties
and other challenges.
We will incur significant transaction-related costs in connection with our pending acquisition of Finisar.
Our pending acquisition of Finisar is subject to conditions, including certain conditions that may not be satisfied, and
may not be completed on a timely basis, or at all. Failure to complete our pending acquisition of Finisar could have
material and adverse effects on us.
Each of II-VI and Finisar is subject to business uncertainties and contractual restrictions while our acquisition of Finisar
is pending, which could adversely affect each of Finisar’s and II-VI’s business and operations.
The market price of our Common Stock may decline in the future as a result of the Merger.
3
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 participants like us knowing until a substantial amount of time has passed. It is not possible for management to
predict all such risk factors, assess the impact of all such risk factors on our business 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.
4
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 seven 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 aerospace and defense markets. Reference to “fiscal” or “fiscal year” means our fiscal year ended June 30 for
the year referenced.
As of June 30, 2019, the Company’s operations were organized into three reporting segments: (i) II-VI Laser Solutions, (ii) II-VI
Photonics, and (iii) II-VI Performance Products. See below for a more detailed description of each of these segments. In connection
with the refinement of our business strategy, the Company has, effective July 1, 2019 realigned its organizational structure into two
reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound
Semiconductors and (ii) Photonic Solutions. The Company will report financial information for these new reporting segments in fiscal
2020 which should provide enhanced visibility and transparency into the operations, business drivers and the value of our enterprise.
This change in reporting is to occur beginning with periods commencing July 1, 2019.
The following terms are defined for reference: bismuth telluride (“Bi2Te3”); cadmium telluride (“CdTe”); carbon dioxide (“CO2”);
carbon monoxide (“CO”); chemical vapor deposited (“CVD”) materials including diamond; dense wavelength division multiplexing
(“DWDM”); extreme-ultraviolet (“EUV”) lithography; 5th-generation (“5G”) wireless; 4th-generation (“4G”) wireless; gallium
arsenide (“GaAs”); gallium nitride (“GaN”); gigabit Ethernet (“GbE”); gigabit per second (“Gb/s”); high-definition multimedia
interface (“HDMI”); indium phosphide (“InP”); infrared (“IR”); intellectual property (“IP”); light detection and ranging (“LiDAR”);
liquid crystal (“LC”); liquid crystal on silicon (“LCOS”); nanometers (“nm”); near-infrared (“NIR”); organic light-emitting diode
(“OLED”); original equipment manufacturer (“OEM”); optical time domain reflectometer (“OTDR”); radio frequency (“RF”);
reconfigurable optical add/drop multiplexer (“ROADM”); research, development, and engineering (“RD&E”); silicon carbide (“SiC”);
three-dimensional (“3D”); ultraviolet (“UV”); vertical cavity surface-emitting laser (“VCSEL”); wavelength division multiplexing
(“WDM”); wavelength selective switching (“WSS”); zinc selenide (“ZnSe”); and zinc sulfide (“ZnS”).
Pending Acquisition of Finisar Corporation
II-VI and Finisar have entered into an Agreement and Plan of Merger, dated as of November 8, 2018 (the “Merger Agreement”).
Pursuant to the terms of the Merger Agreement, Mutation Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of
II-VI, will be merged with and into Finisar, and Finisar will continue as the surviving corporation in the merger and a wholly owned
subsidiary of II-VI (the “Merger”).
If the Merger is consummated, Finisar stockholders will be entitled to receive, at their election, consideration per share of common
stock of Finisar (the “Finisar Common Stock”) consisting of (i) $26.00 in cash, without interest (the “Cash Consideration”), (ii)
0.5546 shares of II-VI common stock (the shares, the “II-VI Common Stock,” and the consideration, the “Stock Consideration”), or
(iii) a combination of $15.60 in cash, without interest, and 0.2218 shares of II-VI Common Stock (the “Mixed Consideration,” and,
together with the Cash Consideration and the Stock Consideration, the “Merger Consideration”). The Cash Consideration and the
Stock Consideration are subject to proration adjustment pursuant to the terms of the Merger Agreement such that the aggregate
Merger Consideration will consist of approximately 60% cash and approximately 40% II-VI Common Stock assuming a per share
price of II-VI common stock equal to the price when the Merger Agreement was signed on November 8, 2018, which was $46.88 per
share.
At the effective time of the Merger (the “Effective Time”), each option granted pursuant to Finisar’s 2005 Stock Incentive Plan, as
such plan has been further amended and restated (each, a “Finisar Stock Option”), or portion thereof, that is outstanding and
unexercised as of immediately prior to the Effective Time (whether vested or unvested) will be cancelled, terminated and converted
into the right to receive an amount of Mixed Consideration that would be payable to a holder of such number of shares of Finisar
Common Stock equal to the quotient of (i) the product of (a) the excess, if any, of $26.00 over the exercise price per share of such
Finisar Stock Option multiplied by (b) the number of shares of Finisar Common Stock subject to such Finisar Stock Option, divided by
(ii) $26.00.
5
At the Effective Time, each restricted stock unit granted pursuant to Finisar’s 2005 Stock Incentive Plan, as such plan has been further
amended and restated (each, a “Finisar Restricted Stock Unit”), or portion thereof , that is outstanding and subject to a performance-
based vesting condition that relates solely to the value of Finisar Common Stock will, to the extent such Finisar Restricted Stock Unit
vests in accordance with its terms in connection with the Merger (the “Participating RSUs”), be cancelled and extinguished and
converted into the right to receive the Cash Consideration, the Stock Consideration or the Mixed Consideration at the election of the
holder of such Participating RSUs, subject to proration adjustment.
At the Effective Time, each Finisar Restricted Stock Unit (or portion thereof) that is outstanding and unvested, does not vest in
accordance with its terms in connection with the Merger and is either (x) subject to time-based vesting requirements only or (y)
subject to a performance-based vesting condition other than the value of Finisar Common Stock will be assumed by II-VI (each, an
“Assumed RSU”). Each Assumed RSU will be subject to substantially the same terms and conditions as applied to the related Finisar
Restricted Stock Unit immediately prior to the Effective Time, including the vesting schedule (and the applicable performance-vesting
conditions in the case of a grant contemplated by clause (y) of the preceding sentence) and any provisions for accelerated vesting
applicable thereto, except that the number of shares of II-VI Common Stock subject to each Assumed RSU will be equal to the
product of (i) the number of shares of Finisar Common Stock underlying such unvested Finisar Restricted Stock Unit award as of
immediately prior to the Effective Time multiplied by (ii) the sum of (a) 0.2218 plus (b) the quotient obtained by dividing (1) $15.60
by (2) the volume weighted average price per share of II-VI Common Stock (rounded to the nearest cent) on the Nasdaq Global Select
Market for the ten consecutive trading days ending on (and including) the third trading day immediately prior to the Effective Time
(with the resulting number rounded down to the nearest whole share).
II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and that registration statement became effective
in accordance with the provisions of Section 8(a) of the Securities Act of 1933, as amended, on February 7, 2019. Shareholders of II-
VI and stockholders of Finisar voted to approve proposals related to the Merger at special meetings held on March 26, 2019 by the
respective companies.
The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to the Merger has
expired without a request for additional information. Other regulatory approvals applicable to the Merger have been obtained in
Germany, Mexico and Romania.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including
review and approval of the Merger by the State Administration for Market Regulation in China. The Company is planning to refile
with the State Administration for Market Regulation in China, extending the approval period. Subject to the satisfaction or waiver of
each of the closing conditions, II-VI and Finisar expect that the Merger will be completed in the second half of calendar
2019. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a
different time or not at all.
On November 8, 2018, in connection with its entry into the Merger Agreement, II-VI entered into a commitment letter (together with a
related fee letter) with Bank of America, N.A., which was subsequently amended and restated on December 7, 2018 and on
December 14, 2018 (together with one or more related fee letters, the “Commitment Letter”). Subject to the terms and conditions set
forth in the Commitment Letter, the lender parties thereto severally committed to provide 100% of up to $2.425 billion in aggregate
principal amount of senior secured credit facilities of II-VI.
On March 4, 2019, II-VI entered into a Credit Agreement, dated as of March 4, 2019 (as amended, the “New Credit Agreement”), by
and among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other
lenders party thereto. II-VI also entered into Amendment No. 1 to Credit Agreement, dated as of May 24, 2019, by and among the
Company, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, which includes the final results of the
syndication of the Term A Facility (as defined below). Pursuant to the terms and subject to the conditions therein, the New Credit
Agreement provides for senior secured financing of $1.705 billion in the aggregate, consisting of (i) a five-year senior secured first-
lien term A loan facility in an aggregate principal amount of $1.255 billion (the “Term A Facility”) and (ii) a five-year senior secured
first-lien revolving credit facility in an aggregate principal amount of $450.0 million (the “Revolving Credit Facility” and together
with the Term A Facility, the “New Senior Credit Facilities”). The New Credit Agreement also provides for a letter of credit sub-
facility not to exceed $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million, subject to adjustment in
accordance with the terms of the New Credit Agreement. II-VI anticipates using the proceeds from the Term A Facility, together with
a separately committed term B loan facility in an aggregate principal amount of up to $720.0 million (the “Term B Facility”) and cash
and short-term investments of II-VI and Finisar, to pay the cash portion of the merger consideration payable in connection with the
Merger and related fees and expenses. II-VI currently does not intend to draw on the Revolving Credit Facility in order to fund the
cash portion of the merger consideration payable in connection with the Merger.
6
The funding obligations of the lenders under the New Senior Credit Facilities are subject to certain currently unsatisfied conditions,
including the consummation of the Merger. Accordingly, no borrowings are currently outstanding under the New Senior Credit
Facilities, and II-VI currently is not able to borrow under the New Senior Credit Facilities. Further, II-VI expects that the New Credit
Agreement will be amended prior to the consummation of the Merger to reflect syndication of the Term B Facility and to finalize
certain other terms in the New Credit Agreement. Upon the consummation of the Merger, the New Senior Credit Facilities, governed
by the New Credit Agreement as it may be amended as of such time, will be used (i) to refinance in full the Amended Credit Facility
(as defined in Note 9 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K)
and (ii) on or after the date of the consummation of the Merger, to repay amounts owed in connection with Finisar’s outstanding
convertible notes, currently in an aggregate principal amount outstanding of $575.0 million, including with the proceeds of a portion
of the Term A Facility which will be available to II-VI for a certain period after the initial funding under the New Senior Credit
Facilities.
Unless and until the Merger is consummated and the other currently unsatisfied conditions to the funding obligations of the lenders
under the New Senior Credit Facilities are satisfied or waived, the Amended Credit Facility remains in effect in accordance with its
terms.
General Description of Business
We develop, manufacture, and market engineered materials, optoelectronic components, and devices for precision use in industrial
materials processing, optical communications, aerospace and defense, consumer electronics, semiconductor capital equipment, life
sciences, and automotive applications and markets. We use advanced engineered materials growth technologies coupled with
proprietary high-precision fabrication, microassembly, optical thin-film coating, and electronic integration to manufacture complex
optoelectronic devices and modules. Our products are deployed in a variety of applications, including (i) laser cutting, welding, and
marking operations; (ii) 3D sensing consumer applications; (iii) optical, data, and wireless communications products; (iv) strategic
aerospace and defense 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 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 those 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; and 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, 2019, are set forth in the Consolidated Statements of Earnings and in Note 14 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 – Risk Factors of this Annual Report on Form 10-K related to our foreign operations, which are
incorporated herein by reference.
7
Bookings and Backlog
We define our bookings as customer orders received that are expected to be converted to revenues over the next 12 months. 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 fiscal year ended June 30, 2019, our bookings were approximately $1.4 billion, compared with bookings of
approximately $1.2 billion for the fiscal year ended June 30, 2018.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2019,
our backlog was approximately $500 million, compared with approximately $450 million as of June 30, 2018.
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, Ohio, Arizona, Colorado, 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 70% of our revenues for the fiscal year ended June 30, 2019, 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, 2019, 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 236 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 expired in June 2019, and the
Company is in the process of negotiating a new collective bargaining agreement. The collective bargaining agreement covering certain
U.S.-based employees expires in January 2021. There are 735 employees of II-VI Photop in China who work under contract
manufacturing arrangements for customers of the Company.
Direct production
Research, development, and engineering
Sales, marketing, administration, finance, and supporting services
Total:
Number of
employees
9,778
1,707
1,002
12,487
Percent of
total
78%
14%
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’ subsystems 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 and risk
management advantages. We employ numerous advanced manufacturing technologies and systems at our manufacturing facilities.
These include metal–organic chemical vapor deposition and molecular beam epitaxy reactors, automated computer numeric control
optical fabrication, high-throughput thin-film coaters, nanoprecision metrology, and custom-engineered automated furnace controls
for crystal growth processes. Manufacturing products for use across the electromagnetic 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.
8
Sources of Supply
Among the major feed stock and raw materials we use are zinc, selenium, ZnSe, ZnS, hydrogen selenide, hydrogen sulfide, arsine,
phosphine, hydrogen, silon, tellurium, yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony,
carbon, graphite, GaAs, InP, copper, germanium, molybdenum, quartz, optical glass, and diamond.
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
As of June 30, 2019, 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 business units within the segments, are reflected in the organizational 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;
direct-diode lasers for industrial use sold under the II-VI HIGHYAG brand name. 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 communications systems; and 6-inch gallium arsenide wafers allowing for the production of high-performance lasers,
optoelectronics, and integrated circuits in high volume under the II-VI Laser Enterprise, II-VI EpiWorks, II-VI Compound
Semiconductor Ltd., and II-VI OptoElectronic Devices brand names.
II-VI Photonics manufactures crystal materials, optics, microchip lasers, and optoelectronic modules for use in optical
communications networks and other diverse consumer, life sciences, and commercial applications. In addition, the segment also
manufactures pump lasers, optical isolators, optical amplifiers, and micro-optics for optical amplifiers for both terrestrial and
submarine applications within the optical communications market; direct-diode laser modules, subsystems, 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 name.
II-VI Performance Products designs, manufactures, and markets infrared optical components and high-precision optical assemblies for
aerospace and defense, 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 SiC applications servicing the
semiconductor equipment, aerospace and defense, communications, automotive, and life science markets.
9
II-VI’s segments are organized by business unit at the group or division level. Each of these business units develops and markets
products as described below.
II-VI Laser Solutions
Group/Division:
II-VI Infrared
II-VI HIGHYAG
II-VI OptoElectronics
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 materials production
including ZnSe, ZnS, ZnS multispectral, and CVD
diamond
• 1 µm laser optics and consumables
• Anti-reflection diamond overcoat
• 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 applications
• RF devices for communications
• GaAs-based RF electronic devices
• III-V epitaxial wafers to enable higher-performance
photonic and RF components for consumer,
communications, network, and mobile applications
10
Segment:
II-VI Photonics
Group/Division:
II-VI Optical Communications
II-VI Photop
II-VI Industrial Laser
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 communications service
providers, datacenter interconnects, ROADM systems,
and subsea fiberoptic 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
• Laser heads and modules; Q-switched laser modules;
high-power, uncooled pump laser modules; laser
solutions for super-hard materials processing; high-
brightness direct-diode laser engines
• Precision optical assemblies, objectives, infrared optics,
thin-film coatings, and optical materials
• Optical solutions to critical and complex design,
engineering, and production challenges in defense,
aerospace, and commercial industries
• Advanced ceramic and metal-matrix composite products
for semiconductor capital equipment, flat-panel displays,
industrial and optical equipment, and defense applications
• Thermoelectric components, subassemblies, and systems
for heating, cooling, temperature tuning, thermal cycling,
and power generation in aerospace, defense, medical,
industrial, automotive, consumer, telecommunications,
and energy-production 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
11
Our Markets
Our market-focused businesses are organized by technology and products. Our businesses are composed of the following primary
markets: communications, materials processing, aerospace and defense, semiconductor capital 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 is part of our ultracompact 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 inherent signal loss and to monitor 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 is 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 base stations to boost the power of the RF signal before it reaches the antenna. These
devices are also widely expected to be embedded in next-generation active antennas for 5G wireless, where multiple devices per
antenna will be required to enable higher bandwidth. SiC has a high number of intrinsic physical and electronic advantages, such as
high thermal conductivity, that enables it 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 for 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 internet of things computing devices.
Over the past several years, fiber laser-based systems operating at 1-micron wavelength in pulsed or continuous mode have taken a
central role in nearly all materials processing segments, 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 workpiece at
wavelengths optimized for aluminum processing.
II-VI’s broad portfolio of coated optics and crystal materials serve all of these growing laser markets.
Aerospace and Defense Market
II-VI aerospace and defense optical products and technologies enable targeting, night vision, and navigation as well as intelligence,
surveillance, and reconnaissance systems. Moreover, our recently acquired optical beam combining and directing technologies, along
with our fiber laser components, are enabling High Energy Laser (HEL) systems and applications.
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 multi-functional protective cover for its internal
components.
12
Rotary and fixed-wing aircraft also use missile warning systems to protect against the threat of shoulder-fired human-portable missiles.
Our competencies in materials growth for UV crystals and our optical assembly capabilities provide significant support to these
common missile warning systems. A key attribute of several of these systems is the ability to filter electromagnetic interference using
microfine 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 aerospace and defense systems employ laser designation and range-finding capabilities supported by our semiconductor laser
bars and solid state laser host crystals and laser optics, all manufactured in-house, and benefit from 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 for night vision and sighting applications.
We provide a range of battlefield-ready technologies for soldier equipment and specifically designed variants for law enforcement.
Our precision patterned reticles can be 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 thermoelectric 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 capital equipment requires advanced materials to meet the need for tighter tolerances, enhanced thermal stability,
faster wafer transfer speeds, and reduced stage settling times. Our metal-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, lightweight 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, and high-power damage-resistant
polycrystalline CVD diamond windows to route the powerful laser beam to a tin droplet from which EUV light will emanate. Due to
its very high mechanical and thermal performance characteristics, our reaction-bonded SiC is 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 multicolored 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 micromachined with a high degree of precision to ensure 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, protect blood supplies, and 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 laser, optics, and temperature-control expertise into new applications to grow our business in the life sciences.
13
Consumer Electronics Market
II-VI manufactures low-cost VCSELs, VCSEL arrays, and filters for the consumer electronics market. Our VCSEL products leverage
our world-class 6-inch GaAs platform, combining our epitaxial wafer growth and wafer fabrication capabilities.
Our VCSELs, unlike many on the market, have already been designed into consumer products such as the computer mouse as well as
for menu navigation in smart phones and vehicle 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 is only afforded by advanced materials 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 a direct sales force and through representatives and distributors around the world. Our market
strategy is focused on understanding our customers’ requirements and building market awareness and acceptance of our products.
New products are continually being developed and introduced to our new and established customers in all markets.
The Company has centralized its worldwide marketing and sales functions across the Company’s business units. Sales offices have
been strategically established to best serve and distribute products to our worldwide customer base. There 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 force develops 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 products as key
components of our customers’ systems. As of June 30, 2019, we employed approximately 273 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. government agency. Most governmental programs are subject to funding approval and can be modified or terminated
without warning by a legislative or administrative body.
14
Customers
The representative groups of customers by segments are as follows:
Segment:
II-VI Laser
Solutions
Group/Division:
II-VI Infrared
II-VI HIGHYAG
Our Customers Are:
OEM and system integrators of
industrial, medical, and aerospace and
defense laser systems; laser end users
who require replacement optics for
their existing laser systems.
Automotive manufacturers, laser
manufacturers, and system integrators.
II-VI OptoElectronics Manufacturers of industrial laser
II-VI
Photonics
II-VI Optical
Communications
II-VI Photop
II-VI Laser Systems
components, optical communications
equipment, and consumer technology
applications.
Worldwide network system and
subsystem 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.
OEM and subsystem integrators of
aiming, machine vision, biomedical
instruments, and fiber lasers; laser
cutting machines for super-hard
materials.
II-VI
Performance
Products
II-VI Optical Systems Manufacturers of equipment and
II-VI M Cubed
II-VI Marlow
II-VI Advanced
Materials
II-VI Performance
Metals
devices for aerospace, defense, and
commercial markets.
Manufacturers and developers of
integrated-circuit capital equipment
for the semiconductor capital
equipment 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.
Manufacturers and developers of
equipment and devices for high-power
RF electronics and high-power,
voltage-switching, and power-
conversion systems for both
commercial and aerospace and
defense applications.
Primary mineral processors, refiners,
and providers of specialized materials
used in laser optics, photovoltaics,
semiconductors, thermoelectric
coolers, metallurgy, and industrial
products.
15
Representative Customers:
• TRUMPF GmbH + Co. KG
• Bystronic Laser AG
• Coherent Inc.
• Ford Motor Company
• Laserline GmbH
• Laserline GmbH
• Wuhan Raycus Fiber Laser
Technologies Co. Ltd.
• Ciena Corporation
• Cisco Systems Inc.
• Fujitsu Network Communications
• Acacia Communications Inc.
• Nokia Solutions and Networks
• Corning Incorporated
• Coherent Inc
• Han’s Laser Technology Industry Group
Co. Ltd.
• Finisar Corp.
• BGI Complete Genomics, Shenzhen Co.
Ltd.
• TRUMPF GmbH + Co. KG
• Lockheed Martin Corporation
• ASML Holding NV
• Carl Zeiss AG
• Nikon Corporation
• KLA-Tencor Corporation
• Corning Incorporated
• Lumentum Operations LLC
• Finisar Corp.
• Sumitomo Electric Device Innovations
Inc.
• Showa Denko KK
• STMicroelectronics
• IQE PLC
• Infineon Technologies AG
• Aurubis AG
Competition
II-VI is a global leader in many of its 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, on-time delivery, 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 materials
processing tools to deliver high-power 1-
micron laser systems
Biomedical instruments for flow cytometry,
DNA sequencing, and fluorescence
microscopy
Semiconductor laser diodes for the
industrial and consumer markets
II-VI Photonics
Optics, optical components, modules, and
subsystems for optical communications
Optical and crystal components, thin-film
coatings, and subassemblies for lasers and
metrology instruments
II-VI Performance
Products
Infrared optics for aerospace and defense
applications
Thermoelectric components, subassemblies,
and systems
Metal-matrix composites and reaction-
bonded ceramic products
Single-crystal SiC substrates
Refining and materials-recovery services
for high-purity rare metals
Competitors:
• Sumitomo Electric Industries Ltd.
• MKS Instruments Inc.
• Wavelength Opto-Electronic Pte. Ltd.
• Sigma Koki 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.
• ams AG
• Jenoptik AG
• OSRAM Licht AG
• Sony Corporation
• Hamamatsu Photonics KK
• Molex LLC
• Lumentum Operations LLC
• Casix Inc.
• CASTECH Inc.
• Hellma GmbH & Co. KG
• Research Electro-Optics Inc.
• IDEX Corporation
• In-house fabrication and thin-film coating
capabilities of major aerospace and defense
customers
• 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 Semiconductor Co. Ltd.
• ROHM Co. Ltd.
• Vital Materials Co. Ltd.
• 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.
16
Our Strategy
Our strategy is to grow businesses with world-class engineered materials 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’ products serving the applications mentioned above.
We have grown the number and size of our key accounts substantially. Now, a significant 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 toward
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 and
automate 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
nonconforming 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, 2019, the Company continued to identify, invest in, and focus our research and development on
new products and platform technologies in an effort to accelerate our organic growth. This approach is managed under a disciplined
innovation program that we refer to as the “II-VI Phase Gate Process.”
From time to time, the ratio of externally funded contract activity to internally funded contract activity varies due to the unevenness of
government-funded research programs and changes in the focus of our internally funded research programs. We are committed to
having the right mix of internally and externally funded research that ties closely to our long-term strategic objectives.
We devote significant resources to RD&E programs directed at the continuous improvement of our existing products and processes
and to the timely development of new materials, technologies, and products. We believe that our RD&E activities are essential to
establishing and maintaining a leadership position in each of the markets we serve. As of June 30, 2019, we employed 1,707 people in
RD&E functions. 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.
17
During the fiscal year ended June 30, 2019, we focused our RD&E investments in the following areas:
Segment:
Area of Development:
Our RD&E Investments:
II-VI Laser Solutions
High-power laser diodes and
high-volume manufacturing
Focusing on increasing fiber coupled optical output power of multi-
emitter modules.
