ROUGH INNOVATIVE M A TE RI A
70
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9 0
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S V I T A L T O A BETTER LIFE TODAY AN
130
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SETTING THE COURSE
FOR ONE TWO-SIX
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HE WORLD TO BE SAFER, HEALT H I E R ,
300
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250
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R, A N D M ORE EFFICIENT
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.
About the cover: The Blue Marble is an image of
Earth taken by the crew of Apollo 17 on December 7, 1972,
from 18,000 miles (29,000 km) away. It shows the Mediterranean
Sea to Antarctica, the Arabian Peninsula, and Madagascar, while the entire
coastline of Africa is clearly visible, and the Asian mainland is on the horizon.
It is one of the most widely distributed photographic images in existence. With the
sun behind the astronauts, the Earth appeared to them to be the size of a glass marble.
To us, the Blue Marble reveals a remarkable view of our Earth and a complex
ecosystem of diminishing resources, driving the need for a delicate and
respectful balance of all the remaining elements of our environment.
The compass pointing to 126 degrees symbolizes our employees coming together
as ONE TWO-SIX with our strong sense of purpose, revealed in our mission
of enabling the world to be safer, healthier, closer, and more efficient.
II-VI’s investments and innovations underpin many of the transformations that the world
is experiencing today — becoming more connected, intelligent, mobile, and electric.
Fifty years ago, at the time of our founding, our course was set to change the world
consistent with our vision of a world transformed through innovative materials
vital to a better life today and the sustainability of future generations.
Sincere thanks to all of our stakeholders as well as those who
have gone before us and those who will come after us to
meet this highest calling to transform the world.
Financial Summary
For the year ended June 30
($000's except per share data)
Revenues
Net Earnings - GAAP
Net Earnings - Non-GAAP
Diluted earnings per share - GAAP
Diluted earnings per share - Non-GAAP
As of June 30
($000)
Total assets
Total shareholders’ equity
Working capital
2020
$ 2,380,071
(67,029)
$
258,616
$
(0.79)
$
2.85
$
$ 5,234,714
$ 2,076,803
$ 1,116,076
2019
$ 1,362,496
$ 107,517
$ 158,218
1.63
$
2.40
$
$ 1,953,773
$ 1,133,209
$ 542,348
Revenues ($ in millions)
30% CAGR
Cash Flow from Operations ($ in millions)
25% CAGR
$2,400
$1,600
$800
$0
2,380.1
1,362.5
1,158.8
827.2
972.0
FY16
FY17
FY18
FY19
FY20
$280
$240
$200
$160
$120
$80
$40
$0
297.3
161.0
178.5
123.0
118.6
FY16
FY17
FY18
FY19
FY20
EBITDA ($ in millions)
13% CAGR
Total Shareholders’ Equity ($ in millions)
28% CAGR
$240
$200
$160
$120
$80
$40
$0
221.4
189.2
149.8
243.6
246.4
FY16
FY17
FY18
FY19
FY20
$1,800
$1,600
$1,200
$800
$400
$0
2,076.8
782.3
900.6
1,024.3
1,133.2
FY16
FY17
FY18
FY19
FY20
Non-GAAP Reconciliation Tables
Reconciliation of Net Earnings to EBITDA ($ in millions)
Reconciliation of Net Earnings to Non-GAAP Net Earnings ($ in millions)
2020
2019
2018
2017
2016
Net earnings
(67.0)
107.5
220.9
92.4
88.0
80.8
95.3
63.6
65.5
56.7
Net Earnings
Preliminary fair value adjustment on acquired inventory
Depreciation
and
amortization
Interest
expense
Income tax
expense
(benefit)
89.4
22.4
18.4
6.8
3.1
3.1
21.3
34.2
23.5
24.5
Amortization of acquired intangibles
Stock based compensation
Transaction expenses related to acquisitions
Severance, restructuring and related costs
Foreign currency exchange (gains) losses
EBITDA
246.4
243.6
221.4
189.2
149.8
Impairment of investment
CAGR – Compound Annual Growth Rate
EBITDA – Earnings before interest, income taxes,
depreciation, and amortization
Non-GAAP amounts exclude certain adjustments for share-based
compensation, acquired intangible amortization expense, certain one-
time transaction expenses, fair value measurement period adjustments
and restructuring and related items. The non-GAAP financial measures
for the comparative periods presented above have been adjusted to
conform to the current period presentation.
Debt extinguishment expense
Additional interest expense related to the Finisar acquisition
Finisar results
Tax impact of Non-GAAP measures and fair value adjustments
Net Earnings - Non-GAAP
2020
2019
(67.0)
107.5
87.7
64.2
63.1
44.6
27.6
14.4
5.0
3.9
1.7
(1.6)
15.1
258.6
-
16.6
25.0
19.4
-
3.2
-
-
-
-
(13.5)
158.2
ii-vi.com 1
Shareholder Letter
We announced this acquisition in November 2018 and
immediately began developing an extensive plan to
merge the companies. The success of this planning
translated into the most compelling showcase
thus far of II-VI’s ability to execute acquisitions.
The following are some of the highlights:
• We are ahead in our plans to achieve synergies of $150M
in three years.
• Our commercialization of indium phosphide optoelectronic
components is taking off as envisioned, validating II-VI’s
signature approach of serving customers at various
levels of the value chain to fully address market needs.
• We leveraged our 150 mm VCSEL array manufacturing
expertise in Warren, New Jersey, to get the VCSEL
production lines in Sherman, Texas, qualified,
positioning us for significant growth in 3D sensing.
As a result of the acquisition, we are seeing customers
increasingly relying on us, since we possess the broadest
product portfolio, applications expertise, and scalable
manufacturing capabilities in the optical communications
industry. We offer one of the most complete portfolios of
products for terrestrial and submarine optical networks, as
well as for the 5G optical infrastructure. We now have an
industry-leading transceiver business that adds around $1B
to our top line. Our manufacturing locations in the United
States, Europe, China, and greater Asia provide customers
with a diversified supply chain and automation capabilities
for high-volume assemblies. Achieving time to market
and scale is among the objectives of our customers, who
realize that our business is built on technology platforms of
materials that matter, an extensive portfolio of intellectual
property, and experienced people who can take on the
toughest challenges and emerge with differentiated products.
Throughout this enormous integration, we still managed
to keep our focus on nurturing other rapidly growing areas
of our business. Aerospace and defense increasingly
is turning into a new growth market for us. In addition
assess and address large and growing markets. As much
as we have accomplished, we are still in the early stages
of a long cycle of technological revolutions, including the
proliferation of cloud-based services, the deployment of
5G and 3D sensing, and the increasing adoption of SiC
technology in the electric vehicle market. Our technology
platforms increasingly enable growth trends involving
applications that are mobile, intelligent, and electric.
Our leadership position in the optical communications
components and subsystems market, our strong
operating performance, and our attention to delivering
financial returns position us to provide vital services
to the network communications infrastructure that is
accelerating the world’s digital transformation. I believe
that we are on a trajectory to build a greater company.
As we enter our 50th year, I would like to recognize our
Chairman and second CEO, Francis J. Kramer, and Dr. Carl
Johnson, the first CEO and co-founder of II-VI. Both paved
the way for employees to have a great opportunity to
participate in the ownership and rewards of the company’s
success and prepared us for the next 50 years with a
timeless sense of our position and importance in a world
transformed through innovative materials vital to a better
life today and the sustainability of future generations.
Dr. Vincent D. (Chuck) Mattera, Jr.
Chief Executive Officer
to our proud support for the contributions we make
to the F-35 aircraft and to platforms that support
vital intelligence, surveillance, and reconnaissance
applications, we are also further positioning II-VI to
address exciting new opportunities in hypersonics and
directed energy, as well as satellites and contested space.
At the same time, we remained mindful of the world’s need
for clean energy. With profound changes in the climate
and in the regulatory environment, we have continued to
double our capacity of silicon carbide (SiC) substrates
every 18 months and are making plans to increase our
capacity another 5-10x within the next five years. As if
that was not exciting enough, we entered into a strategic
arrangement with General Electric (GE) on SiC devices and
modules. GE has long been an innovator in the technology
that we are now licensing to accelerate our participation
in the adoption of SiC in high-value power electronic
applications to advance green and clean solutions.
We accomplished all this in the face of COVID-19.
The gravity of this virus will require a global effort to
overcome its effects and eradicate its causes, and our
endeavors are having an important effect on the world
around us, providing us with a reminder that our mission
to enable the world to be safer, healthier, closer, and
more efficient has never been more important. We
have institutionalized our procedures to ensure that our
employees are safe, our facilities are secure and hygienic,
we are compliant with the laws, and we have adequate
cybersecurity, all while serving rapidly growing markets.
We capped our exciting year with an equity raise
of approximately $920M, as attractive market
conditions presented us a unique opportunity
to strengthen our balance sheet.
Sometimes our actions seem counterintuitive or are
misunderstood by some. I believe that our agility has
helped us build one of the largest photonics and compound
semiconductor companies in the world founded on
advanced materials. This has set us apart and allows us to
Fiscal Year 2020 was my fourth year
as the third CEO of II-VI, and it was one
of the most exciting of my career. I
am humbled to lead our Company and
grateful for having you and over 22,000
employees among our stakeholders.
We began the fiscal year by completing
the largest acquisition in our history, our
fourth platform acquisition, the acquisition
of Finisar. Like the other transformative
acquisitions we have completed, it
heralded a new chapter in our history.
2 II-VI INCORPORATED 2020 ANNUAL REPORT
ii-vi.com 3
Segments and Business Units
II-VI is organized around two operating segments, each with very large addressable
markets. We believe that this structure enables us to fuel our long-term growth
and allows us to take a longer-term view with respect to innovation programs
linked to large-market megatrends. It also ensures that our precious technology
investments are carefully balanced and strategically allocated at all levels of the
value chain, from engineered materials to devices, components, and subsystems.