Developing high-power VCSELs for consumer devices and next-
generation, high-speed VCSELs for 3D sensing and datacom
applications.
High power beam delivery
Developing multi-kW beam delivery systems and cables for
welding and cutting
CVD diamond technology
Developing CVD diamond for EUV applications.
II-VI Photonics
Photonics design
Pump lasers
Broadening our portfolio beyond infrared window applications.
Continuing to develop and improve crystal materials, precision
optical parts, and laser device components for photonics
applications.
Continuing to invest in our next-generation GaAs pump laser
portfolio and flexible manufacturing footprint to address evolving
terrestrial and undersea markets.
Developing InP growth and processing capability together with
associated packaging technology.
Optical amplifiers and
subsystems
Investing and broadening the range of amplifiers and integrated
subsystems including ROADMs.
Wavelength selective switching Developing LC and LCOS technologies and associated module
designs for WSS; investing in manufacturing equipment and the
automation platform.
Optical monitoring
Continuing optical channel monitoring investment.
Developing OTDRs to monitor the health of the fiber plant.
Micro-optics manufacturing
Shifting toward smaller, more compact optics and automated
assembly 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 improvement to maintain world-class, high-quality,
large-diameter substrates and epitaxial wafers.
Thermoelectric materials and
devices
Continuing to develop leading Bi2Te3 materials 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.
Fiber laser technologies
Developing high-power fiber laser technologies for aerospace and
defense and commercial applications.
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
18
have entered into selective intellectual property licensing agreements. We have asserted in the past, and expect that we will continue to
have entered into selective intellectual property licensing agreements. We have asserted in the past, and expect that we will continue to
assert, as well as vigorously protect, our intellectual property rights. We have a total of approximately 800 patents globally.
assert, as well as vigorously protect, our intellectual property rights. We have a total of approximately 800 patents globally.
Internally funded research and development expenditures were $139.2 million, $116.9 million, and $96.8 million for the fiscal years
Internally funded research and development expenditures were $139.2 million, $116.9 million, and $96.8 million for the fiscal years
2019, 2018, and 2017, respectively. For these same periods, externally funded research and development expenditures were $14.7
2019, 2018, and 2017, respectively. For these same periods, externally funded research and development expenditures were $14.7
million, $12.7 million, and $8.7 million, respectively, and were included in cost of goods sold in the Consolidated Statements of
million, $12.7 million, and $8.7 million, respectively, and were included in cost of goods sold in the Consolidated Statements of
Earnings.
Earnings.
Export and Import Compliance
Export and Import Compliance
We are required to comply with various export/import control and economic sanction laws, including:
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
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
Trade Controls, which among other things impose licensing requirements on the export from the United States of
certain defense articles and defense services, generally including items that are specially designed or adapted for a
certain defense articles and defense services, generally including items that are specially designed or adapted for a
military application and/or listed on the United States Munitions List;
military application and/or listed on the United States Munitions List;
The Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and
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,
Security, which among other things impose licensing requirements on certain dual-use goods, technology, and software,
i.e., items that potentially have both commercial and military applications;
i.e., items that potentially have both commercial and military applications;
The regulations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control, which
The regulations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control, which
implement economic sanctions imposed against designated countries, governments, and persons based on U.S. foreign
implement economic sanctions imposed against designated countries, governments, and persons based on U.S. foreign
policy and national security considerations; and
policy and national security considerations; and
The import regulations administered by U.S. Customs and Border Protection.
The import regulations administered by U.S. Customs and Border Protection.
Foreign governments have also implemented similar export and import control regulations, which may affect our operations or
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
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.
forth in Item 1A – Risk Factors of this Annual Report Form on Form 10-K.
Trade Secrets, Patents, and Trademarks
Trade Secrets, Patents, and Trademarks
Our use of trade secrets, proprietary know-how, trademarks, copyrights, patents, contractual confidentiality, and IP ownership
Our use of trade secrets, proprietary know-how, trademarks, copyrights, patents, contractual confidentiality, and IP ownership
provisions help us develop and maintain our competitive position with respect to our products and manufacturing processes. We
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, and in certain jurisdictions across the globe. We
aggressively pursue process and product patents in certain areas of our businesses, and in certain jurisdictions across the globe. We
have entered into selective intellectual property licensing agreements. We have confidentiality and noncompetition agreements with
have entered into selective intellectual property licensing agreements. We have confidentiality and noncompetition agreements with
certain personnel. We require that our U.S. employees sign a confidentiality and noncompetition agreement upon commencement of
certain personnel. We require that our U.S. employees sign a confidentiality and noncompetition agreement upon commencement of
their employment with us.
their employment with us.
The design, processes, and specialized equipment utilized in our engineered materials, advanced components, and subsystems are
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
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
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
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
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
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
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.
risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.
Executive Officers of the Registrant
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and positions as of June 30, 2019, are set forth below. Each executive
The executive officers of the Company and their respective ages and positions as of June 30, 2019, 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
officer listed has been appointed by the Board of Directors to serve until removed or until such person’s successor is appointed and
qualified.
qualified.
Name
Name
Vincent D. Mattera, Jr. ............................................................................... 63 President and Chief Executive Officer; Director
Vincent D. Mattera, Jr. ............................................................................... 63 President and Chief Executive Officer; Director
Mary Jane Raymond................................................................................... 58 Chief Financial Officer and Treasurer and Assistant
Mary Jane Raymond................................................................................... 58 Chief Financial Officer and Treasurer and Assistant
Age
Age
Position
Position
Giovanni Barbarossa ..................................................................................
Giovanni Barbarossa ..................................................................................
57 Chief Technology Officer and President, II-VI Laser
57 Chief Technology Officer and President, II-VI Laser
Secretary
Secretary
Solutions
Solutions
19
19
have entered into selective intellectual property licensing agreements. We have asserted in the past, and expect that we will continue to
assert, as well as vigorously protect, our intellectual property rights. We have a total of approximately 800 patents globally.
Internally funded research and development expenditures were $139.2 million, $116.9 million, and $96.8 million for the fiscal years
2019, 2018, and 2017, respectively. For these same periods, externally funded research and development expenditures were $14.7
million, $12.7 million, and $8.7 million, respectively, and were included in cost of goods sold in the Consolidated Statements of
Earnings.
Export and Import Compliance
We are required to comply with various export/import 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, generally including items that are specially designed or adapted for a
military application and/or listed on the United States Munitions List;
The Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and
Security, which among other things impose licensing requirements on certain dual-use goods, technology, and software,
i.e., items that potentially have both commercial and military applications;
The regulations administered by the U.S. Department of the 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 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, 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, and in certain jurisdictions across the globe. We
have entered into selective intellectual property licensing agreements. We have confidentiality and noncompetition agreements with
certain personnel. We require that our U.S. employees sign a confidentiality and noncompetition agreement upon commencement of
their employment with us.
The design, processes, and specialized equipment utilized in our engineered materials, advanced components, and subsystems are
innovative, complex, and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar
technology, or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a variety of
materials, devices, equipment, configurations, and processes, and others could obtain patents covering technology similar to 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
Name
59 Chief Operating Officer
Gary A. Kapusta .........................................................................................
The executive officers of the Company and their respective ages and positions as of June 30, 2019, are set forth below. Each executive
63 Chief Legal and Compliance Officer and Secretary
Jo Anne Schwendinger...............................................................................
officer listed has been appointed by the Board of Directors to serve until removed or until such person’s successor is appointed and
56 Vice President, Human Resources
David G. Wagner........................................................................................
qualified.
Position
Age
Position
Age
Age
Position
Secretary
Solutions
59 Chief Operating Officer
63 Chief Legal and Compliance Officer and Secretary
56 Vice President, Human Resources
Vincent D. Mattera, Jr. Dr. Mattera initially served as a member of the II-VI Board of Directors from 2000 to 2002. Dr. Mattera
Name
joined the Company as a Vice President in 2004 and served as Executive Vice President from January 2010 to November 2013, when
Vincent D. Mattera, Jr. ............................................................................... 63 President and Chief Executive Officer; Director
he became the Chief Operating Officer. In November 2014, Dr. Mattera became the President and Chief Operating Officer and was
Mary Jane Raymond................................................................................... 58 Chief Financial Officer and Treasurer and Assistant
reappointed to the Board of Directors. In November 2015, he became the President of II-VI. In September 2016, Dr. Mattera became
the Company’s third President and Chief Executive Officer in 45 years. During his career at II-VI, he has assumed successively
57 Chief Technology Officer and President, II-VI Laser
Giovanni Barbarossa ..................................................................................
broader management roles, including as a lead architect of the Company’s diversification strategy. He has provided vision, energy,
Name
and dispatch to the Company’s growth initiatives, including overseeing the acquisition-related integration activities in the United
Gary A. Kapusta .........................................................................................
States, Europe, and Asia—especially in China—thereby establishing additional platforms. These have contributed to a new
Jo Anne Schwendinger...............................................................................
positioning of the Company into large and transformative global growth markets while increasing considerably the global reach of the
19
David G. Wagner........................................................................................
Company, deepening the technology and IP portfolio, broadening the product roadmap and customer base, and increasing the potential
of II-VI.
Vincent D. Mattera, Jr. Dr. Mattera initially served as a member of the II-VI Board of Directors from 2000 to 2002. Dr. Mattera
joined the Company as a Vice President in 2004 and served as Executive Vice President from January 2010 to November 2013, when
Prior to joining II-VI as an executive, Dr. Mattera had a continuous 20-year career in the Optoelectronic Device Division of AT&T
he became the Chief Operating Officer. In November 2014, Dr. Mattera became the President and Chief Operating Officer and was
Bell Laboratories, Lucent Technologies, and Agere Systems, during which he led the development and manufacturing of
reappointed to the Board of Directors. In November 2015, he became the President of II-VI. In September 2016, Dr. Mattera became
semiconductor laser-based materials and devices for optical and data communications networks. Dr. Mattera has 34 years of
the Company’s third President and Chief Executive Officer in 45 years. During his career at II-VI, he has assumed successively
leadership experience in the compound semiconductor materials, device technology, operations, and markets that are core to II-VI’s
broader management roles, including as a lead architect of the Company’s diversification strategy. He has provided vision, energy,
business and strategy. Dr. Mattera holds a B.S. degree in chemistry from the University of Rhode Island (1979) and a Ph.D. in
and dispatch to the Company’s growth initiatives, including overseeing the acquisition-related integration activities in the United
chemistry from Brown University (1984). He completed the Stanford University Executive Program (1996).
States, 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
Mary Jane Raymond has been Chief Financial Officer and Treasurer of the Company since March 2014. Previously, Ms. Raymond
Company, deepening the technology and IP portfolio, broadening the product roadmap and customer base, and increasing the potential
was Executive Vice President and Chief Financial Officer of Hudson Global Inc. (Nasdaq:HSON) from 2005 to 2013. Ms. Raymond
of II-VI.
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 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
Prior to joining II-VI as an executive, Dr. Mattera had a continuous 20-year career in the Optoelectronic Device Division of AT&T
University, and an MBA from Stanford University.
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
Giovanni Barbarossa joined II-VI in 2012 and has been the President, II-VI Laser Solutions, since 2014 and served as the Chief
leadership experience in the compound semiconductor materials, device technology, operations, and markets that are core to II-VI’s
business and strategy. Dr. Mattera holds a B.S. degree in chemistry from the University of Rhode Island (1979) and a Ph.D. in
Technology Officer from 2012 through June 30, 2019. Dr. Barbarossa was employed at Avanex Corporation from 2000 through 2009,
chemistry from Brown University (1984). He completed the Stanford University Executive Program (1996).
serving in various executive positions in product development and general management, and 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,
Mary Jane Raymond has been Chief Financial Officer and Treasurer of the Company since March 2014. Previously, Ms. Raymond
AT&T Bell Labs, Lucent Technologies, and Hewlett-Packard. Dr. Barbarossa graduated from the University of Bari, Italy, with a B.S.
was Executive Vice President and Chief Financial Officer of Hudson Global Inc. (Nasdaq:HSON) from 2005 to 2013. Ms. Raymond
degree in Electrical Engineering and holds a Ph.D. in Photonics from the University of Glasgow, U.K.
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 from 1997 to 2002 and held several management positions at
Gary A. Kapusta joined II-VI in February 2016 and served from then through June 30, 2019 as the Company’s Chief Operating
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.
Officer. Prior to his employment with the Company, Mr. Kapusta served in various roles at Coca-Cola, including as President and
Chief Executive Officer, Coca-Cola Bottlers’ Sales & Services LLC; 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
Giovanni Barbarossa joined II-VI in 2012 and has been the President, II-VI Laser Solutions, since 2014 and served as the Chief
Technologies, and AT&T. Mr. Kapusta graduated from the University of Pittsburgh with B.S. and M.S. degrees in Industrial
Technology Officer from 2012 through June 30, 2019. Dr. Barbarossa was employed at Avanex Corporation from 2000 through 2009,
Engineering and holds an MBA from Lehigh University.
serving in various executive positions in product development and general management, and ultimately serving as President and Chief
Executive Officer. When Avanex merged with Bookham Technology, forming Oclaro, Dr. Barbarossa became a member of the Board
Jo Anne Schwendinger has served as the Company’s Chief Legal and Compliance Officer and Secretary since March 2017. Ms.
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.
Schwendinger also served as the Company’s General Counsel and Secretary from when she joined the Company in March 2017 until
degree in Electrical Engineering and holds a Ph.D. in Photonics from the University of Glasgow, U.K.
November 2017. Prior to her employment with the Company, Ms. Schwendinger practiced law with the 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.
Gary A. Kapusta joined II-VI in February 2016 and served from then through June 30, 2019 as the Company’s Chief Operating
Ms. Schwendinger holds a bachelor’s degree from the Université d'Avignon et des Pays de Vaucluse, a master’s degree from the
Officer. Prior to his employment with the Company, Mr. Kapusta served in various roles at Coca-Cola, including as President and
Université de Strasbourg, and a Juris Doctor degree from the University of Pittsburgh Law School.
Chief Executive Officer, Coca-Cola Bottlers’ Sales & Services LLC; 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
David G. Wagner has been employed by the Company since 2008 and has been Vice President, Human Resources, since 2011. Prior
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.
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 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
Jo Anne Schwendinger has served as the Company’s Chief Legal and Compliance Officer and Secretary since March 2017. Ms.
has announced his intention to retire from the Company, to be effective in 2019, at a date to be determined.
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 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.
20
David G. Wagner has been employed by the Company since 2008 and has been 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 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, to be effective in 2019, at a date to be determined.
20
Name
Age
Position
Gary A. Kapusta .........................................................................................
59 Chief Operating Officer
Jo Anne Schwendinger...............................................................................
63 Chief Legal and Compliance Officer and Secretary
David G. Wagner........................................................................................
56 Vice President, Human Resources
Vincent D. Mattera, Jr. Dr. Mattera initially served as a member of the II-VI Board of Directors from 2000 to 2002. Dr. Mattera
joined the Company as a Vice President in 2004 and served as Executive Vice President from January 2010 to November 2013, when
he became the Chief Operating Officer. In November 2014, Dr. Mattera became the President and Chief Operating Officer and was
reappointed to the Board of Directors. In November 2015, he became the President of II-VI. In September 2016, Dr. Mattera became
the Company’s third President and Chief Executive Officer in 45 years. During his career at II-VI, he has assumed successively
broader management roles, including as a lead architect of the Company’s diversification strategy. He has provided vision, energy,
and dispatch to the Company’s growth initiatives, including overseeing the acquisition-related integration activities in the United
States, 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 the 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, device technology, operations, and markets that are core to II-VI’s
business and strategy. Dr. Mattera holds a B.S. degree in chemistry from the University of Rhode Island (1979) and a Ph.D. 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 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, II-VI Laser Solutions, since 2014 and served as the Chief
Technology Officer from 2012 through June 30, 2019. Dr. Barbarossa was employed at Avanex Corporation from 2000 through 2009,
serving in various executive positions in product development and general management, and 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 served from then through June 30, 2019 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 and
Chief Executive Officer, Coca-Cola Bottlers’ Sales & Services LLC; 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.
Appointment of Walter R. Bashaw II as President Effective July 1, 2019
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
On June 27, 2019, the Board of Directors of the Company appointed Walter R. Bashaw II as the Company’s President, effective July 1,
November 2017. Prior to her employment with the Company, Ms. Schwendinger practiced law with the firm Blank Rome LLP from
2019. Dr. Mattera remains the Company’s Chief Executive Officer and a member of the Company’s Board of Directors.
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.
Mr. Bashaw, 54, has served as the Company’s Senior Vice President, Corporate Strategy and Development, Administration since
Ms. Schwendinger holds a bachelor’s degree from the Université d'Avignon et des Pays de Vaucluse, a master’s degree from the
October 2018 and previously served as the Company’s Interim General Counsel and Secretary from December 2015 until March 2017.
Université de Strasbourg, and a Juris Doctor degree from the University of Pittsburgh Law School.
Mr. Bashaw also previously was the Managing Shareholder and a Director of the law firm of Sherrard, German & Kelly, P.C. (“SGK”)
in Pittsburgh, Pennsylvania, until October 2018 and has been Of Counsel at SGK since October 2018. Mr. Bashaw graduated from
David G. Wagner has been employed by the Company since 2008 and has been Vice President, Human Resources, since 2011. Prior
The Pennsylvania State University with a B.S. degree in Logistics and also holds a J.D. degree from the University of Pittsburgh
to his employment with the Company, Mr. Wagner was employed with Owens Corning (NYSE:OC) from 1985 through 2008, serving
School of Law.
in various human resource management positions, ultimately becoming 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, to be effective in 2019, at a date to be determined.
Changes in Management Roles Effective July 1, 2019
The Company’s Board of Directors also determined on June 27, 2019 that Dr. Barbarossa would be reassigned to the position of Chief
Appointment of Walter R. Bashaw II as President Effective July 1, 2019
Appointment of Walter R. Bashaw II as President Effective July 1, 2019
Strategy Officer and President of the Compound Semiconductor segment, effective July 1, 2019. The Company’s Board of Directors
20
appointed Christopher Koeppen, who most recently served as the Company’s Vice President, Laser Systems Group, as the Company’s
On June 27, 2019, the Board of Directors of the Company appointed Walter R. Bashaw II as the Company’s President, effective July 1,
On June 27, 2019, the Board of Directors of the Company appointed Walter R. Bashaw II as the Company’s President, effective July 1,
Chief Technology Officer, effective July 1, 2019. Mr. Kapusta, who most recently served as the Company’s Chief Operating Officer,
2019. Dr. Mattera remains the Company’s Chief Executive Officer and a member of the Company’s Board of Directors.
2019. Dr. Mattera remains the Company’s Chief Executive Officer and a member of the Company’s Board of Directors.
was reassigned by the Company’s Board of Directors to the position of Chief Procurement Officer, effective July 1, 2019.
Mr. Bashaw, 54, has served as the Company’s Senior Vice President, Corporate Strategy and Development, Administration since
Mr. Bashaw, 54, has served as the Company’s Senior Vice President, Corporate Strategy and Development, Administration since
October 2018 and previously served as the Company’s Interim General Counsel and Secretary from December 2015 until March 2017.
October 2018 and previously served as the Company’s Interim General Counsel and Secretary from December 2015 until March 2017.
Availability of Information
Mr. Bashaw also previously was the Managing Shareholder and a Director of the law firm of Sherrard, German & Kelly, P.C. (“SGK”)
Mr. Bashaw also previously was the Managing Shareholder and a Director of the law firm of Sherrard, German & Kelly, P.C. (“SGK”)
in Pittsburgh, Pennsylvania, until October 2018 and has been Of Counsel at SGK since October 2018. Mr. Bashaw graduated from
Our internet address is www.ii-vi.com. Information contained on our website is not part of, and should not be construed as being
in Pittsburgh, Pennsylvania, until October 2018 and has been Of Counsel at SGK since October 2018. Mr. Bashaw graduated from
The Pennsylvania State University with a B.S. degree in Logistics and also holds a J.D. degree from the University of Pittsburgh
incorporated by reference into, this Annual Report on Form 10-K. We post the following reports on our website as soon as reasonably
The Pennsylvania State University with a B.S. degree in Logistics and also holds a J.D. degree from the University of Pittsburgh
School of Law.
practical after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): our Annual Reports
School of Law.
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
Changes in Management Roles Effective July 1, 2019
Changes in Management Roles Effective July 1, 2019
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
The Company’s Board of Directors also determined on June 27, 2019 that Dr. Barbarossa would be reassigned to the position of Chief
The Company’s Board of Directors also determined on June 27, 2019 that Dr. Barbarossa would be reassigned to the position of Chief
also make our corporate governance documents available on our website, including the Company’s Code of Business Conduct and
Strategy Officer and President of the Compound Semiconductor segment, effective July 1, 2019. The Company’s Board of Directors
Strategy Officer and President of the Compound Semiconductor segment, effective July 1, 2019. The Company’s Board of Directors
Ethics, governance guidelines, and the charters for our Board committees. All such documents are located on the Investors page of our
appointed Christopher Koeppen, who most recently served as the Company’s Vice President, Laser Systems Group, as the Company’s
appointed Christopher Koeppen, who most recently served as the Company’s Vice President, Laser Systems Group, as the Company’s
website and are available free of charge.
Chief Technology Officer, effective July 1, 2019. Mr. Kapusta, who most recently served as the Company’s Chief Operating Officer,
Chief Technology Officer, effective July 1, 2019. Mr. Kapusta, who most recently served as the Company’s Chief Operating Officer,
was reassigned by the Company’s Board of Directors to the position of Chief Procurement Officer, effective July 1, 2019.
was reassigned by the Company’s Board of Directors to the position of Chief Procurement Officer, effective July 1, 2019.
Item 1A. RISK FACTORS
Availability of Information
Availability of Information
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,
Our internet address is www.ii-vi.com. Information contained on our website is not part of, and should not be construed as being
Our internet address is www.ii-vi.com. Information contained on our website is not part of, and should not be construed as being
as well as the other information contained in this Annual Report on Form 10-K when evaluating an investment in our securities.
incorporated by reference into, this Annual Report on Form 10-K. We post the following reports on our website as soon as reasonably
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 (“SEC”): our Annual Reports
practical after they are electronically filed with or furnished to the Securities and Exchange Commission (“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
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
Investments in future markets of potential significant growth may not result in the expected return.
statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, we post our proxy statements on
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
Schedule 14A related to our annual shareholders’ meetings as well as reports filed by our directors, officers, and 10% beneficial
We continue to make investments in programs with the goal of gaining a greater share of end markets using semiconductor lasers and
owners pursuant to Section 16 of the Exchange Act. In addition, all filings are available via the SEC’s website (www.sec.gov). We
owners pursuant to Section 16 of the Exchange Act. In addition, all filings are available via the SEC’s website (www.sec.gov). We
other components including those used for 3D sensing and emerging 5G technology. We cannot guarantee that our investments in
also make our corporate governance documents available on our website, including the Company’s Code of Business Conduct and
also make our corporate governance documents available on our website, including the Company’s Code of Business Conduct and
capital and capabilities will be sufficient. The potential end markets, as well as our ability to gain market share in such markets, may
Ethics, governance guidelines, and the charters for our Board committees. All such documents are located on the Investors page of our
Ethics, governance guidelines, and the charters for our Board committees. All such documents are located on the Investors page of our
not materialize on the timeline anticipated or at all. We cannot be sure of the end market price, specification or yield for products
website and are available free of charge.
website and are available free of charge.
incorporating our technologies. Our technologies could fail to fulfill, partially or completely, our target customers’ 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 damages, loss of market share and
Item 1A. RISK FACTORS
Item 1A. RISK FACTORS
loss of reputation.
We caution our investors that our performance is subject to risks and uncertainties. The following material risk factors may cause our
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,
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.
as well as the other information contained in this Annual Report on Form 10-K when evaluating an investment in our securities.
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
Investments in future markets of potential significant growth may not result in the expected return.
and processes to keep pace with market developments to address increasingly sophisticated customer requirements. Our success in
Investments in future markets of potential significant growth may not result in the expected return.
developing and selling new and enhanced products and processes depends upon a variety of factors including strategic product
We continue to make investments in programs with the goal of gaining a greater share of end markets using semiconductor lasers and
We continue to make investments in programs with the goal of gaining a greater share of end markets using semiconductor lasers and
selection, efficient completion of product design and development, timely implementation of manufacturing and assembly processes,
other components including those used for 3D sensing and emerging 5G technology. We cannot guarantee that our investments in
other components including those used for 3D sensing and emerging 5G technology. We cannot guarantee that our investments in
effective sales and marketing, and high-quality and successful product performance in the market.
capital and capabilities will be sufficient. The potential end markets, as well as our ability to gain market share in such markets, may
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
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’ specifications. We
incorporating our technologies. Our technologies could fail to fulfill, partially or completely, our target customers’ specifications. We
21
cannot guarantee the end market customers’ acceptance of our technologies. Further, we may be unable to fulfill the terms of our
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 damages, loss of market share and
contracts with our target customers, which could result in penalties of a material nature, including damages, loss of market share and
loss of reputation.
loss of reputation.
Our competitive position depends on our ability to develop new products and processes.
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
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
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
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,
selection, efficient completion of product design and development, timely implementation of manufacturing and assembly processes,
effective sales and marketing, and high-quality and successful product performance in the market.
effective sales and marketing, and high-quality and successful product performance in the market.
21
21
Appointment of Walter R. Bashaw II as President Effective July 1, 2019
Appointment of Walter R. Bashaw II as President Effective July 1, 2019
On June 27, 2019, the Board of Directors of the Company appointed Walter R. Bashaw II as the Company’s President, effective July 1,
On June 27, 2019, the Board of Directors of the Company appointed Walter R. Bashaw II as the Company’s President, effective July 1,
2019. Dr. Mattera remains the Company’s Chief Executive Officer and a member of the Company’s Board of Directors.
2019. Dr. Mattera remains the Company’s Chief Executive Officer and a member of the Company’s Board of Directors.
Mr. Bashaw, 54, has served as the Company’s Senior Vice President, Corporate Strategy and Development, Administration since
Mr. Bashaw, 54, has served as the Company’s Senior Vice President, Corporate Strategy and Development, Administration since
October 2018 and previously served as the Company’s Interim General Counsel and Secretary from December 2015 until March 2017.
October 2018 and previously served as the Company’s Interim General Counsel and Secretary from December 2015 until March 2017.
Mr. Bashaw also previously was the Managing Shareholder and a Director of the law firm of Sherrard, German & Kelly, P.C. (“SGK”)
Mr. Bashaw also previously was the Managing Shareholder and a Director of the law firm of Sherrard, German & Kelly, P.C. (“SGK”)
in Pittsburgh, Pennsylvania, until October 2018 and has been Of Counsel at SGK since October 2018. Mr. Bashaw graduated from
in Pittsburgh, Pennsylvania, until October 2018 and has been Of Counsel at SGK since October 2018. Mr. Bashaw graduated from
The Pennsylvania State University with a B.S. degree in Logistics and also holds a J.D. degree from the University of Pittsburgh
The Pennsylvania State University with a B.S. degree in Logistics and also holds a J.D. degree from the University of Pittsburgh
School of Law.
School of Law.
Changes in Management Roles Effective July 1, 2019
Changes in Management Roles Effective July 1, 2019
The Company’s Board of Directors also determined on June 27, 2019 that Dr. Barbarossa would be reassigned to the position of Chief
The Company’s Board of Directors also determined on June 27, 2019 that Dr. Barbarossa would be reassigned to the position of Chief
Strategy Officer and President of the Compound Semiconductor segment, effective July 1, 2019. The Company’s Board of Directors
Strategy Officer and President of the Compound Semiconductor segment, effective July 1, 2019. The Company’s Board of Directors
appointed Christopher Koeppen, who most recently served as the Company’s Vice President, Laser Systems Group, as the Company’s
appointed Christopher Koeppen, who most recently served as the Company’s Vice President, Laser Systems Group, as the Company’s
Chief Technology Officer, effective July 1, 2019. Mr. Kapusta, who most recently served as the Company’s Chief Operating Officer,
Chief Technology Officer, effective July 1, 2019. Mr. Kapusta, who most recently served as the Company’s Chief Operating Officer,
was reassigned by the Company’s Board of Directors to the position of Chief Procurement Officer, effective July 1, 2019.
was reassigned by the Company’s Board of Directors to the position of Chief Procurement Officer, effective July 1, 2019.
Availability of Information
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
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
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 (“SEC”): our Annual Reports
practical after they are electronically filed with or furnished to the Securities and Exchange Commission (“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
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
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
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
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
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
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.
website and are available free of charge.
Item 1A. RISK FACTORS
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
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,
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.
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 the expected return.
Investments in future markets of potential significant growth may not result in the expected return.
We continue to make investments in programs with the goal of gaining a greater share of end markets using semiconductor lasers and
We continue to make investments in programs with the goal of gaining a greater share of end markets using semiconductor lasers and
other components including those used for 3D sensing and emerging 5G technology. We cannot guarantee that our investments in
other components including those used for 3D sensing and emerging 5G technology. We cannot guarantee that our investments in
capital and capabilities will be sufficient. The potential end markets, as well as our ability to gain market share in such markets, may
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
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’ specifications. We
incorporating our technologies. Our technologies could fail to fulfill, partially or completely, our target customers’ specifications. We
The introduction by our competitors of products or processes using new developments better or faster than ours could render our
cannot guarantee the end market customers’ acceptance of our technologies. Further, we may be unable to fulfill the terms of our
cannot guarantee the end market customers’ acceptance of our technologies. Further, we may be unable to fulfill the terms of our
products or processes obsolete or unmarketable. We intend to continue to make significant investments in RD&E to achieve our goals.
contracts with our target customers, which could result in penalties of a material nature, including damages, loss of market share and
There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products and
contracts with our target customers, which could result in penalties of a material nature, including damages, loss of market share and
loss of reputation.
processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could have a material
loss of reputation.
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 depends on our ability to develop new products and processes.
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
To meet our strategic objectives, we must develop, manufacture and market new products and continue to update our existing products
Global economic downturns may adversely affect our business, operating results and financial condition.
and processes to keep pace with market developments to address increasingly sophisticated customer requirements. Our success in
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
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the
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,
level of growth or contraction of the global economy as a whole. It is even more difficult to estimate growth or contraction in various
selection, efficient completion of product design and development, timely implementation of manufacturing and assembly processes,
effective sales and marketing, and high-quality and successful product performance in the market.
parts, sectors and regions of the economy, including the industrial, aerospace and defense, optical communications,
effective sales and marketing, and high-quality and successful product performance in the market.
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
The introduction by our competitors of products or processes using new developments better or faster than ours could render our
estimates of future income and expenditures very difficult to make.
products or processes obsolete or unmarketable. We intend to continue to make significant investments in RD&E to achieve our goals.
21
There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products and
21
Global economic downturns may affect industries in which our customers operate. These changes could include decreases in the rate
processes in a manner which satisfies customer needs or achieves market acceptance. The failure to do so could have a material
of consumption or use of our customers’ products. Such conditions could have a material adverse effect on demand for our customers’
adverse effect on our ability to grow our business and maintain our competitive position and on our results of operations and/or
products, and in turn, on demand for our products.
financial condition.
Adverse changes may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in
Global economic downturns may adversely affect our business, operating results and financial condition.
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
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the
results include disruption in the credit and financial markets in the United States, Europe and elsewhere, adverse effects of slowdowns
level of growth or contraction of the global economy as a whole. It is even more difficult to estimate growth or contraction in various
in the U.S., European or Chinese economies, reductions or limited growth in consumer spending or consumer credit, global trade
parts, sectors and regions of the economy, including the industrial, aerospace and defense, optical communications,
tariffs, and other adverse economic conditions that may be specific to the Internet, e-commerce and payments industries.
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
Adverse changes could also occur as a result of economic upswings, such as increased wages and scarce labor pools, and increased
estimates of future income and expenditures very difficult to make.
interest rates.
Global economic downturns may affect industries in which our customers operate. These changes could include decreases in the rate
These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, the cost
of consumption or use of our customers’ products. Such conditions could have a material adverse effect on demand for our customers’
and availability of financing, and costs associated with manufacturing and distributing products. Any economic downturn, or surge,
products, and in turn, on demand for our products.
could have a material adverse effect on our business, results of operations or financial condition.
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,
Some systems that use our products are complex in design, and our products may contain defects that are not detected until
contraction of credit availability or other factors affecting economic conditions. For example, factors that may affect our operating
deployed, which could increase our costs, reduce our revenues, cause us to lose key customers and may expose us to litigation
results include disruption in the credit and financial markets in the United States, Europe and elsewhere, adverse effects of slowdowns
arising from lawsuits related to our products.
in the U.S., European or Chinese economies, reductions or limited growth in consumer spending or consumer credit, global trade
Some systems that use our products are inherently complex in design and require ongoing maintenance. Our customers may discover
tariffs, and other adverse economic conditions that may be specific to the Internet, e-commerce and payments industries.
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
Adverse changes could also occur as a result of economic upswings, such as increased wages and scarce labor pools, and increased
identify the source of the problem. If we are unable to correct defects or other problems, we could experience, among other things,
interest rates.
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.
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, or surge,
The occurrence of any one or more of the foregoing factors could have a material adverse effect on our business, results of operations
could have a material adverse effect on our business, results of operations or financial condition.
or financial condition.
Some systems that use our products are complex in design, and our products may contain defects that are not detected until
Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign
deployed, which could increase our costs, reduce our revenues, cause us to lose key customers and may expose us to litigation
exchange losses.
arising from lawsuits related to our products.
We conduct our business and incur costs in the local currency of most countries in which we operate. Our net sales outside the United
Some systems that use our products are inherently complex in design and require ongoing maintenance. Our customers may discover
States represented a majority of our total sales in each of the last three fiscal years. We incur currency transaction risk whenever one
defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our
of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it
products are combined with products from other vendors which may contain defects. Should problems occur, it may be difficult to
operates or holds assets or liabilities in a currency different than its functional currency. Changes in exchange rates can also affect our
identify the source of the problem. If we are unable to correct defects or other problems, we could experience, among other things,
results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S. dollars. We cannot accurately
loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new
predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we
customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers.
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
The occurrence of any one or more of the foregoing factors could have a material adverse effect on our business, results of operations
adverse effect on our financial condition, cash flows and profitability.
or financial condition.
Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign
exchange losses.
22
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.
22
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.
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 of the global economy as a whole. It is even more difficult to estimate growth or contraction in various
parts, sectors and regions of the economy, including the industrial, aerospace and defense, optical communications,
telecommunications, semiconductor, 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 U.S., European or Chinese economies, reductions or limited growth in consumer spending or consumer credit, global trade
tariffs, and other adverse economic conditions that may be specific to the Internet, e-commerce and payments industries.
Adverse changes could also occur as a result of economic upswings, such as increased wages and scarce labor pools, and increased
interest rates.
These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, the cost
and availability of financing, and costs associated with manufacturing and distributing products. Any economic downturn, or surge,
could have a material adverse effect on our business, results of operations or financial condition.
Some systems that use our products are complex in design, and our products may contain defects that are not detected until
deployed, which could increase our costs, reduce our revenues, cause us to lose key customers and may expose us to litigation
arising from lawsuits related to our products.
Some systems that use our products are inherently complex in design and require ongoing maintenance. Our customers may discover
defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our
products are combined with products from other vendors which may contain defects. Should problems occur, it may be difficult to
identify the source of the problem. If we are unable to correct defects or other problems, we could experience, among other things,
loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new
customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers.
The occurrence of any one or more of the foregoing factors could have a material adverse effect on our business, results of operations
or financial condition.
Foreign currency risk may negatively affect our revenues, cost of sales and operating margins and could result in foreign
exchange losses.
Our competitive position may still require significant investments.
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
We continuously monitor the marketplace for strategic opportunities, and our business strategy includes expanding our product lines
of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it
and markets through both internal product development and acquisitions. Consequently, we expect to continue to consider strategic
operates or holds assets or liabilities in a currency different than its functional currency. Changes in exchange rates can also affect our
acquisition of businesses, products or technologies complementary to our business. This may require significant investments of
results of operations when the value of sales and expenses of foreign subsidiaries are translated to U.S. dollars. We cannot accurately
management time and financial resources. If market demand is outside our organic capabilities, if a strategic acquisition is required
predict the impact of future exchange rate fluctuations on our results of operations. Further, given the volatility of exchange rates, we
and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the
may not be able to effectively manage our currency risks, and any volatility in currency exchange rates may increase the price of our
expected return on investment, expose us to unforeseen liabilities or jeopardize our ability to comply with our credit facility covenants
products in local currency to our foreign customers or increase the manufacturing cost of our products, either of which may have an
due to any inability to integrate the business, adjust to operating a larger and more complex organization, adapt to additional political
adverse effect on our financial condition, cash flows and profitability.
and other requirements associated with the acquired business, retain staff, or work with customers, we could suffer a material adverse
Our competitive position may still require significant investments.
effect on our business, results of operations 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
22
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
We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with
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
existing operations.
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
management time and financial resources. If market demand is outside our organic capabilities, if a strategic acquisition is required
We have in the past acquired several companies, and our announced acquisition of Finisar is pending. We may continue to expand and
and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the
and we cannot identify one or execute on it, and/or if financial investments that we undertake distract management, do not result in the
diversify our operations with additional acquisitions. We may be unable to identify or complete prospective acquisitions for many
expected return on investment, expose us to unforeseen liabilities or jeopardize our ability to comply with our credit facility covenants
expected return on investment, expose us to unforeseen liabilities or jeopardize our ability to comply with our credit facility covenants
reasons, including increasing competition from other potential acquirers, the effects of consolidation in our industries, and potentially
due to any inability to integrate the business, adjust to operating a larger and more complex organization, adapt to additional political
due to any inability to integrate the business, adjust to operating a larger and more complex organization, adapt to additional political
high valuations of acquisition candidates. In addition, applicable antitrust laws and other regulations may limit our ability to acquire
and other requirements associated with the acquired business, retain staff, or work with customers, we could suffer a material adverse
and other requirements associated with the acquired business, retain staff, or work with customers, we could suffer a material adverse
targets or force us to divest an acquired business line. If we are unable to identify suitable targets or complete acquisitions, our growth
effect on our business, results of operations or financial condition.
effect on our business, results of operations or financial condition.
prospects may suffer, and we may not be able to realize sufficient scale and technological advantages to compete effectively in all
markets.
We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with
We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with
existing operations.
To the extent we are successful in making acquisitions, we may be unsuccessful in integrating acquired companies or product lines
existing operations.
with existing operations, or the integration may be more difficult or more costly than anticipated. Some of the risks that may affect our
We have in the past acquired several companies, and our announced acquisition of Finisar is pending. We may continue to expand and
We have in the past acquired several companies, and our announced acquisition of Finisar is pending. We may continue to expand and
ability to integrate or realize anticipated benefits from acquired companies, businesses or assets include those associated with:
diversify our operations with additional acquisitions. We may be unable to identify or complete prospective acquisitions for many
diversify our operations with additional acquisitions. We may be unable to identify or complete prospective acquisitions for many
reasons, including increasing competition from other potential acquirers, the effects of consolidation in our industries, and potentially
reasons, including increasing competition from other potential acquirers, the effects of consolidation in our industries, and potentially
high valuations of acquisition candidates. In addition, applicable antitrust laws and other regulations may limit our ability to acquire
high valuations of acquisition candidates. In addition, applicable antitrust laws and other regulations may limit our ability to acquire
targets or force us to divest an acquired business line. If we are unable to identify suitable targets or complete acquisitions, our growth
targets or force us to divest an acquired business line. If we are unable to identify suitable targets or complete acquisitions, our growth
prospects may suffer, and we may not be able to realize sufficient scale and technological advantages to compete effectively in all
•
prospects may suffer, and we may not be able to realize sufficient scale and technological advantages to compete effectively in all
markets.
•
markets.
•
•
•
unexpected losses of key employees of the acquired company;
conforming the acquired company’s standards, processes, procedures and controls with our operations, including
integrating Enterprise Resource Planning (“ERP”) systems and other key business applications;
coordinating new product and process development;
increasing complexity from combining operations;
increasing the scope, geographic diversity and complexity of our operations;
difficulties in consolidating facilities and transferring processes and know-how; and
diversion of management’s attention from other business concerns.
To the extent we are successful in making acquisitions, we may be unsuccessful in integrating acquired companies or product lines
To the extent we are successful in making acquisitions, we may be unsuccessful in integrating acquired companies or product lines
with existing operations, or the integration may be more difficult or more costly than anticipated. Some of the risks that may affect our
with existing operations, or the integration may be more difficult or more costly than anticipated. Some of the risks that may affect our
ability to integrate or realize anticipated benefits from acquired companies, businesses or assets include those associated with:
ability to integrate or realize anticipated benefits from acquired companies, businesses or assets include those associated with:
In connection with acquisitions, we may:
•
•
unexpected losses of key employees of the acquired company;
unexpected losses of key employees of the acquired company;
conforming the acquired company’s standards, processes, procedures and controls with our operations, including
use a signification portion of our available cash;
conforming the acquired company’s standards, processes, procedures and controls with our operations, including
integrating Enterprise Resource Planning (“ERP”) systems and other key business applications;
issue equity securities, which would dilute current shareholders’ percentage ownership;
integrating Enterprise Resource Planning (“ERP”) systems and other key business applications;
coordinating new product and process development;
incur significant debt;
coordinating new product and process development;
increasing complexity from combining operations;
incur or assume contingent liabilities, known or unknown, including potential lawsuits, infringement actions or similar
increasing complexity from combining operations;
increasing the scope, geographic diversity and complexity of our operations;
liabilities;
increasing the scope, geographic diversity and complexity of our operations;
difficulties in consolidating facilities and transferring processes and know-how; and
incur impairment charges related to goodwill or other intangibles; and
difficulties in consolidating facilities and transferring processes and know-how; and
diversion of management’s attention from other business concerns.
face antitrust or other regulatory inquiries or actions.
diversion of management’s attention from other business concerns.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
In connection with acquisitions, we may:
In addition, the market price of our common stock could be adversely affected if the effect of any acquisitions on our consolidated
In connection with acquisitions, we may:
financial results is dilutive or is below the market's or financial analysts' expectations, or if there are unanticipated changes in the
use a signification portion of our available cash;
use a signification portion of our available cash;
business or financial performance of the target company or the combined company. Any failure to successfully integrate acquired
issue equity securities, which would dilute current shareholders’ percentage ownership;
issue equity securities, which would dilute current shareholders’ percentage ownership;
businesses may disrupt our business and adversely impact our business, financial condition and results of operations.
incur significant debt;
incur significant debt;
incur or assume contingent liabilities, known or unknown, including potential lawsuits, infringement actions or similar
incur or assume contingent liabilities, known or unknown, including potential lawsuits, infringement actions or similar
liabilities;
liabilities;
incur impairment charges related to goodwill or other intangibles; and
incur impairment charges related to goodwill or other intangibles; and
face antitrust or other regulatory inquiries or actions.
face antitrust or other regulatory inquiries or actions.
•
•
•
•
In addition, the market price of our common stock could be adversely affected if the effect of any acquisitions on our consolidated
In addition, the market price of our common stock could be adversely affected if the effect of any acquisitions on our consolidated
financial results is dilutive or is below the market's or financial analysts' expectations, or if there are unanticipated changes in the
financial results is dilutive or is below the market's or financial analysts' expectations, or if there are unanticipated changes in the
business or financial performance of the target company or the combined company. Any failure to successfully integrate acquired
business or financial performance of the target company or the combined company. Any failure to successfully integrate acquired
businesses may disrupt our business and adversely impact our business, financial condition and results of operations.
businesses may disrupt our business and adversely impact our business, financial condition and results of operations.
23
23
23
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 70%, 68% and 69% of revenues during the
years ended June 30, 2019, 2018 and 2017, 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, Italy, South Korea, and Taiwan. Our operations vary by location and are
influenced on a location-by-location basis by local customs, languages and work practices, as well as different local weather
conditions, management styles and education systems. In addition, multiple complex issues may arise concurrently in different
countries, potentially hampering our management’s ability to respond in an effective and timely manner. Any inability to respond in
an effective and timely manner to issues in our global operations could have a material adverse effect on our business, results of
operations or financial condition.
We are subject to complex and rapidly changing 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
ability to enter into or complete transactions with certain customers, business partners and other persons. In certain
circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services
and technologies. We may be required to obtain an export license before exporting a controlled item, and granting of a
required license cannot be assured. Compliance with the import laws that apply to our businesses may restrict our access
to, and may increase the cost of obtaining, certain products and could interrupt our supply of imported inventory.
Exported technologies necessary to develop and manufacture certain products are subject to U.S. export control laws and
similar laws of other jurisdictions. We may be subject to adverse regulatory consequences, including government
oversight of facilities and export transactions, monetary penalties and other sanctions for violations of these laws. In
certain instances, these regulations may prohibit the Company from developing or manufacturing certain of its products
for specific applications outside the United States. Failure to comply with any of these laws and regulations could result
in civil and criminal, monetary and 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 goods imported into the
United States, which may narrow the size of our markets, materially impact our revenues or increase our operating costs and
expose us to contract litigation.
In March 2018, President Trump announced new steel and aluminum tariffs, in April 2018, the U.S. Department of Commerce issued
a denial order against two companies in the telecommunications market, and in May 2019, the U.S. Department of Commerce placed
Huawei and its affiliates on the U.S. Entity List. Other international trade actions and initiatives also have been implemented, 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 restrictions
and duties, our business and profits may be materially and adversely affected. Further changes in the trade policy of the United States
or of other countries with which we do cross-border business, or additional sanctions, could result in retaliatory actions by other
countries that could materially and negatively impact the volume of economic activity in the United States or globally, which, in turn,
may decrease our access to customers and markets, reduce our revenues, and increase our operating costs.
Exports of certain of our products are subject to export controls imposed by the U.S. Government and administered by the U.S.
Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the
administering department. For products subject to the Export Administration Regulations, or EAR, administered by the Department of
Commerce's Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the
final destination, the identity of the end user and whether a license exception might apply. Virtually all exports of products subject to
the International Traffic in Arms Regulations, or ITAR, administered by the Department of State's Directorate of Defense Trade
Controls, require a license. Certain of our fiber optics products are subject to EAR controls and we historically have sold some
24
products, including certain products developed with government funding, subject to ITAR. Products developed and manufactured in
our foreign locations are subject to export controls of the applicable foreign nation. Given the current global political climate,
obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses for these shipments, or having one or
more of our customers be restricted from receiving exports from us, could significantly reduce our revenue and materially adversely
affect our business, financial condition and results of operations. Compliance with regulations of the United States and other
governments also subjects us to additional fees and costs. The absence of comparable restrictions on competitors in other countries
may adversely affect our competitive position. We have previously been the subject of inquiries from the Department of State and the
Department of Justice regarding compliance with ITAR. Although these inquiries were closed with no action being taken, we
expended significant time and resources to resolve them, and future inquiries of this type could also be costly to resolve.
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 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 changes in general economic
conditions in the areas where we do business. If we are unable to access funds at competitive rates, or if our short-term or long-term
borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategies
could be adversely affected.
In the future we may be required to raise additional capital through public or private financing or other arrangements. Such financing
may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business and prospects.
Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve
restrictive covenants that may limit our ability to undertake certain activities that we otherwise would find to be desirable. Further,
debt service obligations associated with any debt financing could reduce our profitability. If we cannot raise funds on acceptable terms,
we may not be able to grow our business or respond to competitive pressures.
We may not be able to settle conversions of our convertible senior notes in cash or repurchase the notes in accordance with
their terms.
Holders of our outstanding 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. 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 surrendered notes, 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.
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.
25
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 reflect declining market demands. Unexpected declines in customer demands can result in
excess or obsolete inventory and additional charges. Because certain of our sales, research and development, and internal
manufacturing overhead expenses are relatively fixed, a reduction in customer demand likely would decrease our gross margins and
operating income.
We may encounter increased competition.
We may encounter substantial competition from other companies in the same market, including established companies with significant
resources. Some of our competitors may have financial, technical, marketing or other capabilities that are more extensive than ours.
They may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not
be able to compete successfully against our present or future competitors. Our failure to compete effectively could have a material
adverse effect on our business, results of operations or financial condition.
There are limitations on the protection of our intellectual property and we may from time to time be involved in costly
intellectual property litigation or indemnification.