Segments
Markets
Regions
Photonic
Solutions
65%
35%
Compound
Semiconductors
Industrial
Aerospace & Defense
12%
7%
Consumer Electronics
6%
5%
Semiconductor
Capital Equipment
1%
Other
2%
Life Sciences
67%
Optical
Communications
China
20%
46%
North America
18%
Europe
8%
8%
Japan
Other
BUSINESS UNITS
Silicon Carbide
Substrates
BUSINESS UNITS
PHOTONIC
SOLUTIONS
SEGMENT
PRODUCT
LINES
Datacom
Transceivers
Advanced
Optics
Consumer
Optics
Telecom
Backbone
Telecom
Access
ROADM
Communications
Optics
Laser Optics
The Finisar WSS “hold separate” Business
Unit is not shown
In FY21 the Coherent Optics Business Unit was
merged into the Transceivers Business Unit
Amplifiers and
Linecards
Wavelength
Selective
Switches
Pump Lasers
Advanced
Components
Magneto-optic
Materials
Wide-Bandgap
Semiconductors
Epitaxial
Wafers
GaAs
Photonics
Optoelectronic
and RF Devices
GaAs
Electronics
GaN
Electronics
Ceramics and
Metal Matrix
Composites
PRODUCT
PLATFORMS
COMPOUND
SEMICONDUCTORS
SEGMENT
Aerospace
& Defense
Engineered
Materials and
Laser Optics
Laser Devices
and Systems
Laser Systems
Laser
Processing
Heads
GaAs
Optoelectronics
Performance
Metals
Thermoelectrics
IR Optics and
Materials
4 II-VI INCORPORATED 2020 ANNUAL REPORT
4 II-VI INCORPORATED 2020 ANNUAL REPORT
ii-vi.com 5
ii-vi.com 5
Founded: 1971
IPO 1987: IIVI
Worldwide Employees: 22,000+
Worldwide Locations: 69
Countries: 18
FY2020 Revenue: $2,380M
Hypersonic
Subsystems
Distributed
Aperture
Systems
High-Energy
Lasers
Outer Space
Subsystems
A Complete Portfolio
of Products for
Communication Networks
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.
Fifth-generation (5G) wireless networks 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.
DATACOM
ACCESS NETWORKS
RAID SYSTEM
TAPE DRIVE
Switch
Transceivers
Erbium Doped
Fiber Amplifier
(EDFA)
Dense Wavelength
Division Multiplexer
(DWDM)
ETHERNET
SWITCH/ROUTER
HBA
STORAGE AREA
NETWORK (SAN)
DATACENTER
SERVERS
LOCAL AREA
NETWORK (LAN)
NIC/CNA CARD
ETHERNET
SWITCH/ROUTER
ENTERPRISE
ACCESS
COMMON ANTENNA
TV (CATV)
METRO
ACCESS
METRO AGGREGATION
FIXED BROADBAND
ACCESS
AUTONOMOUS VEHICLES
5G
AUGMENTED REALITY
MOBILE
ACCESS
SMART FACTORY
Industrial Internet of
Things (IIoT)
SMART CITY
Internet of
Things (IoT)
TELEMEDICINE
SERVER
MICRO ETHERNET
LINK (<80km)
Coarse Wavelength
Division Multiplexer
(CWDM)
Erbium Doped
Fiber Amplifier
(EDFA)
Transceivers
Couplers
6 II-VI INCORPORATED 2020 ANNUAL REPORT
Gallium Nitride on
Silicon Carbide
Devices
Gallium Arsenide
Epitaxial Wafers
Gallium Arsenide
Vertical Cavity
Surface Emitting
Lasers (VCSELs)
Indium Phosphide
Lasers
Integrated
Circuits
Transceivers
Thin Film
Filters
Wavelength
Division
Multiplexer
(WDM)
Wavelength
Selective Switch
(WSS)
ii-vi.com 7
Gene Sequencing and
Testing for COVID-19
with Lasers, Optics,
and Thermoelectrics
Thermoelectrics
Fluorescence Filters
Laser Solutions
II-VI plays an important role in the supply
chain for Polymerase Chain Reaction
(PCR) instruments that can determine the
outcome of patient testing for COVID-19.
These PCR instruments were first introduced in the
1980s and are common laboratory equipment used for
the identification of genetic structure. The PCR process
involves thermal cycling (precise and rapid heating and
cooling) of the test sample to drive a reaction that can
make millions of copies of the viral genetic material
required for detection. Next, optical filters and other
optical components are used for sample illumination,
light propagation, and ultimately detection. In short, if
the COVID-19 viral genetic material is present, it will be
amplified and then optically detected.
There are two critical components that make these tests
possible — thermoelectrics (picture, top right) and optics,
including fluorescence filters (picture, middle right). II-VI
is a global leader in manufacturing and delivering both
thermal and optical components and subassemblies
to the leading providers of these instrument platforms.
II-VI has seen a significant increase in demand for
those products and is working tirelessly to support
our life sciences customers who are rapidly increasing
production of these test platforms.
II-VI is also supplying laser solutions (picture, bottom
right) to gene sequencing platforms that help scientists
study COVID-19 and further optimize PCR test platforms,
which may lead to treatments and ultimately provide
critical information that is required to develop a vaccine.
8 II-VI INCORPORATED 2020 ANNUAL REPORT
8 II-VI INCORPORATED 2020 ANNUAL REPORT
ii-vi.com 9
Our Strategic House
The Strategic House describes and illustrates how we will meet the expectations
from all our stakeholders, which include our employees, our customers,
our shareholders, our suppliers, and our communities.
Through it, we aim to create long-term opportunities and
achieve a sustainable competitive advantage.
The Strategic House outlines who we are today, the desired
future we are pursuing, how we intend to get there,
and how we can measure our progress.
STRATEGIC
HOUSE
Quality Policy
Mission
Strategic Areas of
Focus
Key Performance
Indicators
Vision
Values
Fully satisfying customers and continually improving
Enabling the world to be safer, healthier, closer, and more efficient
Quality
Purpose
Quality-Driven
Fully Engaged Employees
Manufacturing Excellence
Innovation
Fully Satisfied Customers
Exceptional Business Results
All of our efforts produce
consistent and reproducible
results that fully satisfy
customer requirements, with
a focus on performance
excellence, continuous
improvement, information
integrity, and growth.
We seek to create a
safe, healthy, and secure
environment that is open,
supportive, and embraces
diversity in which our
employees can contribute,
grow, achieve work/life
balance, and feel valued.
We leverage our global
capabilities and knowledge to
optimize our processes, drive
continuous improvement,
plan for business continuity,
and deliver quality products
on time.
We persistently deliver
exceptional value to
our customers and the
marketplace through the
development of innovative
products and advanced
technologies that enable
organic growth.
We fully anticipate and satisfy
our customers’ requirements,
creating satisfaction, loyalty,
and long-term partnerships
to enable us to increase
business and continue to be a
market leader.
Our outlook is bold, growth-
oriented, sustainable, and
stakeholder-focused, and
we achieve our financial
and strategic goals through
leadership, compliance,
and risk management in all
selected markets.
Stakeholders’ Demands
that Drive Long-Term
Thinking and Actions
• Cost of Quality
• Engagement Index
• Gross Margin
• New Product Revenue
• Customer Market Share
• Revenue
• Employee Turnover
• Inventory Turns
• Return on Investment
• Customer Satisfaction
• Earnings per Share
• Parts per Million
Nonconforming
• Total Recordable Injury
• First-Pass Yield
• Supplier Parts per Million
Rate
Nonconforming
• Preventive Action
Efficiency
• On-Time Delivery
• Procurement Cost
Reduction
• New Product Launch:
Quality, Cost, Delivery
Index
• Corporate Social
Responsibility Index
• Return on Sales
• Profitability
• Free Cash Flow
Long-Term Focus
A world transformed through innovative materials vital to a better life today and the sustainability of future generations
Desired State
I CARE =
Integrity
Collaboration
Accountability
Respect
Enthusiasm
I CARE
10 II-VI INCORPORATED 2020 ANNUAL REPORT
ii-vi.com 11
Vision
A world transformed
through innovative
materials vital to a
better life today and
the sustainability of
future generations
12 II-VI INCORPORATED 2020 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, 2020
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: 001-39375
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
375 Saxonburg Blvd.
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
Series A Mandatory Convertible Preferred
Stock, no par value
Trading Symbol(s)
IIVI
Name of each exchange on which registered
Nasdaq Global Select Market
IIVIP
Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Securities registered pursuant to Section 12(g) of the Act: None
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.
☐
6020_FIN.pdf 1
9/2/20 2:56 PM
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Aggregate market value of outstanding Common Stock, no par value, held by non-affiliates of the Registrant at December 31,
2019, was approximately $3,031,733,938 based on the closing sale price reported on the Nasdaq Global Select Market. For
purposes of this calculation only, directors and executive officers of the Registrant and their spouses are deemed to be affiliates
of the Registrant.
Number of outstanding shares of Common Stock, no par value, at August 20, 2020, was 103,668,355.
6020_FIN.pdf 2
9/2/20 2:56 PM
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2020 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 risk factors, among others, in some cases have affected and in the future could affect our financial performance
and actual results, and could cause actual results for fiscal 2021 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.
Widespread health crises, including the global novel coronavirus (COVID-19) pandemic, could
materially and adversely affect our business, financial condition and results of operations.
Global economic downturns, including any downturn related to COVID-19, 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 related to our products.
Foreign currency risk may negatively affect our revenues, cost of sales and operating margins, and
could result in foreign exchange losses.
Our competitive position may still require significant investments.
We may be unable to successfully implement our acquisitions strategy or integrate acquired
companies and personnel with existing operations.
Although II-VI continues to expect that its acquisition of Finisar will result in cost savings,
synergies, and other benefits, the combined company may not realize those benefits, or be able to
retain those benefits even if realized.
Our future success depends on continued international sales, and our global operations are
complex and present multiple challenges to manage.
We are subject to complex and rapidly changing import and export regulations which could limit
our sales and decrease our profitability.
Changes in trade policies, such as increased import duties, could increase the cost of goods
imported into the United States or China. The inclusion of companies, such as Huawei, on the U.S.
Entity List, could decrease our access to customers and markets and materially impact our
revenues in the aggregate.
Any inability to access financial markets from time to time to raise required capital, finance our
working capital requirements or our acquisition strategies, or otherwise to support our liquidity
3
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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 repurchase the
notes in accordance with their terms.
Our credit agreement restricts our operations, particularly our ability to respond to changes or to
take certain actions regarding our business.
We may fail to accurately estimate the size and growth of our markets and our customers’
demands.
We may encounter increased competition and we may fail to accurately estimate our competitors’
or our customers’ willingness and capability to backward integrate into our competencies and
thereby displace us.
There are limitations on the protection of our intellectual property and we may from time to time
be involved in costly intellectual property litigation or indemnification.
A significant portion of our business is dependent on cyclical industries.
Our global operations are subject to complex legal and regulatory requirements.
Changes in laws and regulations governing data privacy and data protection could 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 that commit us to supply products on specified terms.
We depend on highly complex manufacturing processes that require feeder materials, components,
and products from limited sources of supply.
Increases in commodity prices may adversely affect our results of operations and financial
condition.
We use and generate potentially hazardous substances that are subject to stringent environmental
regulations.
We have a substantial amount of debt, which could adversely affect our business, financial
condition, or results of operations and prevent us from fulfilling its debt-related obligations.
Unfavorable changes in tax rates, tax liabilities, or tax accounting rules could negatively affect
future results.
Natural disasters or other global or regional catastrophic events could disrupt our operations, give
rise to substantial environmental hazards, and adversely affect our results.