We rely on a combination of trade secret, patent, copyright and trademark laws, combined with employee confidentiality,
noncompetition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps we
take will be adequate to prevent misappropriation of our technology or intellectual property. Furthermore, there can be no assurance
that third parties will not assert infringement claims against us in the future.
Asserting our intellectual property rights or defending against third-party claims could involve substantial expense. In the event a
third-party were successful in a claim that one of our processes infringed its proprietary rights, we could be required to pay substantial
damages or royalties, or spend substantial amounts in order to obtain a license or modify processes so that they no longer infringe such
proprietary rights. Any such event could have a material adverse effect on our business, results of operations or financial condition.
A significant portion of our business is dependent on cyclical industries.
Our business is dependent on the demand for products produced by end-users of industrial lasers, optical communication products,
components for semiconductor capital equipment, and components for 3D sensing. Many of these end-users are in industries that have
historically experienced a highly cyclical demand for their products. As a result, demand for our products is subject to these cyclical
fluctuations. Fluctuations in demand could have a material adverse effect on our business, results of operations or financial condition.
Our global operations are subject to complex legal and regulatory requirements.
We manufacture products in 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 inside and outside of the United States
are subject to many legal and regulatory requirements, some of which are not aligned with others. These include tariffs, quotas, taxes
and other market barriers, restrictions on the export or import of technology, potentially limited intellectual property protection,
import and export requirements and restrictions, anti-corruption and anti-bribery laws, foreign exchange controls and cash repatriation
restrictions, foreign investment rules and regulations, data privacy requirements, competition laws, employment and labor laws,
pensions and social insurance, and environmental health and safety laws and regulations.
26
Compliance with these laws and regulations can be onerous and expensive, and requirements differ among jurisdictions. New laws,
changes in existing laws, and abrogation of local regulations by national laws may result in significant uncertainties in how they will
be interpreted and enforced. Failure to comply with any of these foreign laws and regulations could have a material adverse effect on
our business, results of operations or financial condition.
Changes in laws and regulations governing data privacy and data protection could have a material adverse impact on our
business.
We are subject to many data privacy, data protection, and data breach notification laws, including the European Union General Data
Protection Regulation (“GDPR”), which became effective in 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, and unauthorized disclosure of confidential information. If we are unable to prevent or contain
such security or privacy breaches, our operations could be disrupted or we could suffer legal claims, loss of reputation, financial loss,
property damage, or regulatory penalties.
We have entered into supply agreements 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 zinc selenide (“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.
27
In addition, we produce and use other high purity and relatively uncommon materials and compounds to manufacture our products
including, but not limited to, zinc sulfide (“ZnS”), gallium arsenide (“GaAs”), Yttrium Aluminum Garnet (“YAG”), Yttrium Lithium
Fluoride (“YLF”), Calcium Fluoride, Germanium, Selenium, Telluride, Bismuth Telluride (“Bi2Te3”) and silicon carbide (“SiC”). A
significant failure of our internal production processes or our suppliers to deliver sufficient quantities of these necessary materials on a
timely basis could have a material adverse effect on our business, results of operations or financial condition.
Increases in commodity prices may adversely affect our results of operations and financial condition.
We are exposed to a variety of market risks, including the effects of increases in commodity prices. Our businesses purchase, produce
and sell high-purity selenium and other raw materials based upon quoted market prices from minor metal exchanges. The negative
impact from increases in commodity prices might not be recovered through our product sales which could have a material adverse
effect on our net earnings and financial condition.
We use and generate potentially hazardous substances that are subject to stringent environmental regulations.
Hazardous substances used or generated in some of our research and manufacturing facilities are subject to stringent environmental
regulation. We believe that our handling of such substances is in material compliance with applicable 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 these gaseous materials to
minimize the chances of its accidental release into the atmosphere.
With respect to the manufacturing, use, storage and disposal of the low-level radioactive material Thorium Fluoride, our facilities and
procedures have been inspected and licensed by the Nuclear Regulatory Commission. Thorium-bearing by-products are collected and
shipped as solid waste to a government-approved low-level radioactive waste disposal site in Clive, Utah.
The generation, use, collection, storage and disposal of all other hazardous by-products, such as suspended solids containing heavy
metals or airborne particulates, are believed by us to be in material compliance with regulations. We believe that we have obtained all
of the permits and licenses required for operation of our business.
Although we do not know of any material environmental, safety or health problems in our properties or processes 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.
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.
The enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017 significantly affected U.S. tax law by changing how
the U.S. imposes tax on multinational corporations. The U.S. Department of Treasury has broad authority under the Tax Act to issue
regulations and interpretive guidance. We have applied available guidance to estimate our tax obligations, but new guidance issued by
the U.S. Treasury Department may cause us to make adjustments to our tax estimates in future periods.
In addition, we are subject to regular examination of our income tax returns by the 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.
28
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 $50.75 and a low of $29.31 in
the fiscal year ended June 30, 2019. 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.
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 the intent to acquire, 20% or more of a corporation’s voting power, subject to certain exceptions. These
provisions:
•
•
•
•
provide the other shareholders of the corporation with certain rights against the acquiring group or person;
prohibit the corporation from engaging in a broad range of business combinations with the acquiring group or person;
restrict the voting and other rights of the acquiring group or person; and
provide that certain profits realized by the acquiring group or person from the sale of our equity securities belong to and
are recoverable by us.
29
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 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.
We contract with a number of large end-user service providers and product companies that have considerable bargaining
power, which may require us to agree to terms and conditions that could have an adverse effect on our business or ability to
recognize revenues.
Large end-user service providers and product companies comprise a significant portion of our customer base. These customers
generally have greater purchasing power than smaller entities and, accordingly, often request and receive more favorable terms from
suppliers, including us. As we seek to expand our sales to existing customers and acquire new customers, we may be required to agree
to terms and conditions that are favorable to our customers and that may affect the timing of our ability to recognize revenue, increase
our costs and have an adverse effect on our business, financial condition, and results of operations. Furthermore, large customers have
increased buying power and ability to require onerous terms in our contracts with them, including pricing, warranties, and
indemnification terms. If we are unable to satisfy the terms of these contracts, it could result in liabilities of a material nature,
including litigation, damages, additional costs, loss of market share and loss of reputation. Additionally, the terms these large
customers require, such as most-favored customer or exclusivity provisions, may impact our ability to do business with other
customers and generate revenues from such customers.
We may be adversely affected by climate change regulations.
In many of the countries in which we operate, government bodies are increasingly enacting legislation and regulations in response to
potential impacts of climate change. These laws and regulations may be mandatory. They have the potential to impact our operations
directly or indirectly as a result of required compliance by our customers or our supply chain. Inconsistency of regulations may also
affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change legislation,
regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in
which we operate.
We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations, added
costs to purchase 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.
30
We depend on large purchases from a few significant customers, and any loss, cancellation, reduction or delay in purchases by
these customers could harm our business.
A small number of customers have consistently accounted for a significant portion of our revenues, although none individually greater
than 10% of total revenues. Our success will depend on our continued ability to develop and manage relationships with our major
customers. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue
for the foreseeable future. We may not be able to offset any decline in revenues from our existing major customers with revenues from
new customers, and our quarterly results may be volatile because we are dependent on large orders from these customers that may be
reduced, delayed, or cancelled. The markets in which we have historically sold our optical subsystems and components products are
dominated by a relatively small number of systems manufacturers, thereby limiting the number of our potential customers.
Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically
important to our business. We cannot ensure that we will be able to retain our major customers, attract additional customers, or that
our customers will be successful in selling their products that incorporate our products. We have in the past experienced delays and
reductions in orders from some of our major customers. In addition, our customers have in the past sought price concessions from us,
and we expect that they will continue to do so in the future. Expense reduction measures that we have implemented over the past
several years, and additional action we are taking to reduce costs, may adversely affect our ability to introduce new and improved
products which may, in turn, adversely affect our relationships with some of our key customers. Further, some of our customers may
in the future shift their purchases of products from us to our competitors or to joint ventures between these customers and our
competitors, or may in certain circumstances produce competitive products themselves. The loss of one or more of our major
customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with additional
customers, or future price concessions that we may make could significantly harm our business.
The manufacturing of our products may be adversely affected if we are unable to manufacture certain products in our
manufacturing facilities.
We manufacture some of the components that we provide to our contract manufacturer, along with our own finished goods. For some
of the components and finished goods we are the sole manufacturer. Our manufacturing processes are highly complex, and issues are
often difficult to detect and correct. From time to time we have experienced problems achieving acceptable yields in our
manufacturing facilities, resulting in delays in the availability of our products. In addition, if we experience problems with our
manufacturing facilities, it would be costly and require a long period of time to move the manufacture of these components and
finished good products to a different facility or contract manufacturer, which could result in interruptions in supply, and would likely
materially impact our financial condition and results of operations. In addition, for a variety of reasons, including changes in
circumstances at our contract manufacturers or our own business strategies, we may be required to, or voluntarily may, transfer the
manufacturing of certain products to other manufacturing sites.
Changes in manufacturing processes are often required due to changes in product specifications, changing customer needs and the
introduction of new products. These changes may reduce manufacturing yields at our contract manufacturers and at our own
manufacturing facilities, resulting in reduced margins on those products. In addition, many of our products are sourced from suppliers
based outside of the United States, primarily in Asia. Uncertainty with respect to tax and trade policies, tariffs and government
regulations affecting trade between the United States and other countries has recently increased. Major developments in tax policy or
trade relations, such as the imposition of tariffs on imported products, could increase our product and product-related costs or require
us to seek alternative suppliers, either of which could result in decreased sales or increases product and product-related costs.
Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or non-
cancelable purchase commitments.
We base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends which are
highly unpredictable. Some of our purchase commitments are not cancelable, and in some cases we are required to recognize a charge
representing the amount of material or capital equipment purchased or ordered, which exceeds our actual requirements. Should
revenues in future periods fall substantially below our expectations, or should we fail to accurately forecast changes in demand mix,
we could be required to record substantial charges for obsolete or excess inventories or non-cancelable purchase commitments
31
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to
produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and Nasdaq listing requirements. The
Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control
over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal
control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including
accounting-related costs and significant management oversight.
Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could
cause us to delay reporting of our financial results, be subject to one or more investigations or enforcement actions by state or federal
regulatory agencies, stockholder lawsuits or other adverse actions requiring us to incur defense costs, pay fines, settlements or
judgments. Any such failures could also cause investors to lose confidence in our reported financial and other information, which
would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these
requirements, we may not be able to remain listed on the Nasdaq stock market.
Risks Relating to the Merger
Although II-VI expects that its acquisition of Finisar will result in cost savings, synergies and other benefits, the combined
company may not realize those benefits because of integration difficulties and other challenges.
The success of II-VI’s acquisition of Finisar will depend in large part on the success of the management of the combined company in
integrating the operations, strategies, technologies and personnel of the two companies following the completion of the Merger. The
combined company may fail to realize some or all of the anticipated benefits of the Merger if the integration process takes longer than
expected or is more costly than expected. The failure of the combined company to meet the challenges involved in successfully
integrating the operations of the two companies or to otherwise realize any of the anticipated benefits of the Merger, including
additional cost savings and synergies, could impair the operations of the combined company. In addition, II-VI anticipates that the
overall integration of Finisar will be a time-consuming and expensive process that, without proper planning and effective and timely
implementation, could significantly disrupt the combined company’s business.
Potential difficulties the combined company may encounter in the integration process include the following:
•
•
•
•
•
•
•
•
the integration of management teams, strategies, technologies and operations, products and services;
the disruption of ongoing businesses and distraction of their respective management teams from ongoing business
concerns;
the retention of and possible decrease in business from the existing customers of both companies;
the creation of uniform standards, controls, procedures, policies and information systems;
the reduction of the costs associated with each company’s operations;
the integration of corporate cultures and maintenance of employee morale;
the retention of key employees; and
potential unknown liabilities associated with the Merger.
The anticipated cost savings, synergies and other benefits of the Merger assume a successful integration of the companies and are
based on projections and other assumptions, which are inherently uncertain. Even if integration is successful, anticipated cost savings,
synergies and other benefits may not be achieved.
II-VI and Finisar will incur significant transaction-related costs in connection with the Merger.
II-VI and Finisar expect to incur a number of non-recurring transaction-related costs associated with completing the Merger,
combining the operations of the two companies and achieving desired synergies. These fees and costs will be significant. Non-
recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing
costs. II-VI will incur significant costs with respect to the financing for the cash consideration to be paid in connection with the
Merger. Additional unanticipated costs may be incurred in the integration of the businesses of II-VI and Finisar. There can be no
assurance that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of
the two businesses, will offset the incremental transaction-related costs over time. Thus, any net benefit may not be achieved in the
near term, the long term or at all.
32
Our pending acquisition of Finisar is subject to conditions, including certain conditions that may not be satisfied, and may not
be completed on a timely basis, or at all. Failure to complete the Merger could have material and adverse effects on us.
The completion of the Merger is subject to a number of conditions, which make the completion and timing of the completion of the
Merger uncertain. Also, either Finisar or II-VI may terminate the Merger Agreement if the Merger has not been completed by
November 8, 2019, although this termination right is not available if failure to comply with the Merger Agreement is a principal cause
of or results in the failure of the Merger to occur before November 8, 2019.
If the Merger is not completed on a timely basis, or at all, II-VI’s and Finisar’s respective ongoing businesses may be adversely
affected and, without realizing any of the benefits of having completed the Merger, II-VI and Finisar will be subject to a number of
risks, including the following:
•
•
•
•
II-VI and Finisar will be required to pay certain costs relating to the Merger, whether or not the Merger is completed,
such as legal, accounting, financial advisor and printing fees;
under the Merger Agreement, each of II-VI and Finisar is subject to certain restrictions on the conduct of its business
prior to completing the Merger, which may adversely affect its ability to execute certain of its business strategies;
time and resources committed by II-VI’s and Finisar’s respective management to matters relating to the Merger could
otherwise have been devoted to pursuing other beneficial opportunities; and
the market price of II-VI Common Stock could decline below current market prices to the extent that such current market
prices reflect a market assumption that the Merger will be completed.
In addition, if the Merger is not completed, II-VI may experience negative reactions from the financial markets and from its customers
and employees. II-VI could also be subject to litigation related to any failure to complete the Merger or to enforcement proceedings
commenced against II-VI to perform its obligations under the Merger Agreement. If the Merger is not completed, II-VI cannot assure
its shareholders that the risks described above will not materialize and will not adversely affect the business, financial results and
stock prices of II-VI.
Each of II-VI and Finisar is subject to business uncertainties and contractual restrictions while the Merger is pending, which
could adversely affect each of Finisar’s and II-VI’s business and operations.
Under the terms of the Merger Agreement, Finisar and II-VI are subject to certain restrictions on the conduct of their respective
business prior to completing the Merger, which may adversely affect each party’s ability to execute certain of its business strategies.
Such limitations could negatively affect each party’s businesses and operations prior to the completion of the Merger. Furthermore,
the process of planning to integrate two businesses and organizations for the post-Merger period can divert management attention and
resources and could ultimately have an adverse effect on each of Finisar and II-VI.
In connection with the Merger, parties with which Finisar or II-VI does business may experience uncertainty associated with the
Merger, including with respect to current or future business relationships with Finisar, II-VI or the combined business. It is possible
that some customers, suppliers and other persons with whom Finisar or II-VI has a business relationship may delay or defer certain
business decisions or might decide to seek to terminate, change or renegotiate their relationships with Finisar or II-VI, as applicable,
as a result of the Merger, which could negatively affect Finisar’s or II-VI’s revenues, earnings and cash flows, as well as the market
price of shares of II-VI Common Stock, regardless of whether the Merger is completed.
The market price of II-VI Common Stock may decline in the future as a result of the Merger.
The market price of II-VI Common Stock may decline in the future as a result of the Merger for a number of reasons, including:
•
•
•
the unsuccessful integration of Finisar and II-VI (including for the reasons set forth in the preceding risk factor);
the need to pay cash amounts owing on conversion of, or in respect of any demands for repurchase of, Finisar’s
outstanding convertible notes in connection with the Merger and to issue II-VI Common Stock in connection with any
future conversion of the Finisar’s outstanding convertible notes, which may cause substantial dilution to holders of II-VI
Common Stock; and
the failure of the combined company to achieve the perceived benefits of the Merger, including financial results, as
rapidly as or to the extent anticipated by financial or industry analysts.
These factors are, to some extent, beyond the control of II-VI. As a consequence, II-VI shareholders could lose the value of their
investment in II-VI Common Stock.
33
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Information regarding our principal U.S. properties at June 30, 2019 is set forth below:
Location
Primary Use(s)
Primary Business Segment(s)
Approximate
Square
Footage
Saxonburg, PA
Manufacturing and Research and
Development
II-VI Laser Solutions and II-VI
235,000
Performance Products
Ownership
Owned and
Leased
Warren, NJ
Newark, DE
Murrieta, CA
Champaign, IL
Dallas, TX
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Manufacturing and
Research and Development
Warrendale, PA Corporate Administrative Offices
Monroe, CT
Manufacturing and
Research and Development
II-VI Laser Solutions
159,000
Leased
II-VI Performance Products
135,000
Leased
II-VI Performance Products
108,000
Leased
II-VI Laser Solutions
69,000
Leased
II-VI Performance Products
N/A
II-VI Performance Products
68,000
63,000
48,000
Owned and
Leased
Leased
Leased
Easton, PA
Manufacturing and
II-VI Laser Solutions and II-VI
48,000
Leased
Performance Products
Pine Brook, NJ
Research and Development
Manufacturing and
Research and Development
II-VI Performance Products
47,000
Leased
Santa Rosa, CA Manufacturing and
II-VI Photonics
39,000
Leased
Starkville, MS
Tustin, CA
Research and Development
Manufacturing
Manufacturing and
Research and Development
II-VI Performance Products
II-VI Performance Products
35,000
31,000
Leased
Leased
Philadelphia, PA Manufacturing and
II-VI Performance Products
30,000
Leased
Research and Development
Hillsborough, NJ Manufacturing and
II-VI Performance Products
23,000
Leased
Research and Development
We also maintain some additional small research and development, distribution, and administrative facilities in leased space in the
United States.
34
Information regarding our principal foreign properties at June 30, 2019 is set forth below:
Location
China
Primary Use(s)
Manufacturing, Research and
Development, and Distribution
Primary Business Segment(s)
II-VI Laser Solutions, II-VI
Photonics and II-VI Performance
Products
Approximate
Square
Footage
1,694,000
United Kingdom
Philippines
Manufacturing, Research and
Development
Manufacturing
II-VI Laser Solutions and II-VI
319,000
Photonics
II-VI Laser Solutions and II-VI
318,000
Vietnam
Manufacturing
Switzerland
Germany
Manufacturing, Research and
Development, and Distribution
Manufacturing and Distribution
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
192,000
118,000
81,000
Ownership
Leased
Owned and
Leased
Leased
Owned and
Leased
Leased
Owned and
Leased
Singapore
Manufacturing
II-VI Laser Solutions and II-VI
38,000
Leased
Performance Products
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.
35
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.” As of August 12,
2019, there were approximately 824 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 convertible notes. The shares that were purchased by the Company pursuant to this authorization were
retained as treasury stock and are available for general corporate purposes. The Company purchased 1,414,900 shares of its common
stock for approximately $49.9 million pursuant to this authorization.
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions
from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the
Company are retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30, 2019, the
Company purchased 50,000 shares of its common stock for $1.6 million under this program. The Company did not repurchase shares
pursuant to this Program during the fiscal years ended June 30, 2018 and 2017. As of June 30, 2019, the Company has cumulatively
purchased 1,366,587 shares of its common stock pursuant to the Program for approximately $20.7 million. The dollar value of shares
as of June 30, 2019 that may yet be purchased under the Program is approximately $29.3 million
The following table provides information with respect to purchases of the Company’s equity securities during the quarter ended June
30, 2019.
Period
April 1, 2019 to April 30, 2019
May 1, 2019 to May 31, 2019
June 1, 2019 to June 30, 2019
Total Number of
Shares Purchased
$
-
2,594 (1) $
$
-
Average Price Paid
Per Share
-
32.86
32.32
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs
Dollar Value of
Shares That May
Yet be Purchased
Under the
Program
-
-
50,000
$
$
$
30,906,904
30,906,904
29,290,759
(1)
Includes 2,594 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.
36
The information incorporated by reference in Item 12 of this Annual Report on Form 10-K, from our 2019 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, 2014, through June 30, 2019. The Company’s current fiscal year peer group includes Cabot Microelectronics
Corporation, Franklin Electric Co. Inc., MKS Instruments, Inc., Silicon Laboratories Inc., Lumentum Holdings Inc., Finisar
Corporation, Coherent, Inc. and Corning Incorporated.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among II-VI Incorporated, the NASDAQ Composite Index,
and a Peer Group
$350
$300
$250
$200
$150
$100
$50
$0
6/14
6/15
6/16
6/17
6/18
6/19
II-VI Incorporated
NASDAQ Composite
Peer Group
*$100 invested on 6/30/14 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
37
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.
2019
2018
2017
2016
2015
Year Ended June 30,
($000 except per share data)
Statement of Earnings
Net revenues
Net earnings
Basic earnings per share
Diluted earnings per share
Diluted weighted average shares outstanding
June 30,
($000)
Balance Sheet
Working capital
Total assets
Long-term debt
Total debt
Retained earnings
Shareholders' equity
$ 1,362,496 $ 1,158,794 $
107,517
1.69
1.63
65,804
88,002
1.41
1.35
65,133
972,046 $
95,274
1.52
1.48
64,507
827,216 $
65,486
1.07
1.04
62,909
741,961
65,975
1.08
1.05
62,586
2019
2018
2017
2016
2015
$
542,348 $
525,370 $
517,344 $
411,721 $
373,812
1,057,273
155,066
175,066
587,302
729,081
1,953,773
443,163
466,997
943,581
1,133,209
1,761,661
419,013
439,013
836,064
1,024,311
1,477,297
322,022
342,022
748,062
900,563
1,211,981
215,307
235,307
652,788
782,338
38
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, aerospace and defense, consumer electronics, semiconductor capital
equipment, life science and automotive applications and markets. The Company produces a wide variety of application-specific
photonic and electronic materials and components, and deploys them in various forms, including integration with advanced software.
The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing engineered materials and
optoelectronic components and devices for precision use in industrial materials processing, optical communications, consumer
electronics, semiconductor capital 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, aerospace and defense, semiconductor, medical and life science markets, consumer, U.S.
government prime contractors, various U.S. Government agencies and thermoelectric integrators. `
In September 2018, November 2018, and March 2019, the Company completed its acquisitions of CoAdna Holdings, Inc. (“CoAdna”),
an additional product line, and Redstone Aerospace Corporation (“Redstone”), respectively. See Note 3, Acquisitions, to our
Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K. The operating results of these
acquisitions have been reflected in the selected financial information of the Company’s II-VI Photonics segment since the respective
dates of the acquisitions, with the exclusion of Redstone which is reflected in the II-VI Performance Products Segment.
As we grow, we are focused on scaling our Company and deriving the continued benefits of vertical integration as we strive to be a
best in class competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company
operates or is organized in the future to enable the most efficient implementation of its strategy.
Pending Acquisition of Finisar Corporation
II-VI and Finisar have entered into an Agreement and Plan of Merger, dated as of November 8, 2018 (the “Merger Agreement”).
Pursuant to the terms of the Merger Agreement, Mutation Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of
II-VI, will be merged with and into Finisar, and Finisar will continue as the surviving corporation in the merger and a wholly owned
subsidiary of II-VI (the “Merger”).
If the Merger is consummated, Finisar stockholders will be entitled to receive, at their election, consideration per share of common
stock of Finisar (the “Finisar Common Stock”) consisting of (i) $26.00 in cash, without interest (the “Cash Consideration”), (ii)
0.5546 shares of II-VI common stock (the shares, the “II-VI Common Stock,” and the consideration, the “Stock Consideration”), or
(iii) a combination of $15.60 in cash, without interest, and 0.2218 shares of II-VI Common Stock (the “Mixed Consideration,” and,
together with the Cash Consideration and the Stock Consideration, the “Merger Consideration”). The Cash Consideration and the
Stock Consideration are subject to proration adjustment pursuant to the terms of the Merger Agreement such that the aggregate
Merger Consideration will consist of approximately 60% cash and approximately 40% II-VI Common Stock assuming a per share
price of II-VI common stock equal to the price when the Merger Agreement was signed on November 8, 2018, which was $46.88 per
share.
39
At the effective time of the Merger (the “Effective Time”), each option granted pursuant to Finisar’s 2005 Stock Incentive Plan, as
such plan has been further amended and restated (each, a “Finisar Stock Option”), or portion thereof, that is outstanding and
unexercised as of immediately prior to the Effective Time (whether vested or unvested) will be cancelled, terminated and converted
into the right to receive an amount of Mixed Consideration that would be payable to a holder of such number of shares of Finisar
Common Stock equal to the quotient of (i) the product of (a) the excess, if any, of $26.00 over the exercise price per share of such
Finisar Stock Option multiplied by (b) the number of shares of Finisar Common Stock subject to such Finisar Stock Option, divided by
(ii) $26.00.
At the Effective Time, each restricted stock unit granted pursuant to Finisar’s 2005 Stock Incentive Plan, as such plan has been further
amended and restated (each, a “Finisar Restricted Stock Unit”), or portion thereof , that is outstanding and subject to a performance-
based vesting condition that relates solely to the value of Finisar Common Stock will, to the extent such Finisar Restricted Stock Unit
vests in accordance with its terms in connection with the Merger (the “Participating RSUs”), be cancelled and extinguished and
converted into the right to receive the Cash Consideration, the Stock Consideration or the Mixed Consideration at the election of the
holder of such Participating RSUs, subject to proration adjustment.
At the Effective Time, each Finisar Restricted Stock Unit (or portion thereof) that is outstanding and unvested, does not vest in
accordance with its terms in connection with the Merger and is either (x) subject to time-based vesting requirements only or (y)
subject to a performance-based vesting condition other than the value of Finisar Common Stock will be assumed by II-VI (each, an
“Assumed RSU”). Each Assumed RSU will be subject to substantially the same terms and conditions as applied to the related Finisar
Restricted Stock Unit immediately prior to the Effective Time, including the vesting schedule (and the applicable performance-vesting
conditions in the case of a grant contemplated by clause (y) of the preceding sentence) and any provisions for accelerated vesting
applicable thereto, except that the number of shares of II-VI Common Stock subject to each Assumed RSU will be equal to the
product of (i) the number of shares of Finisar Common Stock underlying such unvested Finisar Restricted Stock Unit award as of
immediately prior to the Effective Time multiplied by (ii) the sum of (a) 0.2218 plus (b) the quotient obtained by dividing (1) $15.60
by (2) the volume weighted average price per share of II-VI Common Stock (rounded to the nearest cent) on the Nasdaq Global Select
Market for the ten consecutive trading days ending on (and including) the third trading day immediately prior to the Effective Time
(with the resulting number rounded down to the nearest whole share).
II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and that registration statement became effective
in accordance with the provisions of Section 8(a) of the Securities Act of 1933, as amended, on February 7, 2019. Shareholders of II-
VI and stockholders of Finisar voted to approve proposals related to the Merger at special meetings held on March 26, 2019 by the
respective companies.
The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to the Merger has
expired without a request for additional information. Other regulatory approvals applicable to the Merger have been obtained in
Germany, Mexico and Romania.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including
review and approval of the Merger by the State Administration for Market Regulation in China. The Company is planning to refile
with the State Administration for Market Regulation in China, extending the approval period. Subject to the satisfaction or waiver of
each of the closing conditions, II-VI and Finisar expect that the Merger will be completed in the second half of calendar
2019. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a
different time or not at all.
On November 8, 2018, in connection with its entry into the Merger Agreement, II-VI entered into a commitment letter (together with a
related fee letter) with Bank of America, N.A., which was subsequently amended and restated on December 7, 2018 and on
December 14, 2018 (together with one or more related fee letters, the “Commitment Letter”). Subject to the terms and conditions set
forth in the Commitment Letter, the lender parties thereto severally committed to provide 100% of up to $2.425 billion in aggregate
principal amount of senior secured credit facilities of II-VI.
On March 4, 2019, II-VI entered into a Credit Agreement, dated as of March 4, 2019 (as amended, the “New Credit Agreement”), by
and among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other
lenders party thereto. II-VI also entered into Amendment No. 1 to Credit Agreement, dated as of May 24, 2019, by and among the
Company, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, which includes the final results of the
syndication of the Term A Facility (as defined below). Pursuant to the terms and subject to the conditions therein, the New Credit
Agreement provides for senior secured financing of $1.705 billion in the aggregate, consisting of (i) a five-year senior secured first-
lien term A loan facility in an aggregate principal amount of $1.255 billion (the “Term A Facility”) and (ii) a five-year senior secured
first-lien revolving credit facility in an aggregate principal amount of $450.0 million (the “Revolving Credit Facility” and together
with the Term A Facility, the “New Senior Credit Facilities”). The New Credit Agreement also provides for a letter of credit sub-
facility not to exceed $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million, subject to adjustment in
accordance with the terms of the New Credit Agreement. II-VI anticipates using the proceeds from the Term A Facility, together with
40
a separately committed term B loan facility in an aggregate principal amount of up to $720.0 million (the “Term B Facility”) and cash
and short-term investments of II-VI and Finisar, to pay the cash portion of the merger consideration payable in connection with the
Merger and related fees and expenses. II-VI currently does not intend to draw on the Revolving Credit Facility in order to fund the
cash portion of the merger consideration payable in connection with the Merger.
The funding obligations of the lenders under the New Senior Credit Facilities are subject to certain currently unsatisfied conditions,
including the consummation of the Merger. Accordingly, no borrowings are currently outstanding under the New Senior Credit
Facilities, and II-VI currently is not able to borrow under the New Senior Credit Facilities. Further, II-VI expects that the New Credit
Agreement will be amended prior to the consummation of the Merger to reflect syndication of the Term B Facility and to finalize
certain other terms in the New Credit Agreement. Upon the consummation of the Merger, the New Senior Credit Facilities, governed
by the New Credit Agreement as it may be amended as of such time, will be used (i) to refinance in full the Amended Credit Facility
(as defined in Note 9 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K)
and (ii) on or after the date of the consummation of the Merger, to repay amounts owed in connection with Finisar’s outstanding
convertible notes, currently in an aggregate principal amount outstanding of $575.0 million, including with the proceeds of a portion
of the Term A Facility which will be available to II-VI for a certain period after the initial funding under the New Senior Credit
Facilities.
Unless and until the Merger is consummated and the other currently unsatisfied conditions to the funding obligations of the lenders
under the New Senior Credit Facilities are satisfied or waived, the Amended Credit Facility remains in effect in accordance with its
terms.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the
United States (“U.S. GAAP”) and the Company’s discussion and analysis of its financial condition and results of operations requires
the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its Consolidated
Financial Statements and accompanying notes. Note 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 business combinations, impairment of goodwill
and indefinite-lived intangible assets, and income taxes. 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 policies and 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.
Business Combinations
The Company accounts for business acquisitions under the acquisition method of accounting whereby the total purchase price was
allocated to tangible and intangible assets acquired and liabilities assumed based on the respective fair values. The Company believes
that the accounting estimates related to business combinations are “critical accounting estimates” because the Company must, in
determining the fair value of assets acquired, make assumptions about the future performance of the acquired business, including
among other things, the forecasted revenue attributable to the asset group. The valuation methodologies applied require the Company
to determine a risk-adjusted discount rate that is reflective of the level of risk associated with these estimates to discount the forward-
looking estimates to present value. Different assumptions may result in materially different values for these assets, which would
impact the Company’s financial position and future results of operations.
41
The Company’s intangible assets are comprised of customer relationships and developed technology. The estimated fair value of the
customer relationships and developed technology are determined using the multi-period excess earnings method and relief from
royalty method, respectively. Both methods require forward looking estimates that are discounted to determine the fair value of the
intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with
the asset group.
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, 2019, 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, 2019 and 2018.
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 impairment of goodwill or indefinite-lived intangible assets for the fiscal year
ended June 30, 2019.
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
42
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.
Fiscal Year 2019 Compared to Fiscal Year 2018
The Company aligns its organizational structure into the following three reporting segments for the purpose of making operational
decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products.
The Company is reporting financial information (revenue through operating income) for these reporting segments in this Annual
Report on Form 10-K.
The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 2019 and 2018
($ 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, 2019
% of
Revenues
Year Ended
June 30, 2018
% of
Revenues
$
1,362.4
841.1
521.3
100.0% $
61.7
38.3
1,158.8
696.6
462.2
139.2
233.5
19.8
128.8
21.3
107.5
$
10.2
17.1
1.5
9.5
1.6
7.9% $
116.9
208.6
14.6
122.2
34.2
88.0
100.0%
60.1
39.9
10.1
18.0
1.3
10.5
3.0
7.6%
Diluted earnings per share
$
1.63
$
1.35
Executive Summary
Net earnings for fiscal year 2019 were $107.5 million ($1.63 per-share diluted), compared to $88.0 million ($1.35 per-share diluted)
for fiscal year 2018. The increase in net earnings during the current fiscal year from fiscal year 2018 was primarily driven by
incremental margin realized on the 18% revenue increase due primarily to strong demand from customers in the optical
communications market. Offsetting the incremental margin on net earnings, the Company realized increased investments in internal
research and development during the current fiscal year addressing new product development in growing mega-trend markets as well
as higher selling, general and administrative expenses supporting the growing revenue base. During the current fiscal year, the
Company incurred approximately $18.6 million in acquisition and integration expenses on its completed acquisitions as well as its
pending acquisition of Finisar, which is included in selling, general and administrative expenses. The Company’s effective income tax
rate of 16.6% was lower than the 28% effective tax rate for fiscal year 2018. The higher income tax rate in fiscal year 2018 was the
result of the adoption of the Tax Act and the income tax expense associated with the transition tax.
Consolidated
Revenues. Revenues for the year ended June 30, 2019 increased 18% to $1,362.4 million, compared to $1,158.8 million for the prior
fiscal year. The increase in revenues during the current fiscal year was driven by strong demand from customers across the majority of
the Company’s business units. In particular, II-VI Photonics experienced a 31% revenue growth from the prior fiscal year, primarily
driven by increased demand from customers in the optical communication market. Specifically, the segment saw increased demand for
ROADM and other optical communication products addressing the growing deployment of 5G optical networks. II-VI Performance
Products recorded a 23% 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 and communication end markets.
In addition, this segment also realized increased revenues from its aerospace and defense products addressing strengthening demand
from customers in the intelligence, surveillance and reconnaissance markets.
43
Gross margin. Gross margin for the year ended June 30, 2019 was $521.3 million, or 38.3%, of total revenues, compared to $462.2
million, or 39.9% of total revenues, for the same period last fiscal year. Gross margin as a percentage of revenues decreased 160 basis
points compared to the prior fiscal year despite the 18% increase in revenues during this same period. The Company’s II-VI
Photonic’s gross margin was negatively impacted by a shift in product mix to lower margin products while II-VI Laser Solution’s
experienced under-absorption of manufacturing costs for its 3D Sensing product line due to continued delays in the program and
underutilization of capacity.
Internal research and development. Company-funded internal research and development (“IR&D”) expenses for the fiscal year
ended June 30, 2019 were $139.2 million, or 10.2% of revenues, compared to $116.9 million, or 10.1% of revenues, last fiscal year.
The increase in IR&D expenses is primarily due to the Company continuing to invest in new products and processes across all its
businesses including investments in 5G technology, 3D Sensing and other engineered material applications. IR&D expenses as a
percentage of revenues were consistent between both fiscal years, and the Company anticipates this percentage to continue to range
between 10% and 15% of revenues as the Company continues investing in new product and process development.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2019 were
$233.5 million, or 17.1% of revenues, compared to $208.6 million, or 18.0% of revenues, last fiscal year. During fiscal year 2019, the
Company announced its intention to acquire Finisar, and incurred approximately $15.6 million of related transaction expenses. In
addition to the transaction expenses, the Company incurred higher SG&A expenses to support its growing revenue base. The
Company has been successful in capitalizing on synergies from its recent acquisitions to improve its operating leverage.
Interest and other, net. Interest and other, net for the year ended June 30, 2019 was expense of $19.8 million compared to expense of
$14.6 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. The increase in interest and other, net was primarily due to increased interest expense during the
current fiscal year of approximately $4.1 million due to the higher levels of outstanding debt.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2019 was 16.6%, compared to an effective tax rate of
28.0% last fiscal year. The prior fiscal year’s effective tax rate was negatively impacted by the U.S. enacted tax legislation and the
recording the provision for the transition tax under the new tax law.
Segment Reporting
Revenues and operating income for each of the Company’s reportable segments are discussed below. Operating income differs from
income from operations in that operating income excludes certain operational expenses included in other expense (income) – net, as
reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance
over which management has direct control and is used by management in its evaluation of segment performance. See Note 14 to the
Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the
Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by
reference.
Effective July 1, 2018, the Company realigned its composition of its operating segments. The Company moved Laser Systems Group,
from II-VI Laser Solutions to II-VI Photonics and moved Integrated Photonics, Inc. from II-VI Photonics to II-VI Performance
Products. All applicable segment information has been restated to reflect this change. Additionally, the Company renamed Laser
Systems Group to II-VI Industrial Laser.
II-VI Laser Solutions ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Decrease
2019
2018
$
$
396.6 $
40.3 $
405.9
40.1
(2%)
0%
Revenues for the fiscal year ended June 30, 2019 for II-VI Laser Solutions decreased 2% to $396.6 million, compared to revenues of
$405.9 million last fiscal year. The decrease in revenues during the current fiscal year was the result of lower demand from industrial
based customers for the Company’s CO2 and fiber laser optics and components.
Operating income for the fiscal year ended June 30, 2019 for II-VI Laser Solutions of $40.3 million remained consistent compared to
the last fiscal year.
44
II-VI Photonics ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2019
2018
$
$
638.8 $
81.9 $
486.5
63.2
31%
30%
The above operating results for the year ended June 30, 2019 include the Company’s acquisitions of CoAdna in September 2018 and
the product line which was acquired in November 2018.
Revenues for the year ended June 30, 2019 for II-VI Photonics increased 31% to $638.8 million, compared to $486.5 million for last
fiscal year. Included in the current year’s revenues were $12.4 million of revenues, excluding sales to customers through our sales
offices, from the above acquisitions. Exclusive of these acquisitions, the increase in revenues was primarily attributed to increased
demand for optical communication products driven by the China broadband initiative as China continues to build out its broadband
networks. Specifically, the segment has seen increased demand for its ROADM and EDFA product lines to address this and other
market demands, including the accelerating demand for 5G technology.
Operating income for the year ended June 30, 2019 for II-VI Photonics increased 30% to $81.9 million, compared to an operating
income of $63.2 million last fiscal year. The increase in operating income was primarily due to incremental margin realized on
increased revenues.
II-VI Performance Products ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2019
2018
$
$
327.0 $
42.2 $
266.4
33.5
23%
26%
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, 2019 for II-VI Performance Products increased 23% to $327.0 million, compared to $266.4
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 its thermoelectric and aerospace and
defense markets.
Operating income for the year ended June 30, 2019 for II-VI Performance Products increased 26% to $42.2 million, compared to
$33.5 million for last fiscal year. The increase in operating income during the current fiscal year was primarily driven by incremental
margin realized by increased sales volume, as well as favorable product mix toward higher margin products.
45
Fiscal Year 2018 Compared to Fiscal Year 2017
The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 2018 and 2017.
($ 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
696.6
462.2
100.0% $
60.1
39.9
116.9
208.6
14.6
122.2
34.2
88.0
$
10.1
18.0
1.3
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 shares
$
1.35
$
1.48
Consolidated
Revenues. Revenues for the year ended June 30, 2018 increased 19% to $1,158.8 million, compared to $972.0 million for the fiscal
year ended June 30, 2017. The increase in revenues during fiscal year 2018 were 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 fiscal year 2017,
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 fiscal year 2018, driven by
strengthening demand for SiC substrate products addressing RF electronics and high-power switching and power conversion systems
for automotive, communication and aerospace and defense markets.
Gross margin. Gross margin as a percentage of revenues for the year ended June 30, 2018 was $462.2 million, or 39.9%, compared to
$388.3 million, or 39.9%, for the fiscal year ended June 30, 2017. Gross margin as a percentage of revenues was consistent with the
fiscal year 2017 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 expenses for the year ended June 30, 2018
were $116.9 million, or 10.1% of revenues, compared to $96.8 million, or 10.0% of revenues, for the fiscal year ended June 30, 2017.
The increase in IR&D expenses is primarily the result of the acquisition of Kaiam Laser Limited, acquired in August 2017, which
contributed $14.6 million of expense.
Selling, general and administrative. SG&A expenses for the fiscal year ended June 30, 2018 were $208.6 million, or 18.0% of
revenues, compared to $176.0 million, or 18.1% of revenues, for the fiscal year ended June 30, 2017. 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 expenses 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.
Interest and other, net. Interest and other, net for the year ended June 30, 2018 was expense of $14.6 million compared to income of
$3.3 million for the year ended June 30, 2017. 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 aggregate principal
amount of convertible notes issued in August 2017. The Company recognized $10.8 million of interest and amortization of debt
discounts and issuance costs. Other income during fiscal year 2017 included approximately $7.0 million of income from earn-out and
technology transfer agreements from the Company’s sale of its ANADIGICS’ RF business.
46
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% at June 30, 2017. 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 fiscal year 2018’s
effective tax rate is the result of approximately $8.0 million of increased income tax expense relating to repatriation on foreign source
earnings.
II-VI Laser Solutions ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2018
2017
$
$
405.9 $
40.1 $
317.5
27.5
28%
46%
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 year ended June 30, 2018 for II-VI Laser Solutions increased 28% to $405.9 million, compared to $317.5 million for
fiscal year ended June 30, 2017. The increase in revenues from fiscal year 2017 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 year ended June 30, 2018 for II-VI Laser Solutions increased 46% to $40.1 million, compared to $27.5
million for fiscal year June 30, 2017. The increase in operating income during fiscal year 2018 was the result of incremental margins
realized from increased capacity utilization, increase in mix of higher margin products, offset somewhat by greater investment in
growth markets.
II-VI Photonics ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
(Decrease)
2018
2017
$
$
486.5 $
63.2 $
440.4
66.5
10%
(5%)
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 acquisition of IPI, which was acquired in June 2017.
Revenues for the year ended June 30, 2018 for II-VI Photonics increased 10% to $486.5 million, compared to $440.4 million for the
fiscal year ended June 30, 2017. 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 segment realized increased 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 decreased 5% to $63.2 million, compared to an operating
income of $66.5 million for the fiscal year ended June 30, 2017. The increase in operating income was primarily due to incremental
margin realized on increased revenues but significantly offset by mix shifts and negative foreign exchange effects.
47
II-VI Performance Products ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2018
2017
$
$
266.4 $
33.5 $
214.2
21.6
24%
55%
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 fiscal year June 30, 2017. The increase in revenues during the fiscal year 2018 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 saw increased demand for products and components for the semiconductor capital
equipment and aerospace and defense markets.
Operating income for the year ended June 30, 2018 for II-VI Performance Products increased 55% to $33.5 million, compared to
$21.6 million for fiscal year June 30, 2017. The increase in operating income during fiscal year 2018 was primarily driven by
incremental margin realized by increased sales volume, as well as favorable product mix toward higher margin products.
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, debt issuance costs, payments in satisfaction of employees’ minimum tax obligations and
purchases of treasury stock. Supplemental information pertaining to our sources and uses of cash is presented as follows:
Sources (uses) of Cash (millions):
Year Ended June 30,
Net cash provided by operating activities
Net proceeds on long-term borrowings
Proceeds from exercises of stock options
Additions to property, plant & equipment
Purchases of businesses, net of cash acquired
Payments in satisfaction of employees' minimum tax
obligations
Debt issuance costs
Purchases of equity investments
Payment on earnout consideration
Purchases of treasury stock
Effect of exchange rate changes on cash and cash
equivalents and other
$
2019
2018
2017
178.5 $
15.0
8.7
(137.1)
(83.1)
161.0 $
153.0
10.5
(153.4)
(80.5)
118.6
104.0
15.1
(138.5)
(40.0)
(7.1)
(5.6)
(4.5)
(4.5)
(1.6)
(6.6)
(10.1)
(52.1)
-
(49.9)
(4.1)
-
-
(2.0)
-
(0.8)
3.2
0.3
Net cash provided by operating activities:
Net cash provided by operating activities was $178.5 million and $161.0 million for the fiscal years ended June 30, 2019 and 2018,
respectively. The increase in cash provided by operations during the current fiscal year was due to a combination of higher net
earnings as well as non-cash items such as depreciation, amortization, and share-based compensation expense and improved working
capital management of accounts payable.
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 operating activities during fiscal year 2018 was due to a combination of higher net
earnings as well as 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.
48
Net cash used in investing activities:
Net cash used in investing activities was $224.0 million and $285.0 million for the fiscal years ended June 30, 2019 and 2018,
respectively. The decrease in cash used in investing activities was the result of lower level of investments in property, plant &
equipment as the Company continues to strategically allocate resources.
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 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 fiscal year 2018, totaling
approximately $132.6 million.
Net cash provided by financing activities:
Net cash provided by financing activities was $4.9 million for the year ended June 30, 2019 compared to net cash provided by
financing activities of $97.0 million for the year ended June 30, 2018. During the current fiscal year, the Company had net borrowings
of $15.0 million. The Company realized $8.7 million of proceeds received from the exercise of stock options offset, by $7.1 million of
cash payments in satisfaction of employees’ minimum tax obligations on the vesting of the Company’s restricted and performance
shares during the current fiscal year. In addition, the Company incurred approximately $1.6 million of purchases of treasury stock and
$5.6 million of debt issuance costs associated with its pending financing of the cash consideration payable in connection with its
Finisar acquisition.
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 fiscal year 2018, the Company completed its offering
and sale of $345 million aggregate principal amount of convertible notes. In addition, the Company borrowed $100.0 million on its
revolving credit facility to fund 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 $272.0 million on the Company’s revolving credit facility under the Amended Credit Facility (as defined below), $20.0 million
on the Company’s term loan under the Amended Credit Facility and $10.1 million of convertible debt issuance costs. The Company
also utilized $49.9 million of net proceeds from its offering and sale of its convertible notes to repurchase 1,414,900 shares of its
common stock. The Company realized $10.5 million of proceeds received from exercises 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 fiscal year 2018.
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.
49
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 $268 million as of June 30, 2019 (based on the Company’s closing
stock price on the last trading day of the year ended June 30, 2019).
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)
c)
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
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, 2019, 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 as of June 30, 2019.
The following table sets forth total interest expense recognized related to the Notes for the fiscal years ended June 30, 2019 and 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
$
$
2019
2018
874 $
12,550
13,424 $
731
10,058
10,789
The unamortized discount amounted to $38.3 million as of June 30, 2019 and is being amortized over the remaining period of three
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
50
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 Amended Credit Facility is subject to certain covenants, including those
relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2019, 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 ($4.6 million) facility. The Yen line of credit matures in August
2020. The interest rate is equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.75%. At June 30, 2019 and 2018, 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, 2019, the Company had $2.8 million
outstanding and was in compliance with all covenants under its Yen facility.
Aggregate Availability
The Company had aggregate availability of $211.9 million and $246.4 million under its lines of credit as of June 30, 2019 and 2018,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. Total outstanding
letters of credit supported by the credit facilities were immaterial for fiscal year 2019 and $0.4 million for fiscal year 2018,
respectively.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1.6% and 1.3% for the years ended June 30, 2019 and 2018, respectively.
The weighted average of total borrowings for the fiscal years ended June 30, 2019 and 2018 was $533.9 million and $476.6 million,
respectively.
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 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, 2019, the Company has
cumulatively purchased 1,366,587 shares of its common stock pursuant to the Program for approximately $20.7 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,
2019
June 30,
2018
204.9 $
211.9
467.0
247.0
246.4
439.0
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, acquisition and integration expenses for the
pending Finisar acquisition, and internal and external growth objectives at least through fiscal year 2020.
51
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, 2019, the Company held approximately $173 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
Tax Act created significant changes to the taxation of undistributed foreign earnings and has changed our future intentions regarding
repatriation of earnings.