Our success depends on our ability to attract, retain and develop key personnel and requires
continued good relations with our employees.
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 noncancelable purchase commitments.
If we fail to maintain an effective system of disclosure controls and internal control over financial
reporting, our ability to produce timely and accurate financial statements or comply with
applicable regulations could be impaired.
Our stock price has been volatile in the past and may be volatile in the future.
Provisions in our Amended and Restated Articles of Incorporation (the “Articles of
Incorporation”) and Amended and Restated By-Laws (the “By-Laws”) and the Pennsylvania
Business Corporation Law (the “BCL”) may delay or prevent our acquisition by a third party,
which could also reduce the market price of our capital stock.
Because we do not currently intend to pay dividends, holders 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.
Our ability to declare and pay dividends on our capital stock may be limited, including by the
terms of our existing Credit Agreement.
The Mandatory Convertible Preferred Stock may adversely affect the market price of our common
stock.
4
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Our common stock is subordinate to our existing and future indebtedness; the Mandatory
Convertible Preferred Stock, when issued; and any other preferred stock we may issue in the
future. Our Mandatory Convertible Preferred Stock ranks junior to all of our and our subsidiaries’
consolidated liabilities.
Our board of directors can issue, without approval of the holders of our common stock, preferred
stock with voting and conversion rights that could adversely affect the voting power of the holders
of our common stock, the rights of holders of shares of our capital stock or the market price of our
capital stock.
Reports published by securities or industry analysts, freelance bloggers and credit rating agencies,
including projections in those reports that exceed our actual results, could adversely affect our
share price and trading volume.
Regulatory actions may adversely affect the trading price and liquidity of the Mandatory
Convertible Preferred Stock.
Holders of Mandatory Convertible Preferred Stock have no voting rights with respect to the
Mandatory Convertible Preferred Stock, except under limited circumstances.
We depend on our subsidiaries for cash to fund our operations and expenses, including future
dividend payments with respect to the Mandatory Convertible Preferred Stock.
The foregoing and additional risk factors are described in more detail herein under Item 1A. “Risk Factors”. All such factors, as
well as factors described or referred to in other filings we make with the Securities and Exchange Commission (the “SEC”)
from time to time, should be considered in evaluating our business and 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 or
estimate the extent to which any individual risk factor, or combination of risk factors, may impact our business. It is also not
possible for management to mitigate all such risks, and therefore any such risk factor may cause results to differ materially from
those contained in any forward-looking statement. The forward-looking statements included in this Annual Report on Form 10-
K speak only as of the date of this Annual Report on Form 10-K. We do not assume any obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or developments, or otherwise, except as may
be required by the securities laws. We caution you not to rely on them unduly.
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.
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5
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 of the periodic table of elements from which II-VI originally designed and produced
infrared optics for high-power CO2 lasers used in materials processing. The majority of our revenues are attributable to the sale
of engineered materials and optoelectronic components, devices, and subsystems for the optical communications, industrial
materials processing, aerospace and defense, and consumer electronics markets. Reference to “fiscal” or “fiscal year” means our
fiscal year ended June 30 for the year referenced.
The following terms are defined for reference: bismuth telluride (“Bi2Te3”); cadmium telluride (“CdTe”); carbon dioxide
(“CO2”); carbon monoxide (“CO”); chemical vapor deposition (“CVD”) of materials including diamond; deep ultraviolet
(“DUV”) lithography; 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 (“Gbps”); high-definition multimedia interface (“HDMI”); high-electron-mobility
transistor (“HEMT”); 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”); optical
channel monitor (“OCM”); organic light-emitting diode (“OLED”); original equipment manufacturer (“OEM”); optical time-
domain reflectometer (“OTDR”); polymerase chain reaction (“PCR”); radio frequency (“RF”); reconfigurable optical add/drop
multiplexer (“ROADM”); research and development (“R&D”); research, development, and engineering (“RD&E”); silicon
carbide (“SiC”); terabit per second (“Tbps”); 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”).
Acquisition of Finisar Corporation
On September 24, 2019 (the “Closing Date”), the Company completed its acquisition of Finisar Corporation ("Finisar"), a
global technology leader for subsystems and components for fiber-optic communications. Additional information regarding the
Company’s acquisition of Finisar is set forth below and in Note 3. Acquisitions to our Consolidated Financial Statements in
Item 8 of this Annual Report on Form 10-K. Due to timing of the acquisition, the results of Finisar for the three months ended
September 30, 2019, have not been allocated to an Operating Segment, and are presented in Unallocated and Other within Note
14. Segment and Geographic Reporting to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-
K. Beginning on October 1, 2019, the results of Finisar have been allocated to the Photonic Solutions and Compound
Semiconductors Segments.
General Description of Business
We develop, manufacture, and market engineered materials, optoelectronic components, and devices for use in optical
communications, industrial materials processing, aerospace and defense, consumer electronics, semiconductor capital
equipment, life sciences, and automotive applications and markets. We use advanced engineered materials growth technologies
and 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) optical, data,
and wireless communications products; (ii) laser cutting, welding, and marking operations; (iii) 3D sensing consumer
applications; (iv) aerospace and defense applications including intelligence, surveillance, and reconnaissance; (v)
semiconductor processing tools; and (vi) thermoelectric cooling and power-generation solutions.
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Through RD&E investments and its strategic acquisitions, II-VI has expanded its portfolio of materials and product platforms.
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 our end
markets. These compound semiconductor lasers enable optical signal transmission, reception, and amplification in terrestrial
and submarine communications networks; high-bit-rate server connectivity between and within datacenters; optical
communications network monitoring; materials processing; and fast and accurate measurements in biomedical instruments and
consumer electronics.
II-VI continues to improve its operational capabilities, develop next-generation products, and invest in new technology
platforms to drive our growth in the short term while keeping the long term in mind. With a strategic focus on fast-growing and
sustainable markets, II-VI pursues its mission of enabling the world to be safer, healthier, closer, and more efficient, and strives
to attain its vision of a world transformed through innovative materials vital to a better life today and the sustainability of future
generations.
Information Regarding Market Segments and Foreign Operations
Financial data regarding our revenues, results of operations, industry segments, and international sales for the three years ended
June 30, 2020, are set forth in the Consolidated Statements of Earnings (Loss) and in Note 14. Segment and Geographic
Reporting to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and are
incorporated herein by reference. We also discuss certain Risk Factors set forth in Item 1A – Risk Factors of this Annual Report
on Form 10-K related to our foreign operations, which are incorporated herein by reference.
Effective July 1, 2019, the Company realigned its organizational structure into two reporting segments for the purpose of
making operational decisions and assessing financial performance: (i) Photonic Solutions and (ii) Compound Semiconductors.
Refer to Note 14. Segment and Geographic Reporting for further information on reporting segments.
Bookings and Backlog
We define our bookings as customer orders received that are expected to be converted to revenues over the next 12 months. The
Company reports as bookings only those orders that 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, 2020, our bookings were approximately $2.7
billion, compared with bookings of approximately $1.4 billion for the fiscal year ended June 30, 2019.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30,
2020, our backlog was approximately $957 million, compared with approximately $500 million as of June 30, 2019.
Global Operations
II-VI is headquartered in Saxonburg, Pennsylvania, with RD&E, manufacturing, and sales facilities worldwide. Our U.S.
production and RD&E operations are located in Arizona, California, Colorado, Connecticut, Delaware, Florida, Illinois,
Massachusetts, Michigan, Mississippi, New Jersey, New York, Ohio, Oregon, Pennsylvania, and Texas, and our non-U.S.
production and RD&E operations are based in Australia, China, Germany, Malaysia, the Philippines, Singapore, Sweden,
Switzerland, the United Kingdom, and Vietnam. We also utilize contract manufacturers and strategic suppliers. In addition to
sales offices co-located at most of our manufacturing sites, we have sales and marketing subsidiaries in Belgium, Canada,
China, Germany, Hong Kong, Italy, Japan, South Korea, Switzerland, Taiwan, and the United Kingdom.
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Employees
The table below summarizes the number of our employees as of June 30, 2020, in the main functions. We have a long-standing
practice of encouraging active employee participation in areas of operations and quality management. We believe our relations
with our employees are good. We reward substantially all of our employees with some form of variable compensation based on
achievement of performance goals. There are approximately 161 employees located in the United States and the Philippines
who are covered under collective bargaining agreements. The Company’s five-year collective bargaining agreement in the
United States is up for renewal in January 2021, and the Company's two-year collective bargaining agreement in the Philippines
is up for renewal in June 2021. There are 450 employees of II-VI in China who work under contract manufacturing
arrangements for a customer of the Company, Corning Incorporated.
Direct production
Research, development, engineering, sales and marketing
General administration
Total:
Manufacturing Processes
Number of
employees
15,101
4,058
3,810
22,969
Percent of
total
66%
16%
18%
100%
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 is 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 manufacture products with high yields to atomic tolerances. II-VI continuously updates its
comprehensive quality management systems that feature manufacturing quality best practices. II-VI is committed to delivering
products within specification, on time, and with high quality, with a goal of fully satisfying customers and continually
improving.
Sources of Supply
Among the raw materials we use are zinc, selenium, zinc selenide, zinc sulfide, hydrogen selenide, hydrogen sulfide, arsine,
phosphine, hydrogen, silane, tellurium, yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride,
antimony, graphite, gallium arsenide, gallium nitride, indium phosphide, copper, gold, nickel, germanium, molybdenum, quartz,
optical glass, silicon carbide, and carbon in its diamond form.
We utilize numerous optical, electrical, and mechanical parts in our processes that we often also commonly refer to as raw
materials, including integrated circuits, mechanical housings, and optical components from third-party suppliers.
The continued high quality of and access to these raw materials are critical to the stability and predictability of our
manufacturing yields. We specify and test these raw materials at the onset of and throughout the production process. Additional
research and capital investment may be needed to better define future raw materials specifications. As a result of COVID-19,
we have experienced some production delays due to shortages of raw materials, and we are driving the development of strategic
second sources as part of our overall business continuity Planning. We do occasionally experience problems associated with
vendor-supplied raw materials not meeting contract specifications for quality or purity. As discussed in greater detail in Item 1A
– Risk Factors of this Annual Report on Form 10-K, significant failure of our suppliers to deliver sufficient quantities of
necessary high-quality raw materials to our specifications on a timely basis could have a materially adverse effect on our results
of operations.
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Business Units
The Company’s organizational structure is divided into two reporting segments for the purpose of making operational decisions
and assessing financial performance: (i) Photonic Solutions and (ii) Compound Semiconductors. These segments, and the
business units within the segments, are reflected in the Company's current organizational chart below:
The Photonic Solutions Segment leverages II-VI’s compound semiconductor technology platforms to deliver components and
subsystems that are differentiated based on deep knowledge of end-user applications for our key end markets.