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 9 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)
Total
Payments Due By Period
Less
Than 1
1-3
3-5
More
Than 5
Total
Year
Years
Years
Years
25,321
24,360
119,900
37,012
$ 511,617 $ 23,834 $ 142,783 $ 345,000 $
2,394
3,000
20,900
-
$ 718,210 $ 88,493 $ 192,307 $ 371,294 $
8,590
1,021
23,000
32,048
10,134
2,426
32,000
4,964
-
4,203
17,913
44,000
-
66,116
(1)
(2)
Interest payments represent both variable and fixed rate interest obligations based on the interest rate in place at June 30, 2019,
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 three parcels of land related to II-VI Performance Metals. The lease obligations extend
through years 2039, 2056, 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 earn out opportunities based on certain acquisitions’ achieving agreed-upon financial, operational and technology
targets, and the value of the net purchase option for the Company’s Equity Investment in a Privately Held Company.
(4)
Pension obligations are not included in the table above. The Company expects defined benefit plan employer contributions to be $3.0
million in 2020. 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 17 to the Company’s Consolidated Financial Statements included in item 8 of this Annual Report on
Form 10-K.
The gross unrecognized income tax benefits at June 30, 2019, which are excluded from the above table, were $12.7 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.
52
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 Swiss Franc. 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 forward exchange contracts are used to limit transactional
exposure to changes in currency rates.
Japanese Yen
The Company enters into foreign currency forward contracts that permit it to sell specified amounts of Japanese Yen expected to be
received from its export sales for pre-established U.S. dollar amounts at specified dates. The forward contracts are denominated in the
same foreign currencies in which export sales are denominated. These contracts provide the Company with an economic hedge in
which settlement will occur in future periods, thereby limiting the Company’s exposure. These contracts had a total notional amount
of $17.0 million and $12.0 million at June 30, 2019 and 2018, 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
$10.0 million to an increase of approximately $12.2 million for the year ended June 30, 2019.
Chinese Renminbi
The Company enters into month-to-month forward contracts to limit exposure to the Chinese Renminbi. During the year ended June
30, 2019, the Company recorded a loss of $2.0 million with respect to these forward contracts.
Swiss Franc
The Company enters into month-to-month forward contracts to limit exposure to the Swiss Franc. During the year ended June 30,
2019, the Company recorded an immaterial loss with respect to these forward contracts.
Interest Rate Risks
As of June 30, 2019, the Company’s total borrowings of $467 million consisted of $162.8 million variable rate debt borrowings from a
line of credit of $115.0 million denominated in U.S. dollars, a term loan denominated in U.S. dollars of $45.0 million, and a line of
credit borrowing of $2.8 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
$1.8 million for the fiscal year ended June 30, 2019.
53
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,
2019. 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 internal controls of CoAdna
Holdings, Inc., which was acquired in September 2018, and Redstone Aerospace Corporation, which was acquired in March 2019.
The recent acquisitions excluded from management’s assessment of internal controls over financial reporting represented
approximately $98.1 million and $84.1 million of total assets and net assets, respectively, as of June 30, 2019 and approximately $15.5
million and $1.2 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, 2019, 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, 2019. Its report is included herein.
54
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,
2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended June 30, 2019, 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, 2019, 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 16, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,
by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Accounting for acquisition of CoAdna Holdings, Inc.
Description of the
Matter
As discussed in Note 3 to the consolidated financial statements, during the year ended June 30, 2019, the
Company completed the acquisition of CoAdna Holdings, Inc (“CoAdna”) for a total purchase price of
approximately $42.8 million, net of cash acquired. The acquisition was accounted for under the acquisition
method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired
and liabilities assumed based on the respective fair values.
Auditing the Company’s accounting for its acquisition of CoAdna was complex due to the significant
estimation uncertainty in determining the fair value of identified intangible assets, which principally consisted
of customer relationships and developed technology. The significant estimation uncertainty was primarily due
to the sensitivity of the respective fair values to underlying assumptions about the future performance of the
acquired business which rely upon innovation and growth within the optical communications market and
applicability of the existing offerings to future technologies. The Company used the multi-period excess
earnings method and the relief from royalty method to value the customer relationships and developed
technology, respectively. The significant assumptions used to estimate the fair value of the customer
relationships included the forecasted revenue and earnings generated by the customer relationships and a
discount rate that reflected the level of risk associated with the future cash flows attributable to the customer
relationships. The significant assumptions used to estimate the fair value of the developed technology
included the forecasted revenue generated by the asset group and a discount rate that reflected the level of risk
associated with the future revenue attributable to the developed technology. These significant assumptions are
forward-looking and could be affected by future economic and market conditions.
55
How We Addressed
the Matter in Our
Audit
We tested controls that address the risks of material misstatement relating to the valuation of the customer
relationships and developed technology. For example, we tested controls over management’s review of the
significant assumptions, such as the acquired business’s forecasted revenue and earnings and the discount rates
used in the valuation.
To test the estimated fair value of the acquired customer relationships and developed technology, our audit
procedures included, among others, assessing the appropriateness of the valuation methodologies and testing
the significant assumptions discussed above and the underlying data used by the Company. For example, we
compared the forecasted revenue and earnings to current industry and economic trends as well as the historic
financial performance of the acquired business and its primary customers, and compared the projected revenue
growth to the assumptions used in the valuation of the Company’s Photonics reporting unit. We also
performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result
from changes in the significant assumptions. We involved our valuation specialist to assist in evaluating the
valuation techniques and discount rate used to value the customer relationships and developed technology,
which included comparison of the selected discount rate to the acquired business’s weighted average cost of
capital, an evaluation of the relationship of the weighted average cost of capital, internal rate of return and
weighted-average return on assets, and consideration of implied deal multiples exhibited by recent transactions
of guideline public companies.
Accounting for acquisition of Redstone Aerospace Corporation
Description of the
Matter
As discussed in Note 3 to the consolidated financial statements, during the year ended June 30, 2019, the
Company completed the acquisition of Redstone Aerospace Corporation (“Redstone”) for a total purchase price
of approximately $29.7 million, net of cash acquired. The acquisition was accounted for under the acquisition
method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired
and liabilities assumed based on the respective fair values.
Auditing the Company’s accounting for its acquisition of Redstone was complex due to the significant
estimation uncertainty in determining the fair value of identified intangible assets, which principally consisted
of developed technology. The significant estimation uncertainty was primarily due to the sensitivity of the
respective fair value to underlying assumptions about the future performance of the acquired business which
rely upon significant revenue growth arising from accelerating the deployment and expansion of the acquired
business’s operating capacity as well as market-participant based revenue synergies. The Company used the
relief from royalty method to value the developed technology. The significant assumptions used to estimate
the fair value of the developed technology included the forecasted revenue generated by the asset group and a
discount rate that reflected the level of risk associated with the future revenue attributable to the developed
technology. These significant assumptions are forward-looking and could be affected by future economic and
market conditions.
How We Addressed
the Matter in Our
Audit
We tested controls that address the risks of material misstatement relating to the valuation of the developed
technology. For example, we tested controls over management’s review of the significant assumptions, such
as the acquired business’s forecasted revenue and the discount rate used in the valuation.
To test the estimated fair value of the acquired developed technology, our audit procedures included, among
others, assessing the appropriateness of the valuation methodology and testing the significant assumptions
discussed above and the underlying data used by the Company. For example, we compared the forecasted
revenue growth rate to current industry and economic trends and performed sensitivity analyses to evaluate the
changes in the fair value of the intangible asset that would result from changes in the significant assumptions,
including the timing of projected revenue growth. We involved our valuation specialist to assist in evaluating
the valuation techniques and discount rate used to value the developed technology, which included comparison
of the selected discount rate to the acquired business’s weighted average cost of capital, an evaluation of the
relationship of the weighted average cost of capital, internal rate of return and weighted-average return on
assets, and consideration of guideline public company benchmarking analyses reflecting the composition of
purchase prices for similar transactions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Pittsburgh, Pennsylvania
August 16, 2019
56
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, 2019, 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, 2019, 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 CoAdna
Holdings, Inc. (“CoAdna”) and Redstone Aerospace Corporation (“Redstone”), which are included in the June 30, 2019 consolidated
financial statements of the Company and constituted $98.1 million and $84.1 million of total and net assets, respectively, as of June
30, 2019 and $15.5 million and $1.2 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
CoAdna and Redstone.
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, 2019 and 2018, 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, 2019,
and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 16, 2019
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 16, 2019
57
2019
2018
$
204,872 $
247,038
269,642
296,282
11,778
30,337
812,911
582,790
319,778
139,324
76,208
8,524
14,238
1,953,773 $
23,834 $
104,462
71,847
20,476
49,944
270,563
443,163
23,913
82,925
820,564
-
382,423
(24,221)
943,581
1,301,783
(168,574)
1,133,209
1,953,773 $
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
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
($000)
June 30,
Assets
Current Assets
Cash and cash equivalents
Accounts receivable - less allowance for doubtful accounts of $1,292 at June 30, 2019 and
$837 at June 30, 2018
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 - 76,315,337 shares at June
30, 2019; 75,692,683 shares at June 30, 2018
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost - 12,603,781 shares at June 30, 2019 and 12,395,791 shares at June 30,
2018
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
See Notes to Consolidated Financial Statements.
58
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)
2019
2018
2017
$
1,362,496 $
1,158,794 $
972,046
841,147
139,163
233,518
22,417
(2,562)
1,233,683
696,591
116,875
208,565
18,352
(3,783)
1,036,600
583,684
96,806
176,000
6,809
(10,041)
853,258
Earnings Before Income Taxes
128,813
122,194
118,788
Income Taxes
Net Earnings
Basic Earnings Per Share
Diluted Earnings Per Share
See Notes to Consolidated Financial Statements.
21,296
34,192
23,514
107,517 $
88,002 $
95,274
1.69 $
1.41 $
1.63 $
1.35 $
1.52
1.48
$
$
$
59
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 $(1,642), $763, and $674 for the years
ended June 30, 2019, 2018, and 2017, respectively
Other comprehensive income (loss)
Comprehensive income
See Notes to Consolidated Financial Statements.
2019
2018
2017
$
$
107,517 $
88,002 $
95,274
(14,319)
7,152
(6,122)
(20,441)
87,076 $
2,846
9,998
98,000 $
(2,275)
2,514
239
95,513
60
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, including share amounts)
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
Share-based and deferred compensation activities
Net earnings
Purchases of treasury stock
Foreign currency translation adjustments
Pension adjustment, net of taxes of ($1,642)
Balance - June 30, 2019
72,840 $ 243,812 $
1,241 25,826
-
-
-
-
-
-
74,081 $ 269,638 $
1,612 25,717
-
-
-
-
-
-
- 56,406
-
-
75,693 $ 351,761 $
622 30,662
-
-
-
-
-
-
-
-
76,315 $ 382,423 $
(2,275)
2,514
26
-
-
-
(3,114)
-
-
-
-
-
- 95,274
-
-
(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
-
-
-
-
-
-
56,406
-
2,846
2,846
(3,780) $ 836,064 (12,396) $ (159,734) $ 1,024,311
23,438
(158)
-
-
- 107,517
-
- 107,517
(1,616)
(50)
-
-
(14,319)
-
-
(14,319)
(6,122)
(6,122)
-
-
(24,221) $ 943,581 (12,604) $ (168,574) $ 1,133,209
(1,616)
-
-
(7,224)
See Notes to Consolidated Financial Statements.
61
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
($000)
Cash Flows from Operating Activities
2019
2018
2017
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
107,517 $
88,002 $
95,274
Depreciation
Amortization
Share-based compensation expense
Amortization of discount on convertible debt and debt issuance costs
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):
Accounts receivable
Inventories
Accounts payable
Contract liabilities
Income taxes
Other operating net assets
Net cash provided by operating activities
Cash Flows from Investing Activities
Additions to property, plant & equipment
Purchases of businesses, net of cash acquired
Purchases of equity investments
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
Proceeds from exercises of stock options
Payments on borrowings under Credit Facility
Payments in satisfaction of employees' minimum tax obligations
Debt issuance costs
Payments on earnout considerations
Purchases of treasury stock
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 accrued liabilities
Capital lease obligation incurred on facility lease
Additions to property, plant & equipment included in accounts payable and accrued
liabilities
See Notes to Consolidated Financial Statements.
$
$
$
$
75,745
16,620
21,946
12,550
3,155
(3,214)
(10,462)
(50,764)
(36,392)
15,999
15,889
366
9,520
178,475
(137,122)
(83,067)
(4,480)
693
(223,976)
66,202
14,568
15,312
10,057
850
(3,594)
945
(21,044)
(38,732)
17,436
1,168
7,380
2,464
161,014
(153,438)
(80,503)
(52,056)
1,047
(284,950)
-
150,000
8,698
(135,000)
(7,092)
(5,589)
(4,524)
(1,616)
4,877
(1,542)
(42,166)
247,038
204,872 $
345,000
100,000
10,469
(292,000)
(6,564)
(10,061)
-
(49,875)
96,969
2,117
(24,850)
271,888
247,038 $
50,894
12,743
11,756
-
(1,275)
(744)
(1,184)
(26,247)
(24,992)
6,704
2,345
735
(7,393)
118,616
(138,517)
(40,015)
-
1,291
(177,241)
-
129,000
15,092
(25,000)
(4,136)
(1,384)
(2,000)
-
111,572
496
53,443
218,445
271,888
4,397 $
- $
- $
- $
2,250
25,000
10,986 $
12,313 $
4,428
62
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, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive
applications. The Company markets its products through its direct sales force and through distributors and agents.
The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available
from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company’s
manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the
Company does occasionally experience problems associated with vendor-supplied materials not meeting specifications for quality or
purity. A significant failure of the Company’s suppliers to deliver sufficient quantities of necessary high-quality materials on a timely
basis could have a material adverse effect on the Company’s results of operations.
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 a reduction to the carrying value of inventory 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 $23.5 million and $22.5 million
at June 30, 2019 and 2018, 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.
63
Business Combinations. The Company accounts for business acquisitions by establishing the acquisition-date fair value as the
measurement for all assets acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the
determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and
the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting.
Goodwill. The excess purchase price over the fair 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 fair value of its reporting units. A
number of 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 2019 and 2018, 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 1st, 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 under ASU 2016-01.
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. Our customers may discover defects in our products
after the products have been fully deployed and operated under peak stress conditions. If we are unable to correct defects or other
problems, we could experience, among other things, loss of customers, increased costs of product returns and warranty expenses,
damage to our brand reputation, failure to attract new customers or achieve market acceptance, diversion of development and
engineering resources, or legal action by our customers. The Company had no material loss contingency liabilities at June 30, 2019
related to commitments and contingencies.
64
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. Revenue is recognized under ASC 606 when or as obligations under the terms of a contract with the
Company’s customer have been satisfied and control has transferred to the customer. The Company has elected to exclude all taxes
from the measurement of the transaction price.
For contracts with commercial customers, which comprise the majority of the Company’s performance obligations, ownership of the
goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a product (“Direct Ship
Parts”) to the customer or receipt of the product by the customer and without significant judgments. The majority of contracts
typically require payment within 30 to 60 days after transfer of ownership to the customer.
Contracts with the United States (“U.S.”) government through its prime contractors are typically for products or services with no
alternative future use to the Company with an enforceable right to payment for performance completed to date, whereas commercial
contracts typically have alternative use. Customized products with no alternative future use to the Company with an enforceable right
to payment for performance completed to date are recorded over time utilizing the output method of units delivered. The Company
considers this to be a faithful depiction of the transfer to the customer of revenue over time due to short cycle time and immaterial
work-in-process balances. The majority of contracts typically require payment within 30 to 60 days after transfer of ownership to the
customer.
Service revenue includes repairs, non-recurring engineering, tolling arrangements and installation. Repairs, tolling and installation
activities are usually completed in a short period of time (normally less than one month) and therefore recorded at a point in time
when the services are completed. Non-recurring engineering arrangements are typically recognized over time under the time and
material practical expedient, as the entity has a right to consideration from a customer, in an amount that corresponds directly with the
value to the customer of the entity’s performance completed to date. The majority of contracts typically require payment within 60
days.
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.
Under ASC 606, the Company expenses sales commissions when incurred because the amortization period would have been one year
or less. These costs are recorded within selling, general and administration expenses. The Company has elected to recognize the costs
for freight and shipping when control over products has transferred to the customer as an expense in cost of sales.
The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated
amount of future returns, based on historical experience. The Company makes estimates evaluating its allowance for doubtful
accounts. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated
credit losses based upon its historical experience and any specific customer collection issues that it has identified.
The Company offers an assurance-type limited warranty that products will be free from defects in materials and workmanship. The
warranty is typically one year or the industry standard in length and is limited to either (1) the replacement or repair of the product or
(2) a credit against future purchases. The products are not sold with a right of return.
The Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance
obligations, as our contracts have an original expected duration of less than one year.
65
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.
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
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). The standard requires an entity to recognize revenue in a manner that depicts the transfer
of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. The Company adopted this standard on July 1, 2018 using the modified retrospective method of adoption
applied to all contracts at that date. Adoption of the ASU did not require an adjustment to the opening balance of equity. The standard
did not have a significant effect on its results of operations, liquidity or financial position in fiscal year 2019. The Company
implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and to generate the
disclosures required under the new standard. For the disclosures required by this ASU, see Note 5, Revenue from Contracts with
Customers.
Other Adopted Pronouncements
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework – Changes to the disclosure framework requirements for
Defined Benefit Plans. This update defined a narrower set of disclosures required on the basis of an evaluation of whether the
expected benefits of entities providing the information justify the expected costs. The adoption of this standard did not have a material
effect on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
disclosure requirements for fair value measurements. This update defined a narrower set of disclosures required on the basis of an
evaluation of whether the expected benefits of entities providing the information justify the expected costs. The adoption of this
standard did not 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.
With the adoption of this standard, the Company restated the prior periods ending June 30, 2018, 2017, and 2016. These restatements
did not have a material effect on the Company’s Consolidated Financial Statements.
66
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.
The adoption of this standard did not 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 adoption of this standard did not 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 adoption of this standard did not have a material effect on the Company’s
Consolidated Financial Statements.
Pronouncements Currently Under Evaluation
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.
During fiscal year 2019, we conducted a survey to identify all leases across the organization (including embedded leases). We
identified that a majority of our leases are categorized into one of three categories: office equipment, real estate and vehicles. We are
finalizing the accumulation of lease data, including new leases entered into at the end of fiscal year 2019, and preparing the final
transition adjustment calculations. We estimate that total assets and total liabilities will increase within the range of $90 million and
$120 million on July 1, 2019 when the ASU is adopted.
In July 2018, the FASB issued targeted improvements to ASU 2016-02 in ASU 2018-11. This update provides entities with an
optional transition method, which permits an entity to initially apply the new leases standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We expect to use this new
transition approach and the comparative periods presented in our fiscal 2020 consolidated financial statements will continue to be
reported in accordance with ASC 840, Leases. We anticipate that we will elect the package of practical expedients allowed in the
standard, which among other things, allows us to carry forward our historical lease classification. We also anticipate that we will make
an accounting policy election to use the practical expedient allowed in the standard to not separate lease and non-lease components
when calculating the lease liability under Topic 842.
In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”), which among other things, requires the measurement of all expected credit losses of
financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
Financial institutions and other organizations will now use forward looking information to better inform their credit loss estimates. In
addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with
credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2019, and interim periods within those fiscal
years. The Company is in the process of evaluating the impact of the pronouncement.
Note 2.
Pending Merger
II-VI and Finisar Corporation (“Finisar”) have entered into an Agreement and Plan of Merger, dated as of November 8, 2018 (the
“Merger Agreement”). Pursuant to the terms of the Merger Agreement, Mutation Merger Sub Inc., a Delaware corporation and wholly
owned subsidiary of II-VI, will be merged with and into Finisar, and Finisar will continue as the surviving corporation in the merger
and a wholly owned subsidiary of II-VI (the “Merger”).
If the Merger is consummated, Finisar stockholders will be entitled to receive, at their election, consideration per share of common
stock of Finisar (the “Finisar Common Stock”) consisting of (i) $26.00 in cash, without interest (the “Cash Election Consideration”),
(ii) 0.5546 shares of II-VI common stock (the shares, the “II-VI Common Stock,” and the consideration, the “Stock Election
Consideration”), or (iii) a combination of $15.60 in cash, without interest, and 0.2218 shares of II-VI Common Stock (the “Mixed
Election Consideration,” and, together with the Cash Election Consideration and the Stock Election Consideration, the “Merger
Consideration”). The Cash Election Consideration and the Stock Election Consideration are subject to proration adjustment pursuant
to the terms of the Merger Agreement such that the aggregate Merger Consideration will consist of approximately 60% cash and
approximately 40% II-VI Common Stock (assuming a per share price of II-VI common stock equal to the price when the Merger
Agreement was signed on November 8, 2018, which was $46.88 per share) regardless of the individual election.
67
At the effective time of the Merger (the “Effective Time”), each option granted pursuant to Finisar’s 2005 Stock Incentive Plan, as
such plan has been further amended and restated (each, a “Finisar Stock Option”), or portion thereof, that is outstanding and
unexercised as of immediately prior to the Effective Time (whether vested or unvested) will be cancelled, terminated and converted
into the right to receive an amount of Mixed Election Consideration that would be payable to a holder of such number of shares of
Finisar Common Stock equal to the quotient of (i) the product of (a) the excess, if any, of $26.00 over the exercise price per share of
such Finisar Stock Option multiplied by (b) the number of shares of Finisar Common Stock subject to such Finisar Stock Option,
divided by (ii) $26.00.
At the Effective Time, each restricted stock unit granted pursuant to Finisar’s 2005 Stock Incentive Plan, as such plan has been further
amended and restated, each, a “Finisar Restricted Stock Unit”), or portion thereof, that is outstanding and subject to a performance-
based vesting condition that relates solely to the value of Finisar Common Stock will, to the extent such Finisar Restricted Stock Unit
vests in accordance with its terms in connection with the Merger (the “Participating RSUs”), be cancelled and extinguished and
converted into the right to receive the Cash Election Consideration, the Stock Election Consideration or the Mixed Election
Consideration at the election of the holder of such Participating RSUs, subject to proration adjustment.
At the Effective Time, each Finisar Restricted Stock Unit (or portion thereof) that is outstanding and unvested, does not vest in
accordance with its terms in connection with the Merger and is either (x) subject to time-based vesting requirements only or (y)
subject to a performance-based vesting condition other than the value of Finisar Common Stock will be assumed by II-VI (each, an
“Assumed RSU”). Each Assumed RSU will be subject to substantially the same terms and conditions as applied to the related Finisar
Restricted Stock Unit immediately prior to the Effective Time, including the vesting schedule (and the applicable performance-vesting
conditions in the case of a grant contemplated by clause (y) of the preceding sentence) and any provisions for accelerated vesting
applicable thereto, except that the number of shares of II-VI Common Stock subject to each Assumed RSU will be equal to the
product of (i) the number of shares of Finisar Common Stock underlying such unvested Finisar Restricted Stock Unit award as of
immediately prior to the Effective Time multiplied by (ii) the sum of (a) 0.2218 plus (b) the quotient obtained by dividing (1) $15.60
by (2) the volume weighted average price per share of II-VI Common Stock (rounded to the nearest cent) on the Nasdaq Global Select
Market for the ten consecutive trading days ending on (and including) the third trading day immediately prior to the Effective Time
(with the resulting number rounded down to the nearest whole share).
II-VI filed with the Securities and Exchange Commission a registration statement on Form S-4 relating to the Merger, and that
registration statement became effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933, as amended,
on February 7, 2019. Shareholders of II-VI and stockholders of Finisar voted to approve proposals related to the Merger at special
meetings held on March 26, 2019 by the respective companies.
The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to the Merger has
expired without a request for additional information. Other regulatory approvals applicable to the Merger have been obtained in
Germany, Mexico and Romania.
On November 8, 2018, in connection with its entry into the Merger Agreement, II-VI entered into a commitment letter (together with a
related fee letter) with Bank of America, N.A., which was subsequently amended and restated on December 7, 2018 and on
December 14, 2018 (together with one or more related fee letters, the “Commitment Letter”). Subject to the terms and conditions set
forth in the Commitment Letter, the lender parties thereto severally committed to provide 100% of up to $2.425 billion in aggregate
principal amount of senior secured credit facilities of II-VI.
On March 4, 2019, II-VI entered into a Credit Agreement (the “New Credit Agreement”), by and among the Company, Bank of
America, N.A., as Administrative Agent, Swing Line Lender and a L/C Issuer, and the other lenders party thereto. Pursuant to the
terms and subject to the conditions therein, the New Credit Agreement provides for senior secured financing of $1.625 billion in the
aggregate, consisting of (i) a five-year senior secured first-lien term A loan facility in an aggregate principal amount of $1.175 billion
(the “Term A Facility”) and (ii) a five-year senior secured first-lien revolving credit facility in an aggregate principal amount of
$450.0 million (the “Revolving Credit Facility” and together with the Term A Facility, the “New Senior Credit Facilities”). The New
Credit Agreement also provides for a letter of credit sub-facility not to exceed $25.0 million and a swing loan sub-facility initially not
to exceed $20.0 million, subject to adjustment in accordance with the terms of the New Credit Agreement. II-VI anticipates using the
proceeds from the Term A Facility, together with a separately committed term B loan facility in an aggregate principal amount of up
to $720.0 million (the “Term B Facility”) and cash and short-term investments of II-VI and Finisar, to pay the cash portion of the
merger consideration payable in connection with the Merger and related fees and expenses. II-VI currently does not intend to draw on
the Revolving Credit Facility in order to fund the cash portion of the merger consideration payable in connection with the Merger.
68
The funding obligations of the lenders under the New Senior Credit Facilities are subject to certain currently unsatisfied conditions,
including the consummation of the Merger. Accordingly, no borrowings are currently outstanding under the New Senior Credit
Facilities, and II-VI currently is not able to borrow under the New Senior Credit Facilities. Further, II-VI expects that the New Credit
Agreement will be amended prior to the Closing Date to reflect syndication of the Term B Facility and to finalize certain other terms
in the New Credit Agreement. Upon the consummation of the Merger, the New Senior Credit Facilities, governed by the New Credit
Agreement as it may be amended as of such time, will be used (i) to refinance in full the Amended Credit Facility (as defined in Note
9) and (ii) on or after the date of the consummation of the Merger, to repay amounts owed in connection with Finisar’s outstanding
convertible notes, currently in an aggregate principal amount outstanding of $575.0 million, including the proceeds of a portion of the
Term A Facility which will be available to II-VI for a certain period after the initial funding under the New Senior Credit Facilities.
Unless and until the Merger is consummated and the other currently unsatisfied conditions to the funding obligations of the lenders
under the New Senior Credit Facilities are satisfied or waived, the Amended Credit Facility remains in effect in accordance with its
terms.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including
review and approval of the Merger by the State Administration for Market Regulation in China. The Company is planning to refile
with the State Administration for Market Regulation in China, extending the approval period. Subject to the satisfaction or waiver of
each of the closing conditions, II-VI and Finisar expect that the Merger will be completed in the second half of calendar
2019. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a
different time or not at all.
Note 3.
Acquisitions
CoAdna, Inc.
In September 2018, the Company acquired CoAdna Holdings, Inc. (“CoAdna”), a previously publicly traded company on the Taiwan
Stock Exchange with headquarters in Sunnyvale, CA, in a cash transaction valued at approximately $85.0 million, inclusive of cash
acquired of approximately $42.2 million at closing.
CoAdna is a global leader in wavelength selective switches based on its patented liquid crystal platform. CoAdna operates within the
Company’s II-VI Photonics operating segment.
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 accrued income taxes
Deferred tax liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
5,684
6,189
2,454
3,181
16,072
24,898
58,478
4,006
4,103
6,656
897
15,662
42,816
The goodwill of $24.9 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled
workforce of CoAdna. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was
$5.7 million, with the gross contractual amount being $5.7 million. The Company expensed transaction costs during the year ended
June 30, 2019 of $1.9 million.
69
The amount of revenues of CoAdna included in the Company’s Consolidated Statements of Earnings for the year ended June 30, 2019
was $12.4 million, excluding sales to customers through our sales offices. The amount of net loss of CoAdna included in the
Company’s Consolidated Statement of Earnings for the year ended June 30, 2019 was $0.6 million.
Purchase of a Product Line
In November 2018, the Company acquired certain assets of a product line in a cash transaction valued at approximately $10.0 million.
The transaction was accounted for as a business combination under ASC 805 and ASU 2017-01, Business Combinations (Topic 805):
Clarifying the Definition of a Business. In conjunction with the acquisition of the product line, the Company acquired inventory of
$0.2 million, equipment of $2.3 million, acquired technology of $6.3 million, and recorded goodwill of $1.2 million. The goodwill is
deductible for income tax purposes. The goodwill is recorded in the II-VI Photonics segment and is attributable to the workforce
acquired as part of the transaction. Transaction expenses for this acquisition were insignificant for the year ended June 30, 2019.
Redstone Aerospace Corporation
In March 2019, the Company acquired Redstone Aerospace Corporation (“Redstone”), an aerospace and defense company located in
Colorado. Redstone has unique capabilities to continue our growth in the emerging high-energy market. The consideration consisted
of initial cash paid at the acquisition date of $28.0 million, net of cash acquired. In addition, the acquisition agreement provides up to a
maximum of $2.0 million of additional cash earn out opportunities based on achievement of certain agreed-upon financial objectives.
The following table presents the final purchase price at the date of acquisition ($000):
Net cash paid at acquisition
Fair value of cash earnout arrangement
Purchase price
$
$
27,959
1,776
29,735
The following table presents a final allocation of the purchase price of the assets acquired and liabilities assumed at the date of
acquisition ($000):
Assets
Accounts receivable
Other Assets
Property, plant & equipment
Intangible assets
Goodwill
Total assets acquired
Liabilities
Non-Interest bearing liabilities
Deferred tax liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
1,606
215
350
9,100
21,596
32,867
980
2,152
3,132
29,735
The goodwill of $21.6 million is recorded in the II-VI Performance Products segment and is attributed to the expected synergies and
the assembled workforce of Redstone. The goodwill is non-deductible for income tax purposes. At the time of the acquisition, the
Company expected to collect all of the accounts receivable. Transaction expenses for this acquisition were insignificant for the year
ended June 30, 2019.
70
The amount of revenues and net earnings from the acquisition included in the Company’s Consolidated Statements of Earnings for the
year ended June 30, 2019 were insignificant.
Note 4.
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. The Company’s
pro-rata share of earnings from this investment since the acquisition date was $1.3 million and $2.4 million for the years ended June
30, 2019 and 2018, respectively, 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, 2019
93.8%
Equity as of
June 30, 2019 ($000)
$
57,645
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, 2019, the Company’s maximum financial statement exposure related to the Equity Investment was approximately
$57.6 million, which is included in Investments on the Consolidated Balance Sheet as of June 30, 2019.
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, 2019 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, 2019
and June 30, 2018 was $14.1 million and $12.9 million, respectively. During the years ended June 30, 2019, 2018 and 2017, the
Company’s pro-rata share of earnings from this investment was $1.9 million, $1.2 million and $0.7 million, respectively, and was
recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years ended June 30, 2019, 2018 and
2017, the Company received dividends from this equity investment of $0.7 million, $0.4 million and $0.4 million, respectively.
Other Equity Investment
During the quarter ended September 30, 2018, the Company acquired a 10% equity investment in a privately-held company for $4.5
million. The Company has determined that the equity interest does not give it the ability to exercise significant influence or joint
control. Therefore, the Company will not account for this investment under the equity method of accounting. Under ASU 2016-01,
Financial Instruments, the Company has elected the measurement alternative, as the investment does not have a readily determinable
fair value. Under the alternative, the Company measures the investment at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for identical or similar investment of the Company for which there were none
during the year ended June 30, 2019.
71
Note 5.
Revenue from Contracts with Customers
The following table summarizes disaggregated revenue by market and product for the year ended June 30, 2019 ($000):
Commercial
Direct Ship Parts
Services
U.S. Government
Direct Ship Parts
Services
Total Revenues
Twelve Months Ended June 30, 2019
II-VI
Laser
II-VI
Solutions Photonics Products
II-VI
Performance
Total
$ 382,066 $ 631,407 $
7,482
3,738
181,036 $ 1,194,509
21,646
10,426
$ 10,751 $
18
- $
-
119,562 $ 130,313
16,028
16,010
$ 396,573 $ 638,889 $
327,034 $ 1,362,496
Contract Liabilities
Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract
liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the
performance obligation has been performed. During the year ended June 30, 2019, the Company recognized revenue of $3.4 million
related to customer payments that were included in the consolidated balance sheet as of July 1, 2018. As of June 30, 2019, the
Company had $19.4 million of contract liabilities recorded in the consolidated balance sheet.
Note 6.
Inventories
The components of inventories were as follows:
June 30,
($000)
Raw materials
Work in progress
Finished goods
Note 7.
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
2019
2018
$
$
119,917 $
101,091
75,274
296,282 $
97,502
83,002
67,764
248,268
2019
2018
$
$
9,001 $
249,238
739,330
71,425
1,068,994
(486,204)
582,790 $
9,072
216,507
633,934
88,350
947,863
(422,973)
524,890
Note 8.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable
intangible assets acquired in business combinations are recorded based upon fair value at the date of acquisition.
72
Changes in the carrying amount of goodwill were as follows ($000):
Balance-beginning of period
Goodwill acquired
Foreign currency translation
Balance-end of period
II-VI Laser
Solutions
Year Ended June 30, 2019
II- VI
Performance
Products
II-VI
Photonics
$
$
98,737 $
-
(856)
97,881 $
109,670 $
26,069
(1,682)
134,057 $
62,271 $
25,569
-
87,840 $
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
$
$
79,527 $
18,956
-
254
98,737 $
108,544 $
-
407
719
109,670 $
62,271 $
-
-
-
62,271 $
Total
270,678
51,638
(2,538)
319,778
Total
250,342
18,956
407
973
270,678
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2019
and 2018 were as follows ($000):
Gross
Carrying
Amount
June 30, 2019
Accumulated
Amortization
Net
Book
Value
Gross
Carrying
Amount
June 30, 2018
Accumulated
Amortization
Net
Book
Value
Technology and Patents
Trade Names
Customer Lists
Other
Total
$
$
91,637 $
15,759
132,872
1,572
241,840 $
(39,679) $
(1,601)
(59,664)
(1,572)
(102,516) $
51,958 $
14,158
73,208
-
139,324 $
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
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2019, 2018 and 2017 was $16.6 million,
$14.6 million, and $12.7 million, respectively. The technology and patents are being amortized over a range of 60 to 240 months with
a weighted-average remaining life of approximately 84 months. The customer lists are being amortized over 60 to 240 months with a
weighted-average remaining life of approximately 130 months.
In conjunction with the acquisition of CoAdna, the Company recorded $9.8 million attributed to the value of technology and patents
and $6.3 million of customer lists. The intangibles were recorded based on the Company’s purchase price allocation utilizing either
the multi-period excess earnings method or relief from royalty method to derive the fair value.
In conjunction with the acquisition of the product line, the Company recorded $6.3 million of acquired technology. The acquired
technology was recorded based on the Company’s purchase price allocation utilizing a relief from royalty method to derive the fair
value.
In conjunction with the acquisition of Redstone, the Company recorded $9.1 million of acquired technology. The acquired technology
was recorded based on the Company’s purchase price allocation utilizing a 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 $14.0 million as of June 30, 2019 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 2019 and 2018. Based on the results of
these tests, the trade names were not impaired in fiscal years 2019 and 2018.
The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows ($000):
Year Ending June 30,
2020
2021
2022
2023
2024
$
16,700
16,300
14,800
14,400
14,000
73
Note 9.
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%
Line of credit, interest at LIBOR, as defined, plus 1.75%
Amended credit facility unamortized debt issuance costs
Yen denominated line of credit, interest at LIBOR, as defined,
plus 1.75%
Note payable assumed in IPI acquisition
Total debt
Current portion of long-term debt
Long-term debt, less current portion
2019
345,000
$
2018
345,000
$
(43,859)
45,000
115,000
(761)
2,783
3,834
466,997
(23,834)
443,163 $
(56,409)
65,000
80,000
(1,126)
2,714
3,834
439,013
(20,000)
419,013
$
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”), pursuant to which the Company
issued and sold $345 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.
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 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 $268.0 million as of June 30, 2019 (based on the Company’s closing
stock price on the last trading day of the year ended June 30, 2019).
74
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)
c)
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
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, 2019, 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, 2019
(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
$
$
2019
2018
874 $
12,550
13,424 $
731
10,058
10,789
The unamortized discount amounted to $38.3 million as of June 30, 2019 and is being amortized over approximately 3 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, 2019, the Company was in compliance with all financial
covenants under its Amended Credit Facility.
75
Yen Loan
The Company’s yen denominated line of credit is a 500 million Yen ($4.6 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, 2019 and 2018, 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, 2019, the Company had $2.8 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.
Aggregate Availability
The Company had aggregate availability of $211.9 million and $246.4 million under its lines of credit as of June 30, 2019 and 2018,
respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. Total outstanding
letters of credit supported by the credit facilities were immaterial as of June 30, 2019, and $0.4 million at June 30, 2018.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1.6% and 1.3% for the years ended June 30, 2019 and 2018, respectively.
The weighted average of total borrowings for the fiscal years ended June 30, 2019 and 2018 was $533.9 million and $476.6 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 years ended June 30, 2019, 2018 and 2017 were $9.2 million,
$6.6 million and $6.1 million, respectively.
Remaining Annual Principal Payments
Remaining annual principal payments under the Company’s existing credit facilities and notes payable as of June 30, 2019 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
5,000
-
-
45,000
$
$
-
2,783
-
-
-
2,783
$
$
-
-
115,000
-
-
115,000
$
$
3,834
-
-
-
-
3,834
$
$
-
-
-
345,000
-
345,000
$
$
$
$
$
$
23,834
22,783
120,000
345,000
-
511,617
Year Ended
June 30, 2020 $
June 30, 2021
June 30, 2022
June 30, 2023
June 30, 2024
$
Total
Note 10.
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
2019
2018
2017
$
$
(34,241) $
163,054
128,813 $
(15,207) $
137,401
122,194 $
(6,944)
125,732
118,788
76
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
2019
2018
2017
$
$
$
$
$
1,755 $
472
29,531
31,758 $
(3,764) $
(2,010)
(4,688)
(10,462) $
21,296 $
$
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
2019
2018
$
$
$
$
$
5,687 $
1,251
9,797
54,192
7,192
5,488
(16,558)
67,049 $
(28,184) $
(28,202)
(11,662)
(8,662)
(5,728)
(82,438) $
(15,389) $
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)
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
GILTI and FDII
Impact of U.S. tax rate change on deferred balances
Other
2019
%
2018
%
2017
%
27,051
21 $
34,284
28
$
41,576
(1,212)
(5,857)
(6,703)
(11,756)
(1,914)
14,108
6,437
-
1,142
21,296
77
$
(1)
(5)
(5)
1,426
(16,058)
(6,008)
1
(13)
(5)
(641)
(12,907)
(806)
(9)
(1)
11
5
-
1
17 $
(7,024)
(4,103)
36,777
-
(4,209)
(893)
34,192
(6)
(3)
30
-
(3)
(1)
$
28
(5,681)
1,770
-
-
-
203
23,514
35
-
(11)
(1)
(5)
2
-
-
-
-
20
U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes changes to the U.S.
statutory federal tax rate and puts into effect the migration from a worldwide system of taxation to a territorial system, among other
things. As of December 31, 2018, the Company completed its analysis of the impact of the Tax Act in accordance with U.S.
Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) and the amounts are no longer considered
provisional. The Company’s transition tax increased due to finalization of calculations and consideration of Notices and regulations
issued by the US Department of Treasury and the Internal Revenue Service; however, the increase is offset by available net operating
loss and credit carryforwards which currently have a valuation allowance. Consequently, the tax expense reported is reduced by the
release of the valuation allowance on the U.S. deferred tax assets, and as result, there was no material financial statement impact due
to finalization.
The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no
deferred income taxes. As a result of the Act, among other things, the Company determined it will repatriate earnings for all non-U.S.
Subsidiaries with cash in excess of working capital needs. Such distributions could potentially be subject to U.S. state tax in certain
states and foreign withholding taxes. Foreign currency gains/losses related to the translation of previously taxed earnings from
functional currency to U.S. dollars could also be subject to U.S. tax when distributed. The Company has estimated the associated
withholding tax to be $11.7 million.
Furthermore, the Tax Act includes certain changes such as introducing a new category of income, referred to as global intangible low
tax income (“GILTI”), related to earnings taxed at a low rate of foreign entities without a significant fixed asset base, and imposes
additional limitations on the deductibility of interest and officer compensation. The Company made a final accounting policy election
to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred. These
changes are included in the Company’s 2019 fiscal year income tax expense.
During the fiscal years ended June 30, 2019, 2018, and 2017, net cash paid by the Company for income taxes was $26.3 million, $21.3
million, and $23.6 million, respectively.
Our foreign subsidiaries in the Philippines operate under various tax holiday arrangements. The benefits of such arrangements phased
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
0.25%, 0.17% and 0.31% for the fiscal years ended June 30, 2019, 2018 and 2017, 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, 2019:
Type
($000)
Tax credit carryforwards:
Federal research and development credits
Foreign tax credits
State tax credits
State tax credits (indefinite)
Operating loss carryforwards:
Loss carryforwards - federal
Loss carryforwards - state
Loss carryforwards - foreign
Loss carryforwards - foreign (indefinite)
Amount
Expiration Date
$
$
20,084 June 2029-June 2039
1,088 June 2025-June 2027
12,449 June 2020-June 2039
448
Indefinite
59,749 June 2020-June 2036
52,762 June 2020-June 2039
8,467 June 2021-June 2027
8,502
Indefinite
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.
78
Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2019, 2018 and 2017 were as follows:
($000)
Beginning balance
Increases in current year tax positions
Increases in prior year tax positions
Decreases in prior year tax positions
Acquired business
Settlements
Expiration of statute of limitations
Ending balance
2019
2018
2017
$
$
9,892 $
191
376
-
6,036
-
(4,975)
11,520
$
$
7,577
2,536
224
(9)
-
-
(436)
9,892
$
5,559
895
2,605
-
-
(1,143)
(339)
7,577
The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2019, 2018 and 2017,
there was $(0.1) million, $0.3 million and $0.5 million of interest and penalties within income tax expense, respectively. The
Company had $1.2 million, $0.6 million and $0.3 million of interest and penalties accrued at June 30, 2019, 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 $6.2 million,
$1.6 million and $1.3 million at June 30, 2019, 2018 and 2017, respectively. The Company expects a decrease of $2.2 million of
unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.
Fiscal years 2017 to 2019 remain open to examination by the Internal Revenue Service, fiscal years 2014 to 2019 remain open to
examination by certain state jurisdictions, and fiscal years 2008 to 2019 remain open to examination by certain foreign taxing
jurisdictions. The Company is currently under examination for the certain subsidiary companies in Florida for the years ended June 30,
2016 through June 30, 2018; Philippines for the year ended June 30, 2017; Germany for the years ended June 30, 2012 through June
30, 2015; and Vietnam for the years June 30, 2018 through June 30, 2019. The Company believes its income tax reserves for these tax
matters are adequate.
Note 11.
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 years 2019 and 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
2019
2018
2017
$ 107,517 $ 88,002 $ 95,274
63,584
62,499
62,576
Basic earnings per common share
$
1.69 $
1.41 $
1.52
Net earnings
Divided by:
Weighted average shares
Dilutive effect of common stock equivalents
Diluted weighted average common shares
$ 107,517 $ 88,002 $ 95,274
63,584
2,220
65,804
62,499
2,634
65,133
62,576
1,931
64,507
Diluted earnings per common share
$
1.63 $
1.35 $
1.48
79
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
2019
2018
2017
115
7,331
7,446
135
7,331
7,466
140
-
140
Note 12. 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, 2019 are as follows:
Year Ending June 30,
($000)
2020
2021
2022
2023
2024
Thereafter
$
23,000
17,700
14,300
11,200
9,700
44,000
Rent expense was approximately $20.0 million, $17.0 million, and $14.7 million for the fiscal years ended June 30, 2019, 2018 and
2017, respectively.
Note 13.
Share-Based Compensation
The Company’s Board of Directors adopted the II-VI Incorporated 2018 Omnibus Incentive Plan (the “Plan”), which was approved by
the shareholders at the Annual Meeting in November 2018. The Plan provides for the grant of non-qualified stock options, stock
appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to
employees, officers and directors of the Company. The maximum number of shares of the Company’s common stock authorized for
issuance under the Plan is limited to 3,550,000 shares of common stock, not including any remaining shares forfeited under the
predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability
of the grantee. As of June 30, 2019, there were approximately 3.6 million shares available to be issued under the Plan, including
forfeited shares from predecessor plans.
The Company records share-based compensation expense for these awards, which requires the recognition of the grant-date fair value
of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite
service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-based stock
appreciation rights, cash-based restricted share unit 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, 2019, 2018 and 2017 is as follows ($000):
Year Ended June 30,
Stock Options and Cash-Based Stock
Appreciation Rights
Restricted Share Awards, Restricted Share
Units, and Cash-Based Restricted Share Units
Performance Share Awards and Cash
Based Performance Share Unit Awards
2019
2018
2017
$
6,801
$
6,605
$
9,242
7,850
$
8,920
24,963
$
5,221
19,676
$
5,611
6,799
3,626
16,036
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 $3.0 million, $4.4 million, and $4.3 million, in the fiscal years ended June
30, 2019, 2018 and 2017, respectively.
80
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, 2019, 2018 and 2017, the weighted-average fair value of options granted under the stock option plan was $20.66,
$14.23 and $8.88, respectively, per option using the following assumptions:
Year Ended June 30,
Risk-free interest rate
Expected volatility
Expected life of options
Dividend yield
2019
2018
2017
2.80%
37%
2.00%
37%
6.96 years
None
6.43 years
None
1.43%
37%
6.28 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 16.0%. 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, 2019 was as follows:
Stock Options
Cash-Based Stock Appreciation
Rights
Number of Weighted Average Number of Weighted Average
Exercise Price
Rights
Exercise Price
Outstanding - July 1, 2018
Granted
Exercised
Forfeited and Expired
Outstanding - June 30, 2019
Exercisable - June 30, 2019
Shares
3,928,708 $
412,940 $
(522,173) $
(58,192) $
3,761,283 $
2,348,812 $
20.07
47.61
16.66
26.29
23.47
18.62
205,448 $
48,305 $
(21,562) $
(4,695) $
227,496 $
89,827 $
22.56
48.56
20.45
31.43
28.09
27.50
As of June 30, 2019, 2018 and 2017, the aggregate intrinsic value of stock options and cash-based stock appreciation rights
outstanding and exercisable was $56.4 million, $96.1 million and $69.3 million, respectively. Aggregate intrinsic value represents the
total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30,
2019, 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, 2019. 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, 2019, 2018, and 2017 was $14.7 million, $14.7 million, and $12.3 million, respectively. As of June 30, 2019, total
unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $13.8 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, 2019 were as follows:
Range of
Exercise Prices
$12.07 - $16.97
$16.98 - $18.06
$18.07 - $21.65
$21.66 - $33.75
$33.76 - $49.90
Stock Options and Cash-Based Stock
Appreciation Rights Outstanding
Weighted
Average Remaining
Contractual Term
(Years)
Weighted
Average
Exercise
Price
Number of
Shares or
Rights
825,579
799,765
734,900
679,449
949,096
3,988,789
3.52 $
4.52 $
4.04 $
7.15 $
8.62 $
5.65 $
14.41
17.72
19.24
22.25
41.48
23.74
81
Number of
Shares or
Rights
720,059
591,237
688,310
309,016
130,017
2,438,639
Stock Options and Cash-Based Stock
Appreciation Rights Exercisable
Weighted
Average Remaining
Contractual Term
(Years)
Weighted
Average
Exercise
Price
3.28 $
3.95 $
3.87 $
7.02 $
8.08 $
4.34 $
14.47
17.68
19.20
22.01
35.82
18.68
Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Unit Awards:
Restricted share awards, restricted share units, and cash-based restricted share unit awards compensation expense was calculated based
on the number of shares or units expected to be earned by the grantee multiplied by the stock price at the date of grant (for restricted
share awards) or the stock price at the period end date (for cash-based restricted share unit awards), and is being recognized over the
vesting period. Generally, the restricted share awards, restricted share units, and cash-based restricted share unit awards have a three-
year tranche vesting provision and an estimated forfeiture rate of 4.5%.