The Compound Semiconductors Segment is a market leader in differentiated materials and devices such as those based on
GaAs, InP, GaN, and SiC by independently driving investments that advance its technology roadmaps. We may from time to
time reorganize parts of a given segment or corporate center to drive the focus of certain priorities as identified by the CEO.
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II-VI’s segments are organized by business unit at the group or division level. Each of these business units develops and
markets products as described below.
Segment
Photonic Solutions
Business Unit
ROADM
Coherent Optics
Transceivers
Advanced Optics
Our Products
•
•
•
•
Products and solutions that enable high-bit-rate
interconnects for datacenters and communications
service providers, datacenter interconnects,
ROADM systems, and undersea fiber-optic
transmission
High-speed optoelectronics and modules for optical
communications in telecom networks, including for
datacenter interconnects and for metro, regional,
long-haul, and ultralong-haul networks
Pluggable transceivers for Ethernet and fiber
channel applications in cloud and enterprise
datacenter applications
Fiber optics and precision optics used in projection
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
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Segment
Compound
Semiconductors
Business Unit
Our Products
Engineered Materials & Laser
Optics
Laser Devices & Systems
Aerospace & Defense
Wide Bandgap Semiconductors
Optoelectronic & RF Devices
InP Devices
11
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Laser optics and accessories for CO2 lasers used in
materials processing, semiconductors, and life
sciences
High-power fiber and direct-diode laser optics
Infrared thermal imaging optics and assemblies
Polycrystalline materials production including
ZnSe, ZnS, and CVD diamond
Thermoelectric components, subassemblies, and
systems for heating, cooling, temperature tuning,
thermal cycling, and power generation in aerospace
and defense, medical, industrial, automotive,
consumer, telecommunications, and energy-
production markets
Specialty refining, recycling, and materials recovery
services for high-purity rare metals such as selenium
and tellurium, as well as related chemical products
such as tellurium dioxide for optics, photovoltaics,
semiconductors, thermoelectric coolers, metallurgy,
agriculture, and industrial applications
Advanced ceramic and metal-matrix composite
products for semiconductor capital equipment, flat-
panel displays, industrial and optical equipment, and
defense applications
High-power semiconductor lasers and laser bars
enabling fiber and direct-diode lasers for materials
processing, medical, defense, consumer, and
printing applications
Laser heads and modules; Q-switched laser
modules; high-power, uncooled pump laser
modules; laser solutions for super-hard materials
processing; high-brightness direct-diode laser
engines
Laser processing heads and beam delivery systems
for laser materials processing with industrial lasers
High-speed VCSELs for optical communications
High-power pumps for amplifiers and optical
communications
Precision optical assemblies, objectives, infrared
optics, thin-film coatings, and optical materials
Optical solutions for critical and complex design,
engineering, and production challenges in defense
and aerospace
SiC and advanced semiconductor materials for high-
frequency and high-power electronic device
applications in defense, telecommunications,
automotive, and industrial markets
VCSELs for sensing, including 3D sensing in
consumer electronics and automotive applications
GaAs-based RF electronic devices
Integrated circuits for transceivers for optical
communications
III-V epitaxial wafers to enable higher-performance
photonic and RF components for consumer,
communications, network, and mobile applications
Semiconductor lasers and detectors for optical
interconnects and sensing applications
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Our Markets
Our market-focused businesses are currently organized by technologies and products. Our businesses address the following
primary markets: optical and wireless communications, industrial materials processing, aerospace and defense, consumer
electronics, semiconductor capital equipment, life sciences, and automotive. As we grow, we may add new primary markets.
Communications Market
II-VI’s optical communications and wireless products and technologies enable the digital transformation in the next generation
of high-speed optical transmission systems, networks, and datacenter solutions necessary to meet the accelerating global
bandwidth demand.
Demand for our products is largely driven by the continually growing need for additional network bandwidth created by the
ongoing proliferation of data and video traffic from video downloads and streaming, live TV, social networking, on-line
gaming, file sharing, enterprise IP/internet traffic, cloud computing, and datacenter virtualization that must be handled by both
wireline and wireless networks. Mobile traffic is increasing as a result of the proliferation of smartphones, tablet computers, and
other mobile devices.
We are a global technology leader in optical communications, providing materials, components, modules, and subsystems to
optical component and module manufacturers, networking equipment manufacturers, datacenter operators, and telecom service
providers. We design products that meet the increasing demands for network bandwidth and data storage.
Our optical communications products can be divided into two main groups, optical transmission and optical transport.
Our optical transmission products consist primarily of transmitters, receivers, transceivers, transponders, and active optical
cables, which provide the fundamental optical-electrical, or optoelectronic, interface for interconnecting the electronic
equipment used in these networks. This equipment includes switches, routers, and servers used in wireline networks as well as
antennas and base stations used in wireless networks. These products rely on advanced components such as semiconductor
lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective
means for transmitting and receiving digital signals over fiber-optic cable at speeds ranging from less than 1 Gbps to more than
400 Gbps, over distances of less than 10 meters to more than 5,000 kilometers, using a wide range of network protocols and
physical configurations.
Our optical transport products are at the core of both terrestrial and undersea optical networks; our market-leading 980 nm
pump lasers are the key enablers of our erbium-doped fiber amplifiers, which boost the power of optical signals in fiber-optic
cables at intervals spanning typically 80 km to allow high-speed signals to be transmitted over longer distances. Our latest
generation of components for coherent transceivers is critical to a new generation of small-size, long-reach DWDM
transmission modules operating from 100 Gbps to 1 Tbps and beyond.
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. Together with our
OCM solutions, which monitor the optical power of the channels transmitted in an fiber-optic link, they enable real-time
intelligence to perform preventive maintenance so as to preserve data transmission. In addition, we offer a portfolio of WSS
products, which we also incorporate into ROADM line cards and subsystems.
The accelerating adoption of applications such as cloud computing is driving the rapid growth of datacenter buildouts. Our
high-speed 25 Gbps VCSELs enable transceivers for intra-datacenter communication. 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 the mobile wireless market, II-VI is a global leader in the strategic supply chain for materials and devices utilized in the latest
4G and 5G base station infrastructure. The deployment of 5G wireless is accelerating globally, driving the demand for RF
power amplifiers that can operate efficiently in new high-frequency bands and be manufactured on a technology platform that
can scale to meet the growing demand. Gallium nitride on silicon carbide (GaN-on-SiC) RF power amplifiers have superior
performance, compared with devices based on silicon, over a wide spectrum of 5G operating frequencies in the gigahertz range,
including in the millimeter-wave bands.
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We are a market leader in the development and manufacture of 100 mm and 150 mm semi-insulating SiC substrates. These
substrates are utilized by customers worldwide to manufacture GaN-on-SiC HEMT RF power amplifier devices that are
embedded in remote radio heads in 4G/5G wireless base stations. In areas of high bandwidth demand, 5G antennas with
beamforming technology utilizing multiple devices per antenna are expected to be densely deployed, increasing the demand for
GaN-on-SiC power amplifiers by approximately an order of magnitude or more versus previous 4G antennas. Looking forward,
II-VI continues to advance the state of the art in SiC substrates, with a strong technology portfolio of 30 active patents using
highly differentiated and proprietary manufacturing platforms and technologies including crystal growth, substrate fabrication,
and polishing. Our recent demonstration of the world’s first prototype 200 mm semi-insulating SiC substrates will enable the
RF power amplifier market to continue to scale, increasingly replacing functions performed by devices based on silicon and
enabling new applications.
Leveraging this materials expertise, II-VI has invested aggressively in a world-class 150 mm compound semiconductor
manufacturing platform and is developing a fully vertically integrated, 150 mm wafer fabrication platform to manufacture the
state-of-the-art GaN-on-SiC HEMT devices that will enable these next-generation wireless networks.
Materials Processing Market
Our industrial laser optics and solutions for the materials processing market remain well-positioned, although we were impacted
by the global industrial slowdown associated with COVID-19. Our vertically integrated and market-leading ZnSe optics and
components, due to their inherent low loss at around the 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 plastics, 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 integrated circuits.
Fiber lasers that operate at about the 1-micron wavelength in pulsed or continuous mode have taken a central role in many
materials processing applications, especially for precision machining such as marking and microdrilling. II-VI supplies a broad
set of laser optics and fused-fiber products that enable many functions within these fiber lasers, from the laser chips that
generate the input optical power to the beam delivery systems that direct the output optical power to the target. The same set of
II-VI products is 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 to process specific metals or alloys.
II-VI’s broad portfolio of coated optics and crystal materials serves all of these growing laser markets.
Aerospace and Defense Market
II-VI’s aerospace and defense solutions enable mission-critical capabilities for applications in high-energy lasers (HELs);
contested space; and intelligence, surveillance, and reconnaissance (ISR). From uniquely grown single crystals and advanced
ceramics, to completely engineered gimbal subsystems, II-VI solutions are embedded on nearly every platform in the field as
well as those under development. Recently acquired coherent laser beam combining (CBC) and advanced lightweight gimbal
technologies, along with domestically produced high-power fiber laser pumps and amplifiers, are enabling next-generation HEL
systems and space-based laser communications applications. With the addition of nano-machined single-crystal silicon and
grating technologies, together with II-VI’s advanced HEL coating capabilities, we enable advanced spectral beam combining
and novel microstructured surface capabilities, which are highly valued within the aerospace and defense industry.
Our advanced missile warning, electro-optical targeting, and imaging systems are deployed on virtually every U.S. fixed-wing
and rotary platform. Our advanced sapphire, germanium, and multispectral domes provide unique protection to our advanced
imaging, seeker, and laser solutions packaged behind them. They provide hemispherical coverage for airborne, naval, and
ground-based systems.
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Our solutions for the Lunar Reconnaissance Orbiter (LRO) provided the first images proving that the footprints on the moon are
still there. The LRO continues to orbit the moon and provide rich information for future lunar landing sites. The LRO camera,
and more advanced derivatives, are the basis for many advanced space imaging applications being pursued by our customers.
Our solution for the OSIRIS-REx mission enables the first-ever ability for a NASA satellite to touch down on an asteroid
(Bennu) and to retrieve a sample and return it to Earth. Our advanced imaging lenses and windows ensure our customers’
vehicles are able to safely and accurately dock with the Space Station. Our advanced telescope solution for the Geostationary
Lightning Mapper enables the GOES satellites to detect early lightning strikes and predict tornados a full 20 minutes before
previous technology. It forms the basis for many of our customers’ advanced multispectral imaging solutions.
II-VI’s Aerospace & Defense (A&D) division maintains separate business development, accounting, finance, engineering, and
manufacturing facilities in the United States with strictly controlled access; they 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.
Our products enable legacy DUV lithography equipment that is widely deployed in semiconductor fabs. In the emerging market
of EUV lithography systems, CO2 lasers are used to generate extreme-ultraviolet 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
Within the life sciences end market, II-VI focuses on light-based analytical instruments that are found in modern biotechnology
laboratories. Applications include flow cytometry, genome sequencing, PCR, molecular diagnostics, imaging, and
spectroscopy, to name a few. Our broad product portfolio delivers solutions covering illumination, light management, and
thermal control. Visible-wavelength “QOMO” lasers and multicolored laser engines provide low-noise, high-performance,
reliable light sources. Optical components and subassemblies such as filters, lenses, flow cells, gratings, objective lenses, and
patterned reticles are embedded into these instruments to manage light delivery to and from samples. Our state-of-the-art
thermal engines precisely control temperature and uniformity across large areas such as plate and block assemblies, even
extending to reagent or sample chilling.
Medical and clinical procedures are increasingly performed with systems that integrate our lasers, optics, and thermal solutions.
These applications are performed at or near the patient, requiring extreme precision and often complex designs and typically
reaching into the NIR and IR wavelengths. Applications are varied, from laser-based treatments and surgeries to medical
imaging and even point of care. II-VI’s semiconductor laser bars and stacks are used in applications such as hair and wrinkle
removal procedures. Crystals and laser cavities, along with custom-designed lens assemblies, are integrated and used for
ophthalmic, dental, and dermatological surgeries. Finally, thermal components and subassemblies deliver solutions for medical-
based applications such as delivering heating and cooling to the human body and medical laser temperature control.
II-VI solutions are the building blocks of scientific molecular spectroscopy and imaging-based platforms. These tools typically
target environmental applications such as water, air, food/beverage, pharmaceutical, and agricultural testing and monitoring. II-
VI continues to leverage its core laser, optics, and temperature-control expertise to deliver custom components and
subassembly-level solutions.
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Consumer Electronics Market
II-VI manufactures 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 computer mice and mobile phones as
well as 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 has been leveraged for the emerging 3D sensing market. 3D sensing was
the first application to drive the demand for relatively large two-dimensional VCSEL arrays. A typical design for 3D sensing
requires tens of VCSELs per chip in order to scale up the optical power required, for example, for face recognition applications.
Therefore, 3D sensing applications drove an entirely new manufacturing infrastructure to enable 6-inch wafer processing.
Today, II-VI is one of the very few vertically integrated 6-inch VCSEL manufacturers with a proven track record in high-
volume manufacturing of high-reliability, large multi-emitter VCSEL dies designed for 3D sensing. An increasing number of
consumer devices are coming on the market with embedded VCSELs, including multiple smartphones and augmented reality
headsets.
Automotive Market
II-VI is a global leader in SiC substrates for power electronics that improve the energy efficiency of electric and hybrid-electric
vehicles. Power electronics based on SiC enable systems to achieve significantly improved power utilization and conversion
efficiencies, lower operating temperatures, and reduced thermal loads. This in turn enables either increased driving range or
reductions in required battery capacity for a given range, which results in a significant cost reduction. Our comprehensive
understanding of crystal growth and materials processing was acquired over decades of sustained R&D and manufacturing,
allowing us to continuously evolve our technology and IP portfolio. We offer a full range of substrate diameters, including the
world’s first 200 mm substrate.
Our industry-leading semiconductor lasers, optics, and materials are at the core of LiDAR systems embedded in advanced
driver-assistance systems (ADAS) and autonomous vehicles. LiDAR sensors enable ADAS to perform functions such as
emergency braking and adaptive cruise control. LiDAR sensors are also expected to be embedded in autonomous vehicles.
II-VI enables LiDAR sensors with a broad portfolio of components and modules, including high-power laser diodes, fiber
amplifiers, frequency-modulated continuous wave detection (FMCW) solutions, optical filters for detection, mirrors for
scanning, and thermoelectric coolers for temperature control. Our product offerings include edge-emitters and VCSELs that are
capable of providing high peak powers for direct illumination and imaging. Emission and return windows on LiDAR systems
are available in ultrahard bulk materials, such as SiC and diamond, and with optical coatings that are water-shedding and oil-
resistant. Our thermoelectric coolers are qualified to automotive standards and enable LiDAR systems to operate with optimal
performance and efficiency.
New generations of vehicles will be equipped with a greater number of sensors that can monitor a driver’s alertness and let
occupants interact with the console using touch sensing or gesture recognition. In the event of a collision, sensors can help
provide critical information about the position and attention of occupants to activate restraints and deploy airbags in the best
possible manner. II-VI’s products enable the most advanced in-cabin control and monitoring systems for the latest applications
in human-vehicle interactions. Our VCSELs are ideal for optical touch sensors integrated in dashboards or steering wheels. Our
VCSEL arrays can provide infrared cabin illumination and structured light projection to enable gesture recognition.
Automotive manufacturers continue to differentiate their products with comfort features such as temperature-controlled car
seats and cup holders, all of which require thermoelectric devices. II-VI offers thermal management solutions that are qualified
to stringent automotive industry standards and tailored to various applications.
Sales and Marketing
We market our products through a direct sales force and through representatives and distributors around the world. Our market
strategy is focused on understanding our customers’ requirements and building market awareness and acceptance of our
products. New products are continually being developed and introduced to our new and established customers in all markets.
The Company has centralized its worldwide sales and its strategic marketing functions. Sales offices have been strategically
realigned 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.
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Our sales force develops effective communications with our OEM and end-user customers worldwide. Products are actively
marketed through key account relationships, personal selling, select advertising, attendance at trade shows, and customer
partnerships. Our sales force includes a highly trained technical sales support team to assist customers in designing, testing, and
qualifying our products as key components of our customers’ systems. As of June 30, 2020, we employed approximately 336
individuals in sales, marketing, and support.
We do business with a number of customers in the aerospace and defense industry, who in turn generally contract with a
governmental entity, typically a U.S. government agency. Most governmental programs are subject to funding approval and can
be modified or terminated without warning by a legislative or administrative body.
Customers
The representative groups of customers by segment are as follows:
Segment:
Photonic
Solutions
Business Unit:
ROADM
Coherent Optics
Transceivers
Advanced Optics
Our Customers Are:
Worldwide network system and
subsystem providers of
telecommunications, data
communications, and CATV
Cloud service providers, telecom
service providers, enterprises with
internal datacom networks,
datacom OEMs, telecom OEMs
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
Representative Customers:
•
•
•
•
•
•
•
•
Ciena Corporation
Fujitsu Network Communications
Nokia Solutions and Networks
Nippon Electric Company Ltd.
(NEC Corporation)
Cisco Systems Inc.
Corning Incorporated
Coherent Inc.
Han’s Laser Technology Industry
Group Co. Ltd.
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Compound
Semiconductors
Engineered
Materials & Laser
Optics
Laser Devices &
Systems
OEM and system integrators of
industrial, medical, personal
comfort, and aerospace and defense
laser systems; laser end users who
require replacement optics for their
existing laser systems
Manufacturers and developers of
integrated-circuit capital equipment
for the semiconductor capital
equipment industry
Primary mineral processors,
refiners, and providers of
specialized materials used in laser
optics, photovoltaics,
semiconductors, thermoelectric
coolers, metallurgy, and industrial
products
Manufacturers of industrial laser
components, optical
communications equipment, and
consumer technology applications;
automotive manufacturers
OEM and subsystem integrators of
aiming, machine vision, biomedical
instruments, and fiber lasers; laser
cutting machines for superhard
materials
Aerospace &
Defense
Manufacturers of equipment and
devices for aerospace, defense, and
commercial markets
Wide Bandgap
Semiconductors
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
Optoelectronic & RF
Devices
Manufacturers of consumer
electronics and transceivers
InP Devices
Manufacturers of transceivers
•
•
•
•
•
•
•
•
TRUMPF GmbH + Co. KG
Bystronic Laser AG
Coherent Inc.
ASML Holding NV
Carl Zeiss AG
Nikon Corporation
KLA-Tencore Corporation
Aurubis AG
Ford Motor Company
Laserline GmbH
•
•
• Wuhan Raycus Fiber Laser
Technologies Co. Ltd.
Hisense Broadband
•
•
•
•
•
•
•
•
•
•
•
BGI Complete Genomics,
Shenzhen Co. Ltd.
TRUMPF GmbH + Co. KG
Lockheed Martin Corporation
Sumitomo Electric Device
Innovations Inc.
Showa Denko KK
STMicroelectronics
IQE PLC
Infineon Technologies AG
Dynax Semiconductor Inc.
Sumitomo Electric Devices
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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:
Photonic Solutions
Areas of Competition:
Optics, optical components, modules,
and subsystems for optical
communications
Optical and crystal components, thin-
film coatings, and subassemblies for
lasers and metrology instruments
Compound
Semiconductors
Infrared laser optics
Competitors:
• Molex LLC
• Lumentum Operations LLC
• Casix Inc.
• CASTECH Inc.
• Hellma GmbH & Co. KG
• Research Electro-Optics Inc.
• IDEX Corporation
• Sumitomo Electric Industries Ltd.
• MKS Instruments Inc.
• Wavelength Opto-Electronic Pte. Ltd.
• Sigma Koki Co. Ltd.
Automated equipment and laser
materials processing tools to deliver
high-power 1-micron laser systems
• Optoskand AB
• Precitec GmbH & Co. KG
• Mitsubishi Cable Industries Ltd.
Biomedical instruments for flow
cytometry, DNA sequencing, and
fluorescence microscopy
• Coherent Inc.
• Pavilion Integration Corporation
• Shimadzu Corporation
Semiconductor laser diodes for the
industrial and consumer markets
• Lumentum Operations LLC
• Broadcom Ltd.
• ams AG
• Jenoptik AG
• OSRAM Licht AG
• Sony Corporation
• Hamamatsu Photonics KK
Infrared optics for aerospace and
defense applications
•
In-house fabrication and thin-film coating
capabilities of major aerospace and defense
customers
Thermoelectric components,
subassemblies, and systems
• Komatsu Ltd.
• Laird PLC
• Ferrotec Corporation
Metal-matrix composites and reaction-
bonded ceramic products
Single-crystal SiC substrates
Refining and materials recovery
services for high-purity rare metals
• 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
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In addition to competitors who manufacture products similar to those we produce, there are other technologies and products
available that may compete with our technologies and products.
Our Strategy
Our strategy is to grow businesses with world-class engineered 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. A significant portion of our business is based on sales
orders with market leaders, which enables 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:
Identify New Products and Markets
Balanced Approach to Research and
Development
Leverage Vertical Integration
Investment in Scalable Manufacturing
Enhance Our Performance and Reputation
as a Quality and Customer Service Leader
Identify and Complete Strategic
Acquisitions and Alliances
Research, Development, and Engineering
Our Plan to Execute:
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 7%–11% 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
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 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
During the fiscal year ended June 30, 2020, 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.”