Restricted share, restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30, 2019, was as
follows:
Nonvested - June 30, 2018
Granted
Vested
Forfeited
Nonvested - June 30, 2019
Number
of
Shares
595,519 $
- $
(401,341) $
(10,749) $
183,429 $
Restricted Share Awards
Weighted
Average
Grant Date Fair
Value
Restricted Share Units
Weighted
Average
Grant Date Fair
Value
Number
of
Shares
24.58
-
21.96
27.15
30.30
- $
177,609 $
- $
(1,872) $
175,737 $
-
47.16
-
49.90
47.13
Cash-Based Restricted Share
Units
Weighted
Average
Grant Date Fair
Value
Number
of
Units
117,326 $
30,506 $
(68,846) $
(1,344) $
77,642 $
25.57
49.05
22.67
35.59
37.19
As of June 30, 2019, total unrecognized compensation cost related to non-vested restricted share, restricted share unit, and cash-based
restricted share unit awards was $9.1 million. This cost is expected to be recognized over a weighted-average period of approximately
two years. The restricted share and restricted share unit compensation expense was calculated based on the number of shares expected
to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based
restricted share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the
stock price at the period-end date, and is being recognized over the vesting period. The total fair value of the restricted share, restricted
share unit, and cash-based restricted share unit awards granted during the years ended June 30, 2019, 2018 and 2017, was $9.9 million,
$7.5 million and $7.8 million, respectively. The total fair value of restricted shares and cash-based restricted share unit awards vested
was $19.9 million, $17.0 million and $6.2 million during fiscal years 2019, 2018 and 2017, 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, 2019, 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, 2019, was as follows:
Nonvested - June 30, 2018
Granted
Vested
Forfeited
Nonvested - June 30, 2019
Performance Share Awards
Number of Weighted Average
Shares
Grant Date Fair Value
24.57
38.00
17.84
22.24
36.80
382,270 $
218,583 $
(100,481) $
(86,721) $
413,651 $
Cash-Based Performance Share Units
Number of
Units
Weighted Average
Grant Date Fair Value
25.71
44.00
17.84
38.77
37.47
17,279 $
11,943 $
(4,398) $
(600) $
24,224 $
82
As of June 30, 2019, total unrecognized compensation cost related to non-vested performance share and cash-based performance share
unit awards was $5.7 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,
2019, 2018 and 2017 was $10.0 million, $3.8 million and $5.3 million, respectively. The total fair value of performance shares vested
during the fiscal years ended June 30, 2019, 2018 and 2017 was $10.5 million, $3.6 million and $5.9 million, respectively.
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 14.
Segment and Geographic Reporting
The Company reports its business segments using the “management approach” model for segment reporting. This means that the
Company determines its reportable business segments based on the way the chief operating decision maker organizes business
segments within the Company for making operating decisions and assessing performance.
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 aerospace and
defense, 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, aerospace and defense and
medical markets.
Effective July 1, 2018 the Company realigned the composition of its operating segments. The Company moved Laser Systems Group
from II-VI Laser Solutions to II-VI Photonics and moved Integrated Photonics, Inc. from II-VI Photonics to II-VI Performance
Products. All applicable segment information has been restated to reflect this change.
In September 2018, November 2018, and March 2019, the Company completed its acquisitions of CoAdna, an additional product line,
and Redstone, respectively. See Note 3, Acquisitions. The operating results of these acquisitions have been reflected in the selected
financial information of the Company’s II-VI Photonics segment, with the exclusion of Redstone that is reflected in the II-VI
Performance Products Segment, since the date of the acquisitions.
83
The accounting policies are consistent across each of the segments. To the extent possible, 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. Eliminations and Other
include eliminating inter-segment sales and transfers as well as transaction costs related to the pending Finisar acquisition.
The following tables summarize selected financial information of the Company’s operations by segment:
($000)
2019
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
Goodwill
($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
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
$
$
$
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
& Other
Total
396,573
91,507
40,261
-
-
-
-
44,529
43,936
716,788
97,881
$
$
638,889
10,745
81,898
-
-
-
-
26,273
44,851
681,610
134,057
327,034
20,928
42,153
-
-
-
-
21,563
39,963
555,375
87,840
$
-
(123,180)
(15,643)
-
-
-
-
-
-
-
-
$ 1,362,496
-
148,668
(22,417)
2,562
(21,296)
107,517
92,365
128,750
1,953,773
319,778
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
& Other
Total
$
405,940
34,590
40,119
-
-
-
-
38,004
80,776
740,020
98,737
$
$
486,485
11,180
63,152
-
-
-
-
23,242
36,122
554,574
109,670
266,369
26,262
33,492
-
-
-
-
19,524
44,425
467,067
62,271
-
(72,032)
-
-
-
-
-
-
-
-
-
$ 1,158,794
-
136,763
(18,352)
3,783
(34,192)
88,002
80,770
161,323
1,761,661
270,678
II-VI
Laser
Solutions
II-VI
Photonics
II-VI
Performance
Products
Eliminations
& Other
Total
$
317,495
33,669
27,459
-
-
-
-
24,684
81,346
$
$
440,361
8,003
66,462
-
-
-
-
21,612
28,811
214,190
10,189
21,635
-
-
-
-
17,341
32,788
$
-
(51,861)
-
-
-
-
-
-
-
972,046
-
115,556
(6,809)
10,041
(23,514)
95,274
63,637
142,945
84
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
Hong Kong
China
Germany
Japan
Switzerland
Vietnam
Korea
Singapore
Philippines
United Kingdom
Taiwan
Belgium
Italy
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
2019
Revenues
2018
2017
$
405,404
$
373,735
$ 294,200
319,601
290,287
155,000
109,670
32,770
22,322
11,674
6,868
4,179
2,712
2,005
4
-
957,092
1,362,496
$
186,978
253,672
132,161
89,153
49,557
26,898
9,757
5,941
3,909
9,359
1,705
4,511
11,458
785,059
1,158,794
190,702
208,595
88,304
76,212
50,497
22,497
6,584
3,913
3,057
8,473
718
7,503
10,791
677,846
$ 972,046
2019
Long-Lived Assets
2018
2017
$
$
345,866
$
309,062
$
240,029
108,688
60,369
35,592
14,857
11,656
7,793
5,032
1,190
245,177
591,043
$
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
$
Note 15.
Fair Value of Financial Instruments
The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the
measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in
accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the
measurement date as follows:
(cid:129)
(cid:129)
(cid:129)
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.
85
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the
measurement.
At June 30, 2019, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments
were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued
by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts.
The Company has entered into earnout arrangements in conjunction with specified acquisitions, as discussed in Note 3, that provide
additional cash earnout opportunities based upon achievement of certain agreed upon financial and operational targets. The fair values
of the contingent earnout arrangements and the net put option were measured using valuations based upon other unobservable inputs
that are significant to the fair value measurement (Level 3).
The fair values of these contingent earnout arrangements and the net put option (discussed in Note 4) 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 Notes based on quoted market prices as of the last trading day prior to June 30, 2019;
however, the Notes have only a limited trading volume and, as such, this fair value estimate is not necessarily the value at which the
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 9 for details on the Company’s
debt facilities. The fair value and carrying value of the convertible notes were as follows at June 30, 2019 ($000):
Convertible notes
Fair Value
365,700
$
Carrying
Value
$
301,141
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, 2019 and 2018 ($000):
Fair Value Measurements at June 30, 2019 Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
June 30, 2019
Liabilities:
Foreign currency forward contracts
Contingent earnout arrangements
Net put option
$
$
$
139
4,397
2,024
$
$
$
-
-
-
$
$
$
139
-
-
$
$
$
-
4,397
2,024
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
86
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 Company’s acquisitions 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, 2018
Activity:
Payments
Changes in fair value recorded in other expense (income), net
Other earnout arrangements
Balance at June 30, 2019
$
$
7,429
(4,524)
(881)
4,397
6,421
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because
of the short-term maturity of those instruments. The Company’s borrowings include 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 16. 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 $17.0 million and $12.0 million at June 30, 2019 and 2018, respectively. As of June 30, 2019, these forward
contracts had expiration dates ranging from July 2019 through October 2019, with Japanese Yen denominations individually between
300 million and 645 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, 2019. The change in the fair value of these contracts for the fiscal year ended June 30, 2019, 2018 and
2017 was insignificant.
87
Note 17.
Employee Benefit Plans
Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at
the discretion of the Company’s board of directors and were $4.6 million, $5.0 million, and $4.3 million for the years ended June 30,
2019, 2018 and 2017, respectively.
On August 18, 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“2018 Plan”) for full time employees who have
completed two years of continuous employment with the Company, and the 2018 Plan was approved by the Company’s shareholders
at the Company’s Annual Meeting of Shareholders in November 2018. The employee may purchase the Company’s common stock for
the lessor of 90% of the fair market value of the shares (i) on the first trading day of the offering period, or (ii) on the purchase date.
Offering periods will run from August through January and from February through July each year. The number of shares which may
be bought by an employee during each fiscal year is limited to 15% of the employee’s base pay. The 2018 Plan, limits the number of
shares of common stock available for purchase to 2,000,000 shares. As of June 30, 2019, there have been no purchases under the 2018
Plan.
Switzerland Defined Benefit Plan
The Company maintains 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, 2019 and 2018 were $3.0 million and $2.7 million,
respectively. Expected employer contributions in fiscal year 2020 are $3.0 million.
The changes in the funded status of the Swiss Plan during the fiscal years ended June 30, 2019 and 2018 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
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:
Pension adjustment
Accumulated benefit obligation, end of period
2019
2018
62,554
3,629
528
(103)
-
6,690
1,557
(1,372)
73,483
49,034
342
2,965
1,557
(103)
(1,076)
52,719
$
$
$
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
4,392
$
2,859
20,764
13,520
(11,784)
69,682
$
$
2,846
59,800
$
$
$
$
$
$
88
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
2019
2018
2017
$
$
3,629 $
528
951
185
5,293 $
3,766
424
849
203
5,242
$
$
3,689
163
(742)
594
3,704
The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 2019 and 2018 using the
following assumptions:
June 30,
Discount rate
Salary increase rate
2019
2018
0.5%
2.0%
0.9%
2.0%
The net periodic pension cost for the Swiss Plan was calculated during the fiscal years ended June 30, 2019, 2018, and 2017 using the
following assumptions:
Year Ended June 30,
Discount rate
Salary increase rate
Expected return on plan assets
2019
2018
2017
0.9%
2.0%
2.0%
0.8%
2.0%
2.0%
0.3%
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, 2019, 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)
2020
2021
2022
2023
2024
Next five years
89
2019
2018
12.0%
50.0%
28.0%
7.0%
3.0%
100.0%
12.0%
50.0%
31.0%
4.0%
3.0%
100.0%
$
$
3,400
2,900
3,000
3,300
5,100
24,300
Note 18. Other Accrued Liabilities
The components of other accrued liabilities were as follows:
June 30,
($000)
Contract liabilities
Warranty reserve
Earnout arrangements
Other accrued liabilities
2019
2018
$
$
10,390 $
4,478
1,861
33,215
49,944 $
3,384
4,679
5,405
29,511
42,979
Note 19. Commitments and Contingencies
The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the
commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase
commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature
of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early termination.
The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred under these
commitments based upon historical experience and current expectations. The Company also has commitments relating to earnout
arrangements on its acquisitions of $4.4 million. Total future commitments are as follows:
Year Ending June 30,
($000)
2020
2021
2022
2023
2024
$
32,048
4,964
-
-
-
Note 20.
Share Repurchase Programs
In August 2017, in conjunction with the Company’s offering and sale of the Notes, the Company’s Board of Directors authorized the
Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from the offering and sale of
the Notes. The shares that were purchased by the Company pursuant to this authorization were retained as treasury stock and are
available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for approximately $49.9
million pursuant to this authorization in fiscal 2018.
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions
from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the
Company are retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30, 2019, the
Company purchased 50,000 shares of its common stock for $1.6 million under this program. The Company did not repurchase shares
pursuant to this Program during the fiscal years ended June 30, 2018 and 2017. As of June 30, 2019, the Company has cumulatively
purchased 1,366,587 shares of its common stock pursuant to the Program for approximately $20.7 million. The dollar value of shares
as of June 30, 2019 that may yet be purchased under the Program is approximately $29.3 million.
90
Note 21. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2019,
2018, and 2017 were as follows ($000):
Foreign
Currency
Translation
Adjustment
Defined
Benefit
Pension Plan
Total
Accumulated Other
Comprehensive
Income
$
(6,185)
$
(7,832)
$
(2,275)
-
(2,275)
(8,460)
7,152
-
7,152
(1,308)
(14,319)
-
(14,319)
(15,627)
$
$
$
$
1,920
594
2,514
(5,318)
2,643
203
2,846
(2,472)
(6,307)
185
(6,122)
(8,594)
$
$
(14,017)
(355)
594
239
(13,778)
9,795
203
9,998
(3,780)
(20,626)
185
(20,441)
(24,221)
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
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
AOCI - June 30, 2019
Note 22. 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,
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of capitalized payments
Amount
2,355
2,419
2,486
2,554
2,624
22,116
34,554
10,193
24,361
$
$
$
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, 2019 and 2018. 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, 2019, the
Company recorded $1.7 million of depreciation expense associated with the capital leased asset. The accumulated depreciation on the
capital lease asset was $4.2 million as June 30, 2019.
91
Quarterly Financial Data (unaudited)
Fiscal Year 2019
Quarter Ended
($000, except per share)
2019
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 2018
Quarter Ended
($000, except per share)
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
September 30, December 31, March 31,
2018
2018
2019
June 30,
2019
$
$
$
$
314,433 $
190,526
33,171
53,523
5,584
(713)
32,342
6,193
26,149 $
342,839 $
211,333
33,764
58,136
5,580
(701)
34,727
6,025
28,702 $
342,496 $
215,212
36,026
60,128
5,647
(1,532)
27,015
2,377
24,638 $
0.41 $
0.45 $
0.39 $
0.40 $
0.44 $
0.38 $
362,728
224,076
36,202
61,731
5,606
384
34,729
6,701
28,028
0.44
0.43
September 30, December 31, March 31,
2017
2017
2018
June 30,
2018
$
$
$
$
261,503 $
155,530
25,575
50,624
3,645
(770)
26,899
5,758
21,141 $
281,470 $
172,075
27,779
49,130
4,644
(2,026)
29,868
20,272
9,596 $
294,746 $
176,521
30,625
53,121
5,014
(1,755)
31,220
1,122
30,098 $
0.34 $
0.15 $
0.48 $
0.32 $
0.15 $
0.45 $
321,075
192,465
32,896
55,690
5,049
768
34,207
7,040
27,167
0.44
0.42
92
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2019, 2018, AND 2017
(IN THOUSANDS OF DOLLARS)
YEAR ENDED JUNE 30, 2019:
Allowance for doubtful accounts
Warranty reserves
Deferred tax asset valuation allowance
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
Balance at
Beginning
of Year
Charged
to
Expense
Charged
to Other
Accounts
Deduction
from
Reserves
Balance
at End
of Year
$
$
$
$
$
$
$
$
$
837
4,679
21,797
1,314
4,546
42,562
2,016
3,908
42,641
$
$
$
$
$
$
$
$
$
548
4,185
(1,607)
(129)
3,821
(4,602)
(134)
4,850
(79)
$
$
$
$
$
$
$
$
$
-
-
-
$
$
$
(92) (1) $
$
$
(4,386)
-
1,293
4,478
20,190
$
-
-
$
(16,163) (2) $
(348) (1) $
$
$
(3,688)
-
837
4,679
21,797
-
-
-
$
$
$
(568) (1) $
$
$
(4,212)
-
1,314
4,546
42,562
(1)
(2)
Primarily relates to write-offs of accounts receivable.
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, 2019, the Company’s disclosure controls and procedures are effective.
93
Management’s Report on Internal Control Over Financial Reporting
Refer to Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report of Form 10-K.
Report of the Registered Public Accounting Firm
The report of Ernst & Young LLP, an independent registered public accounting firm, with respect to our internal control over financial
reporting is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during our most recent quarter
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. 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.
We intend to satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
provision of the Code of Business Conduct and Ethics by posting such information on our web site.
The web site and information contained on it or incorporated in it are not intended to be incorporated in this Annual Report on Form
10-K or other filings with the SEC.
Item 11.
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 2019,” “Executive Compensation,” “Compensation Committee Report” and “Compensation and Risk” in
the Company’s Proxy Statement.
94
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, 2019 is set forth under
Item 8 of this Annual Report on Form 10-K.
Financial statements, financial statement schedules and exhibits not listed have been omitted where the required information is
included in the Consolidated Financial Statements or notes thereto, or is not applicable or required.
95
Exhibit No.
2.01
Description
Agreement and Plan of Merger, dated November 8, 2018, by and
among II-VI Incorporated, Mutation Merger Sub Inc. and Finisar
Corporation.
3.01
Amended and Restated Articles of Incorporation of II-VI
Incorporated
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
Location
Incorporated herein by reference to Exhibit 2.1
to II-VI’s Current Report on Form 8-K (File
No. 000-16195) filed on November 9, 2018.
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
4.03
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.
Description of II-VI’s Securities Registered Pursuant to Section 12 of
the Securities Exchange Act of 1934.
Filed herewith.
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*
96
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.
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*
10.10
Employment Agreement, dated March 6, 2017, by and between II-VI
Incorporated and Jo Anne Schwendinger *
10.12
10.13
10.14
10.15
10.16
10.19
10.20
Form of Employment Agreement* (P)
Form of Executive Employment Agreement
Form of Exhibit 1 to Employment Agreement
Form of Indemnification Agreement
Form of Representative Agreement between II-VI and its foreign
representatives (P)
II-VI Incorporated Amended and Restated Employees’ Profit-Sharing
Plan and Trust Agreement, as amended (P)
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)*
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.
Incorporated herein by reference to Exhibit
10.10 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) filed on August 28,
2018.
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
10.13 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) filed on August 28,
2018.
Incorporated herein by reference to Exhibit
10.14 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) filed on August 28,
2018.
Incorporated herein by reference to Exhibit
10.15 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) filed on August 28,
2018.
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
10.05 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.
97
10.24
Amended and Restated II-VI Incorporated Deferred Compensation
Plan (applicable to periods after January 1, 2015)*
10.25
10.26
Trust Under the II-VI Incorporated Deferred Compensation Plan*
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*
98
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.
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.
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*
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
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*
Incorporated herein by reference to Exhibit
10.33 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2013.
Incorporated herein by reference to Exhibit
10.34 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2013.
Incorporated herein by reference to Exhibit
10.35 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2013.
Incorporated herein by reference to Exhibit
10.38 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2014.
Incorporated herein by reference to Exhibit
10.39 to II-VI’s Annual Report on Form 10-K
(File No. 000-16195) for the fiscal year ended
June 30, 2014.
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.
99
10.50
10.51
10.52
10.53
10.54
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*
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*
10.55
II-VI Incorporated 2018 Employee Stock Purchase Plan*
10.56
II-VI Incorporated 2018 Omnibus Incentive Plan*
10.57
Form of Nonqualified Stock Option Agreement under the II-VI
Incorporated 2018 Omnibus Incentive Plan*
10.58
Form of Restricted Share Unit Settled In Shares Award Agreement
under the II-VI Incorporated 2018 Omnibus Incentive Plan*
10.59
Form of Restricted Share Unit Settled In Cash Award Agreement
under the II-VI Incorporated 2018 Omnibus Incentive Plan*
10.60
Form of Restricted Share Unit Settled In Shares Award Agreement
under the II-VI Incorporated 2018 Omnibus Incentive Plan*
10.61
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated 2018 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit
10.08 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
September 30, 2016.
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.
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.
Incorporated herein by reference to Exhibit
10.1 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on November 13,
2018.
Incorporated herein by reference to Exhibit
10.2 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on November 13,
2018.
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
December 31, 2018.
Incorporated herein by reference to Exhibit
10.02 to II-VI’s Quarterly Report on Form 10-
Q (File No. 000-16195) for the quarter ended
December 31, 2018.
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
December 31, 2018.
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
December 31, 2018.
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
December 31, 2018.
100
10.62
10.63
21.01
23.01
31.01
31.02
32.01
32.02
Credit Agreement, dated March 4, 2019, by and among II-VI
Incorporated, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and an L/C Issuer, and the other lenders party
thereto
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, 2019.
Amendment No. 1 to Credit Agreement, dated as of May 24, 2019,
by and among II-VI Incorporated, Bank of America, N.A., as
Administrative Agent, and the other lenders party thereto.
Incorporated herein by reference to Exhibit
10.1 to II-VI’s Current Report on Form 8-K
(File No. 000-16195) filed on May 31, 2019.
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.
101
Interactive Data File
(101.INS)
(101.SCH)
(101.CAL)
(101.DEF)
(101.LAB)
(101.PRE)
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
Filed herewith.
Filed herewith.
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith.
XBRL Taxonomy Definition Linkbase
Filed herewith.
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
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.
101
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 16, 2019
II-VI INCORPORATED
By:
/s/ Vincent D. Mattera Jr.
Vincent D. Mattera Jr.
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 16, 2019
Date: August 16, 2019
Date: August 16, 2019
Date: August 16, 2019
Date: August 16, 2019
Date: August 16, 2019
Date: August 16, 2019
Date: August 16, 2019
Principal Executive Officer:
By:
/s/ Vincent D. Mattera Jr.
Vincent D. Mattera Jr.
Chief Executive Officer and Director
Principal Financial and Accounting Officer:
By:
By:
By:
By:
By:
By:
By:
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
/s/ Francis J. Kramer
Francis J. Kramer
Chairman of the Board
/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/ Shaker Sadasivam
Shaker Sadasivam
Director
/s/ Enrico Digirolamo
Enrico Digirolamo
Director
102
This page intentionally left blank.
This page intentionally left blank.
Corporate Information
Board of Directors
Joseph J. Corasanti
Retired President, CEO and Director
CONMED Corporation
Enrico Digirolamo
Senior Advisor to Technology Companies
and Manufacturing Firms
Francis J. Kramer, Chairman
Retired President and CEO
II-VI Incorporated
Dr. Vincent D. Mattera, Jr.
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
Dr. Howard H. Xia
Retired General Manager
Vodafone China Limited
Executive Officers
Dr. Vincent D. Mattera, Jr.
Chief Executive Officer
Robert W. Bashaw II
President
Mary Jane Raymond
Chief Financial Officer
Dr. Giovanni Barbarossa
Compound Semiconductors President
and Chief Strategy Officer
Jo Anne Schwendinger
Chief Legal and Compliance Officer
and Secretary
Dr. Christopher S. Koeppen
Chief Technology Officer
Annual Meeting
Tuesday, November 12, 2019
at 3:00 PM EST
Meeting to be webcast from:
Fiddler’s Elbow Country Club
811 Rattlesnake Bridge Road
Bedminster, NJ 07921
Stock Listing
The common stock of II-VI Incorporated
is traded on Nasdaq under the trading
symbol “IIVI.”
Transfer Agent
American Stock Transfer and
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
Financial Reconciliation Tables
This table is a reconciliation of EBITDA to Net Earnings ($ in millions)
This table is a reconciliation of Adjusted Net Earnings to Net
Earnings ($ in millions)
Net earnings
66.0
65.5
95.3
88.0
107.5
Net earnings
2015
2016
2017
2018
2019
Depreciation and amortization
53.1
Interest expense
Income tax expense
3.9
13.1
56.7
3.1
24.5
63.6
6.8
23.5
80.8
18.4
34.2
92.4
22.4
21.3
Share-based compensation expense
Amortization expense
Acquired businesses one-time expense
2.0
3.8
EBITDA
136.1
149.8
189.2
221.4
243.6
Transaction cost related to pending merger
-
15.6
Impact of the "Tax Cuts and Jobs Act"
8.0
-
Tax adjustment on one-time items
Adjusted net earnings
(0.3)
(0.9)
132.0
167.6
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.
2018
2019
88.0
107.5
19.7
25.0
14.6
16.6
375 Saxonburg Boulevard, Saxonburg, PA 16056
724.352.4455
www.ii-vi.com