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. In addition, certain
manufacturing personnel support or participate in our research and development efforts on an ongoing basis. We believe this
interaction between the development and manufacturing functions enhances the direction of our projects, reducing costs and
accelerating technology transfers.
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During the fiscal year ended June 30, 2020, we focused our RD&E investments in the following areas:
Segment:
Photonic Solutions
Area of Development:
Photonics design
Datacom transceivers
Coherent optics
Pump lasers
Optical amplifiers and
subsystems
Wavelength selective
switching
Our RD&E Investments:
Continuing to develop and improve crystal materials,
precision optical parts, and laser device components for
photonics applications
Continuing cost reduction on 10G-100G products, leveraging
our engineering resources and manufacturing scale;
continuing to develop high-end 200G/400G products,
including RF and packaging designs; exploring high-density,
high-bandwidth co-packaged designs through silicon
photonics; continuing to develop vertically integrated
designs, including with lasers and ICs
Driving further integration to reduce size and power
consumption; optimizing product cost with new design
architectures and more efficient manufacturing flow
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
Investing and broadening the range of amplifiers and
integrated subsystems, including ROADMs
Developing LC and LCOS technologies and associated
module designs for WSS; investing in manufacturing
equipment and the automation platform
Compound
Semiconductors
Optical monitoring
Continuing optical channel monitoring investment
Micro-optics manufacturing
High-power laser diodes,
semiconductor lasers, and
devices for optical
communications and sensing,
and high-volume
manufacturing
Developing OTDRs to monitor the health of the fiber plant
Shifting toward smaller, more compact optics and automated
assembly platforms and packages
Investing in manufacturing equipment for computerized
processes
Focusing on increasing fiber-coupled optical output power of
multi-emitter modules
Developing high-power VCSELs for consumer devices and
next-generation, high-speed VCSELs for 3D sensing and
datacom applications
Developing high-power and high-speed InP lasers, detectors,
and components for applications in optical communications
High-power beam delivery
Developing multi-kW beam delivery systems and cables for
welding and cutting
CVD diamond technology
Developing CVD diamond for EUV applications
SiC technology
Thermoelectric materials and
devices
Metal-matrix composites and
reaction-bonded ceramics
Fiber laser technologies
Broadening our portfolio beyond infrared window
applications
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
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
Support industrial customers in developing application-
specific wear and thermal management solutions
Developing high-power fiber laser technologies for
aerospace, defense, and commercial applications
20
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The development of our products and manufacturing processes is largely based on proprietary technical know-how and
expertise. We rely on a combination of contract provisions, trade secret laws, invention disclosures, and patents to protect our
proprietary rights. We have entered into selective intellectual property licensing agreements. We have asserted in the past, and
expect that we will continue to assert, as well as vigorously protect, our intellectual property rights. We have a total of
approximately 2,450 patents globally.
Internally funded research and development expenditures were $339.1 million, $139.2 million, and $116.9 million for the fiscal
years 2020, 2019, and 2018, respectively. For these same periods, externally funded research and development expenditures
were $16.4 million, $14.7 million, and $12.7 million, respectively, and were included in cost of goods sold in the Consolidated
Statements of Earnings (Loss).
Import and Export Compliance
We are required to comply with various import/export and economic sanctions laws and regulations, including:
•
•
•
•
The import regulations administered by U.S. Customs and Border Protection;
The International Traffic in Arms Regulations administered by the U.S. Department of State, Directorate of Defense
Trade Controls, which among other things impose licensing requirements on the export from the United States of
certain defense articles and defense services, 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; and
The regulations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control, implementing
economic sanctions against designated countries, governments, and persons based on U.S. foreign policy and national
security considerations.
Foreign governments have also implemented similar import and export control laws and regulations. For additional discussion
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.
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and positions as of June 30, 2020, are set forth below. Each
executive officer listed has been appointed by the board of directors to serve until removed or until such person’s successor is
appointed and qualified.
Name
Vincent D. Mattera, Jr.
Walter R. Bashaw II
Mary Jane Raymond
Giovanni Barbarossa
Jo Anne Schwendinger
Christopher Koeppen
Age
64
55
59
58
64
49
Position
Chief Executive Officer; Director
President
Chief Financial Officer and Treasurer and Assistant Secretary
Chief Strategy Officer and President, Compound Semiconductors
Chief Legal Officer and Compliance Officer and Secretary
Chief Technology Officer
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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).
Walter R. Bashaw II has served as the Company's President since July 2019. Mr. Bashaw served as the Company's Senior
Vice President, Corporate Strategy and Development, Administration from October 2018 to July 2019. Previously, Mr. Bashaw
served as the Company's Interim General Counsel and Secretary from December 2015 until March 2017. Mr. Bashaw also
previously was a Managing Shareholder and a Director of the law firm of Sherrard, German & Kelly, P.C. (SGK) in Pittsburgh,
Pennsylvania, until October 2018 and Of Counsel at SGK from October 2018 until June 2019. Mr. Bashaw graduated from the
Pennsylvania State University with a B.S. degree in Logistics and also holds a J.D. degree from the University of Pittsburgh
School of Law.
Mary Jane 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 October 2012 and has been the Chief Strategy Officer of the Company and the President
of the Compound Semiconductors Segment since July 2019. Previously, he was the Chief Technology Officer of the Company
and the President of the Laser Solutions Segment. Dr. Barbarossa was employed at Avanex Corporation from 2000 through
2009, serving in various executive positions in product development and general management, ultimately serving as President
and Chief Executive Officer. When Avanex merged with Bookham Technology, forming Oclaro, Dr. Barbarossa became a
member of the board of directors of Oclaro and served as such from 2009 to 2012. Previously, he held senior management roles
in the Optical Networking Division of Agilent Technologies and in the Network Products Group of Lucent Technologies. He
was previously a Member of Technical Staff, then Technical Manager at AT&T Bell Labs, and a Research Associate at British
Telecom Labs. Dr. Barbarossa graduated from the University of Bari, Italy, with a B.S. degree in Electrical Engineering, and
holds a Ph.D. in Photonics from the University of Glasgow, U.K.
Jo Anne Schwendinger has served as the Company’s Chief Legal and Compliance Officer and Secretary since November
2017. Ms. Schwendinger also served as the Company’s General Counsel and Secretary from when she joined the Company in
March 2017 until November 2017. Prior to her employment with the Company, Ms. Schwendinger practiced law with the firm
Blank Rome LLP from August 2016 until February 2017. Previously, Ms. Schwendinger served in various legal roles at Deere
& Company from 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 J.D. degree from the University of Pittsburgh Law
School.
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Christopher Koeppen joined the Company in 2011 following the acquisition of Aegis Lightwave, Inc., where he served as
General Manager, Aegis-NJ. He was named General Manager of II-VI’s Agile Network Products Division in 2012 and Director
of Corporate Strategic Technology Planning in 2015. He then served as Vice President of the Industrial Laser Group and
Corporate Strategic Technology Planning from 2017 until his appointment as Chief Technology Officer in 2019. Previously,
Dr. Koeppen was co-founder and Chief Executive Officer of CardinalPoint Optics, prior to its acquisition by Aegis Lightwave.
He has more than two decades of progressively increasing general and technology management experience in high-tech
companies, including at Meriton Networks, Mahi Networks, Photuris, and Lucent Technologies. Dr. Koeppen holds a Ph.D. in
Physics from the University of Pennsylvania, where he was an AT&T Bell Laboratories Scholar, and B.S. degrees in Physics
and Mathematics from the Pennsylvania State University.
Availability of Information
Our internet address is www.ii-vi.com. Information contained on our website is not part of, and should not be construed as
being incorporated by reference into, this Annual Report on Form 10-K. We post the following reports on our website as soon
as reasonably practical after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”):
our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any
amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In
addition, we post our proxy statements on Schedule 14A related to our annual shareholders’ meetings as well as reports filed by
our directors, officers, and 10% beneficial owners pursuant to Section 16 of the Exchange Act. In addition, all filings are
available via the SEC’s website (www.sec.gov). We also make our corporate governance documents available on our website,
including the Company’s Code of Business Conduct and Ethics, governance guidelines, and the charters for our board
committees. All such documents are located on the Investors page of our website and are available free of charge.
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Item 1A.
RISK FACTORS
The following are certain risk factors that could affect our business, results of operations, financial position or cash flows.
These risk factors should be considered along with the forward-looking statements contained in this Annual Report on Form 10-
K, because these factors could cause our actual results or financial condition to differ materially from those projected in
forward-looking statements. The following discussion is not an all-inclusive listing of risks, although we believe these are the
more material risks that we face. If any of the following occur, our business, results of operations, financial position, or cash
flows could be adversely affected. You should carefully consider these factors, as well as the other information contained in this
Annual Report on Form 10-K, when evaluating an investment in our securities.
Risks Relating to Our Business and Our Industry
Investments in future 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 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 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 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 loss of reputation.
Our competitive position depends on our ability to develop new products and processes.
To meet our strategic objectives, we must develop, manufacture, and market new products and continue to update our existing
products and processes to keep pace with market developments to address increasingly sophisticated customer requirements.
Our success in developing and selling new and enhanced products and processes depends upon a variety of factors, including
strategic product selection, efficient completion of product design and development, timely implementation of manufacturing
and assembly processes, effective sales and marketing, and high-quality and successful product performance in the market.
The introduction by our competitors of products or processes using new developments that are better or faster than ours could
render our products or processes obsolete or unmarketable. We intend to continue to make significant investments in research,
development, and engineering to achieve our goals. There can be no assurance that we will be able to develop and introduce
new products or enhancements to our existing products and processes in a manner which satisfies customer needs or achieves
market acceptance. The failure to do so could have a material adverse effect on our ability to grow our business and maintain
our competitive position and on our results of operations and/or financial condition.
Widespread health crises, including the global novel coronavirus (COVID-19) pandemic, could materially and adversely
affect our business, financial condition, and results of operations.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread
throughout the United States and world. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our
business, including the impact to our suppliers, customers, and employees as well as the impact to the countries and markets in
which we operate. At the onset of the COVID-19 outbreak, we began focusing intensely on mitigating the adverse impacts of
COVID-19 on our foreign and domestic operations, starting by protecting our employees, suppliers, and customers.
Significant reductions in demand for one or more of our products or a curtailment to one or more of our product lines may be
caused by, among other things, the temporary inability of our customers to purchase and utilize our products in next-stage
manufacturing due to shutdown orders or financial hardship.
Workforce constraints triggered by shutdown orders and stay-at-home polices may present challenges in meeting our
obligations to our customers and achieving cost and operational targets. For example, approximately 45% of our global
facilities are subject to a government order, including approximately 10% that are currently closed, most of which are
administrative facilities where employees are working remotely. We expect facilities to continue to be subject to similar
government orders for the foreseeable future.
We may face disruptions from our third-party manufacturing and raw materials supply arrangements caused by constraints over
their workforce capacity or their own financial or operational difficulties. There is also heightened risk and uncertainty
regarding the loss or disruption of other essential third-party service providers, including transportation services, contract
manufacturing, marketing, and distribution services.
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Governmental and regulatory responses to the pandemic may include quarantines, import/export restrictions, price controls, or
other governmental or regulatory actions, including closures or other restrictions that limit or close our operating and
manufacturing facilities, restrict our workforce’s ability to travel or perform necessary business functions, or otherwise impact
our suppliers or customers, which could adversely impact our operating results.
Such efforts to ensure the safety of our workforce, customers, and suppliers may result in increased operating expenses and
potentially jeopardize the efficiency of operations. Such impacts may further increase the difficulty of planning for operations
and may adversely impact our results.
We have made efforts to identify, manage, and mitigate the economic disruption impacts of the COVID-19 pandemic to the
Company; however, there are factors beyond our knowledge or control, including the duration and severity of this outbreak or
any such similar outbreak, as well as further governmental and regulatory actions.
Global economic downturns, including any downturn related to COVID-19, may adversely affect our business,
operating results, and financial condition.
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to
estimate the level of growth or contraction of the global economy as a whole. It is even more difficult to estimate growth or
contraction in various parts, sectors, and regions of the economy, including the industrial, aerospace and defense, optical
communications, telecommunications, semiconductor, consumer, and medical and life science markets in which we participate.
All aspects of our Company’s forecast depend on estimates of growth or contraction in the markets we serve. Thus, prevailing
global economic uncertainties render estimates of future income and expenditures very difficult to make.
Global economic downturns may affect industries in which our customers operate. These changes could include decreases in
the rate of consumption or use of our customers’ products. Such conditions could have a material adverse effect on demand for
our customers’ products and, in turn, on demand for our products.
Adverse changes may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in
currency and commodity prices, wavering confidence, capital expenditure reductions, unemployment, decline in stock markets,
contraction of credit availability, or other factors affecting economic conditions. For example, factors that may affect our
operating results include disruption in the credit and financial markets in the United States, Europe, and elsewhere, adverse
effects of slowdowns in the U.S., European, or Chinese economies, reductions or limited growth in consumer spending or
consumer credit, global trade tariffs, and other adverse economic conditions that may be specific to the Internet, e-commerce,
and payments industries.
Adverse changes could also occur as a result of economic upswings, such as increased wages and scarce labor pools, and
increased interest rates.
These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, the
cost and availability of financing, and costs associated with manufacturing and distributing products. Any economic downturn
could have a material adverse effect on our business, results of operations, or financial condition.
Some systems that use our products are complex in design, and our products may contain defects that are not detected
until deployed, which could increase our costs, reduce our revenues, cause us to lose key customers, and may expose us
to litigation related to our products.
Some systems that use our products are inherently complex in design and require ongoing maintenance. Our 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.
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Foreign currency risk may negatively affect our revenues, cost of sales, and operating margins, and could result in
foreign exchange losses.
We conduct our business and incur costs in the local currency of most countries in which we operate. Our net sales outside the
United States represented a majority of our total sales in each of the last three fiscal years. We incur currency transaction risk
whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from
the currency in which it operates, or holds assets or liabilities in a currency different from its functional currency. Changes in
exchange rates can also affect our results of operations when the value of sales and expenses of foreign subsidiaries are
translated to U.S. dollars. We cannot accurately predict the impact of future exchange rate fluctuations on our results of
operations. Further, given the volatility of exchange rates, we may not be able to effectively manage our currency risks, and any
volatility in currency exchange rates may increase the price of our products in local currency to our foreign customers or
increase the manufacturing cost of our products, either of which may have an adverse effect on our financial condition, cash
flows, and profitability.
Our competitive position may still require significant investments.
We continuously monitor the marketplace for strategic opportunities, and our business strategy includes expanding our product
lines and markets through both internal product development and acquisitions. Consequently, we expect to continue to consider
strategic acquisition of businesses, products, or technologies complementary to our business. This may require significant
investments of management time and financial resources. If market demand is outside our organic capabilities, if a strategic
acquisition is required and we cannot identify one or execute on it, and/or if financial investments that we undertake distract
management, do not result in the expected return on investment, expose us to unforeseen liabilities, or jeopardize our ability to
comply with our credit facility covenants due to any inability to integrate the business, adjust to operating a larger and more
complex organization, adapt to additional political and other requirements associated with the acquired business, retain staff, or
work with customers, we could suffer a material adverse effect on our business, results of operations, or financial condition.
We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel
with existing operations.
We have in the past acquired several companies, including the completion of our acquisition of Finisar Corporation (“Finisar”)
in September 2019. We may continue to expand and diversify our operations with additional acquisitions. We may be unable to
identify or complete prospective acquisitions for many reasons, including increasing competition from other potential acquirers,
the effects of consolidation in our industries, and potentially high valuations of acquisition candidates. In addition, applicable
antitrust laws and other regulations may limit our ability to acquire targets or force us to divest an acquired business line. If we
are unable to identify suitable targets or complete acquisitions, our growth prospects may suffer, and we may not be able to
realize sufficient scale and technological advantages to compete effectively in all markets.
To the extent that we are successful in making acquisitions, we may be unsuccessful in integrating acquired companies or
product lines with existing operations, or the integration may be more difficult or more costly than anticipated. Some of the
risks that may affect our ability to integrate or realize anticipated benefits from acquired companies, businesses, or assets
include those associated with:
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unexpected losses of key employees of the acquired company;
conforming the acquired company’s standards, processes, procedures, and controls with our operations, including
integrating enterprise resource planning systems and other key business applications;
coordinating new product and process development;
increasing complexity from combining operations;
increasing the scope, geographic diversity, and complexity of our operations;
difficulties in consolidating facilities and transferring processes and know-how; and
diversion of management’s attention from other business concerns.
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In connection with acquisitions, we may:
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use a signification portion of our available cash;
issue equity securities, which would dilute current shareholders’ percentage ownership;
incur significant debt;
incur or assume contingent liabilities, known or unknown, including potential lawsuits, infringement actions, or similar
liabilities;
incur impairment charges related to goodwill or other intangibles; and
face antitrust or other regulatory inquiries or actions.
In addition, the market price of our common stock or our 6.00% Series A Mandatory Convertible Preferred Stock (“Mandatory
Convertible Preferred Stock”) could be adversely affected if the effect of any acquisitions on our consolidated financial results
is dilutive or is below the market’s or financial analysts’ expectations, or if there are unanticipated changes in the business or
financial performance of the acquired or combined company. Any failure to successfully integrate acquired businesses may
disrupt our business and adversely impact our business, results of operations, or financial condition.
Although II-VI continues to expect that its acquisition of Finisar will result in cost savings, synergies, and other benefits,
the combined company may not realize those benefits, or be able to retain those benefits even if realized.
The success of II-VI’s acquisition of Finisar will continue to depend in large part on the success of the management of the
combined company in integrating the operations, strategies, technologies, and personnel of the two companies. The combined
company may fail to realize some or all of the anticipated benefits of the combination if the integration process takes longer
than expected or is more costly than expected. The failure of the combined company to meet the challenges involved in
successfully integrating the operations of the two companies or to otherwise realize any of the anticipated benefits of the
combination, including additional cost savings and synergies, could impair the operations of the combined company. In
addition, II-VI continues to believe that the overall integration of Finisar will be a time-consuming and expensive process that,
without proper planning and effective and timely implementation, could significantly disrupt the combined company’s business.
Potential difficulties that the combined company may encounter in the integration process include:
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the integration of management teams, strategies, technologies and operations, products, and services;
the disruption of ongoing businesses and distraction of their respective management teams from ongoing business
concerns;
the retention of, and possible decrease in business from, existing customers of both companies;
the creation of uniform standards, controls, procedures, policies, and information systems;
the reduction of the costs associated with each company’s operations;
the integration of corporate cultures and maintenance of employee morale;
the retention of key employees; and
potential unknown liabilities associated with the merger.
The anticipated cost savings, synergies, and other benefits of the acquisition of Finisar assume a successful integration of the
companies and are based on projections and other assumptions, which are inherently uncertain. Even if integration is successful,
anticipated cost savings, synergies, and other benefits may not be achieved.
Our future success depends on continued international sales, and our global operations are complex and present
multiple challenges to manage.
We anticipate that international sales will continue to account for a significant portion of our revenues for the foreseeable
future. The failure to maintain our current volume of international sales could materially affect our business, results of
operations, financial condition, and/or cash flows.
We manufacture products in the Australia, China, Germany, Malaysia, the Philippines, Singapore, South Korea, Sweden,
Switzerland, the United Kingdom, the United States, and Vietnam, and through a contract manufacturer in Thailand. We also
maintain direct sales offices in Belgium, Canada, China, Germany, Hong Kong, Italy, Japan, South Korea, Switzerland,
Taiwan, and the United Kingdom. Our operations vary by location and are influenced on a location-by-location basis by local
customs, languages, and work practices, as well as different local weather conditions, management styles, and education
systems. In addition, multiple complex issues may arise concurrently in different countries, potentially hampering our
management’s ability to respond in an effective and timely manner. Any inability to respond in an effective and timely manner
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to issues in our global operations could have a material adverse effect on our business, results of operations, or financial
condition.
We are subject to complex and rapidly changing import and export regulations which could limit our sales and decrease
our profitability.
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 by non-U.S. agencies, including, but not limited to, the following:
• We are required to comply with import laws and export control and economic sanctions laws, which may affect our
ability to enter into or complete transactions with certain customers, business partners, and other persons. In certain
circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services,
and technologies. We may be required to obtain an export license before exporting a controlled item, and granting of a
required license cannot be assured. Compliance with the import laws that apply to our businesses may restrict our
access to, and may increase the cost of obtaining, certain products and could interrupt our supply of imported
inventory.
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Exported technologies necessary to develop and manufacture certain products are subject to U.S. export control laws
and similar laws of other jurisdictions. We may be subject to adverse regulatory consequences, including government
oversight of facilities and export transactions, monetary penalties, and other sanctions for violations of these laws. In
certain instances, these regulations may prohibit us from developing or manufacturing certain of our products for
specific applications outside the United States. Failure to comply with any of these laws and regulations could result in
civil and criminal, monetary, and nonmonetary penalties; disruptions to our business; limitations on our ability to
import and export products and services; and damage to our reputation.
Changes in trade policies, such as increased import duties, could increase the costs of goods imported into the United
States or China.
In March 2018, President Trump announced new steel and aluminum tariffs. Then, in July 2018 the United States imposed
increased tariffs on products of Chinese origin, and China responded by increasing tariffs on U.S.-origin goods. On the export
side, denial orders and placing companies on the U.S entity list could decrease our access to customers and markets and
materially impact our revenues in the aggregate. In April 2018, for example, the U.S. Department of Commerce issued a denial
order against two companies in the telecommunications market. In 2019 and 2020, the U.S. Department of Commerce placed a
number of entities, including Huawei, on the U.S. Entity List. If we cannot obtain relief from, or take other action to mitigate
the impact of, these additional duties and restrictions and duties, our business and 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.
Our association with customers that are or become subject to U.S. regulatory scrutiny or export restrictions could negatively
impact our business, and create instability in our operations. Governmental actions such as these could subject us to actual or
perceived reputational harm among current or prospective investors, suppliers or customers, customers of our customers, other
parties doing business with us, or the general public. Any such reputational harm could result in the loss of investors, suppliers,
or customers, which could harm our business, financial condition, operating results, or prospects.
Exports of certain of our products are subject to export controls imposed by the U.S. government and administered by the U.S.
Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the
administering department. For products subject to the Export Administration Regulations, or EAR, administered by the
Department of Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on the type and end use
of the 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 products are subject to EAR controls.
Additionally, certain other products that we sell, including certain products developed with government funding, are subject to
ITAR. Products developed and manufactured in our foreign locations are subject to export controls of the applicable foreign
nation. Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to
obtain export licenses for these shipments, or 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.
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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 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 facility or to issue our equity to fund operations, including working capital investments,
and to finance our acquisition strategies. In the past, market disruptions experienced in the United States and abroad have
materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive and, in certain
cases, have resulted in the unavailability of certain types of financing. Uncertainty in the financial markets may negatively
impact our ability to access additional financing or to refinance our existing credit facility 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 0.25% convertible senior notes due 2022 and Finisar’s 0.50% Convertible Senior Notes due 2036,
which we refer to collectively as our convertible senior notes, have the right to require us to repurchase all or a portion of their
notes upon the occurrence of a fundamental change (as defined in the indenture governing such notes) at a repurchase price
equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest. In addition, upon
conversion of such notes, unless we elect to deliver solely shares of our common stock to settle such conversions (other than
paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of such notes being
converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make
repurchases of surrendered notes, or pay cash with respect to notes being converted.
In addition, our ability to repurchase or to pay cash upon conversion of our notes may be limited by law, regulatory authority,
or agreements governing our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by
the governing indenture, or to pay any cash upon conversion of the notes as required, would constitute a default under the
indenture. A default under the applicable indenture or the fundamental change itself also could lead to a default under
agreements governing our credit facility and any of our future indebtedness. If the payment of the related indebtedness were to
be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and
repurchase the notes or to pay cash upon conversion of any such notes.
Our credit agreement restricts our operations, particularly our ability to respond to changes or to take certain actions
regarding our business.
The documents governing our amended and restated credit agreement, dated as of September 24, 2019, by and among us, Bank
of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto (the
“Credit Agreement”) contain a number of restrictive covenants that may impose operating and financial restrictions on us and
limit our ability to engage in acts that may be in our long-term best interest, including restrictions on the ability to incur
indebtedness, grant liens, undergo certain fundamental changes, dispose of assets, make certain investments, enter into certain
transactions with affiliates, and make certain restricted payments, in each case subject to limitations and exceptions set forth in
the Credit Agreement.
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The Credit Agreement also contains customary events of default that include, among other things, certain payment defaults,
covenant defaults, cross-defaults to other indebtedness, change of control defaults, judgment defaults, and bankruptcy and
insolvency defaults. Such events of default may allow the creditors to accelerate the related debt and may result in the
acceleration of any other debt to which a cross-acceleration or cross-default provision applies, which could have a material
adverse effect on our business, operations, and financial results. Furthermore, if we are unable to repay the amounts due and
payable under the Credit Agreement, those lenders could proceed against the collateral granted to them to secure that
indebtedness, which could force us into bankruptcy or liquidation. In the event that our lenders accelerated the repayment of the
borrowings, we may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the credit
agreements would likely have a material adverse effect on us. As a result of these restrictions, we may be limited in how we
conduct business, unable to raise additional debt or equity financing to operate during general economic or business downturns,
or unable to compete effectively or to take advantage of new business opportunities.
We may fail to accurately estimate the size and growth of our markets and our customers’ demands.
We make significant decisions based on our estimates of customer requirements. We use our estimates to determine the levels
of business we seek and accept, production schedules, personnel needs, and other resource requirements.
Customers may require rapid increases in production on short notice. We may not be able to purchase sufficient supplies or
allocate sufficient manufacturing capacity to meet such increases in demand. Rapid customer ramp-up and significant increases
in demand may strain our resources or negatively affect our margins. Inability to satisfy customer demand in a timely manner
may harm our reputation, reduce our other opportunities, damage our relationships with customers, reduce revenue growth, and/
or cause us to incur contractual penalties.
Alternatively, downturns in the industries in which we compete may cause our customers to significantly reduce their demand.
With respect to orders we initiate with our suppliers to address anticipated demand from our customers, certain suppliers may
have required noncancellable 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 and we may fail to accurately estimate our competitors’ or our customers’
willingness and capability to backward integrate into our competencies and thereby displace us.
We may encounter substantial competition from other companies in the same market, including established companies with
significant resources. Some of our competitors may have financial, technical, marketing, or other capabilities that are more
extensive than ours. They may be able to respond more quickly than we can to new or emerging technologies and other
competitive pressures. We may not be able to compete successfully against our present or future competitors. Our failure to
compete effectively 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
that 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.
The design, processes, and specialized equipment utilized in our engineered materials, advanced components, and subsystems
are innovative, complex, and difficult to duplicate. However, there can be no assurance that others will not develop or patent
similar technology, or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a
variety of materials, devices, equipment, configurations, and processes, and others could obtain patents covering technology
similar to ours. We may be required to obtain licenses under such patents, and there can be no assurance that we would be able
to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be
asserted that may adversely affect our results of operations. In addition, our research and development contracts with agencies
of the U.S. government present a risk that project-specific technology could be disclosed to competitors as contract reporting
requirements are fulfilled. We also enter into development projects from time to time that might result in IP developed during a
project that is assigned to the other party without us retaining rights to that IP or is jointly owned with the other party.
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A significant 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 Australia, China, Germany, Malaysia, the Philippines, Singapore, South Korea, Sweden,
Switzerland, the United Kingdom, the United States, and Vietnam, and through a contract manufacturer in Thailand. We also
maintain direct sales offices in Belgium, Canada, China, Germany, Hong Kong, Italy, Japan, South Korea, Switzerland,
Taiwan, and the United Kingdom. Operations inside and outside of the United States are subject to many legal and regulatory
requirements, some of which are not aligned with others. These include tariffs, quotas, taxes and other market barriers,
restrictions on the export or import of technology, potentially limited intellectual property protection, import and export
requirements and restrictions, anti-corruption and anti-bribery laws, foreign exchange controls and cash repatriation restrictions,
foreign investment rules and regulations, data privacy requirements, competition laws, employment and labor laws, pensions
and social insurance, and environmental health and safety laws and regulations.
Compliance with these laws and regulations can be onerous and expensive, and requirements differ among jurisdictions. New
laws, changes in existing laws, and abrogation of local regulations by national laws may result in significant uncertainties in
how they will be interpreted and enforced. Failure to comply with any of these foreign laws and regulations could have a
material adverse effect on our business, results of operations, or financial condition.
Changes in laws and regulations governing data privacy and data protection could have a material adverse impact on
our business.
We are subject to many data privacy, data protection, and data breach notification laws, including the European Union General
Data Protection Regulation (“GDPR”), which became effective in May 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 that commit us to supply products on specified terms.
We have supply agreements with some customers that require us to supply products and allocate sufficient capacity to make
these products. We have also agreed to pricing schedules and methodologies that 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 a specification for a product that our suppliers cannot meet.
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We also make products for which the Company is one of the world’s largest suppliers. We use high-quality, optical-grade ZnSe
in the production of many of our IR optical products. We are a leading producer of ZnSe for our internal use and for external
sale. The production of ZnSe is a complex process requiring a highly controlled environment. A number of factors, including
defective or contaminated materials, could adversely affect our ability to achieve acceptable manufacturing yields of high-
quality ZnSe. Lack of adequate availability of high-quality ZnSe could have a material adverse effect upon our business. There
can be no assurance that we will not experience manufacturing yield inefficiencies that 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 the
gas. Our potential inability to internally produce hydrogen selenide could have a material adverse effect on our business, results
of operations, or financial condition.
In addition, we produce and use other high-purity and relatively uncommon materials and compounds to manufacture our
products, including, but not limited to, ZnS, GaAs, yttrium aluminum garnet, yttrium lithium fluoride, calcium fluoride,
germanium, selenium, telluride, Bi2Te3, and SiC. A significant failure of our internal production processes or our suppliers to
deliver sufficient quantities of these necessary materials on a timely basis could have a material adverse effect on our business,
results of operations, or financial condition.
Increases in commodity prices may adversely affect our results of operations and financial condition.
We are exposed to a variety of market risks, including the effects of increases in commodity prices. Our 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
environmental, safety, and health regulations at each operating location. We invest substantially in proper personal protective
equipment and process controls, including monitoring and specialized training, to minimize risks to employees, surrounding
communities, and the environment that could result from the presence and handling of such hazardous substances. When
exposure problems or potential exposure problems have been uncovered, corrective actions have been implemented, and re-
occurrence has been minimal or nonexistent.
We have in place an emergency response plans 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 chance 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, processes, or products,
there can be no assurance that problems will not develop in the future that could have a material adverse effect on our business,
results of operations, or financial condition.
We have a substantial amount of debt, which could adversely affect our business, financial condition, or results of
operations and prevent us from fulfilling our debt-related obligations.
As of June 30, 2020, we had approximately $2.3 billion of outstanding debt (including our outstanding debt securities and
borrowings under our Credit Agreement). Our indebtedness could have important consequences for us, including:
• making it more difficult for us to satisfy our obligations with respect to our debt, or to our trade or other creditors;
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increasing our vulnerability to adverse economic or industry conditions;
limiting our ability to obtain additional financing to fund capital expenditures and acquisitions, particularly when the
availability of financing in the capital markets is limited;
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•
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requiring us to pay higher interest rates upon refinancing or on our variable-rate indebtedness if interest rates rise;
requiring a substantial portion of our cash flows from operations and the proceeds of any capital markets offerings or
loan borrowings for the payment of interest on our debt and reducing our ability to use our cash flows to fund working
capital, capital expenditures, acquisitions, and general corporate requirements;
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
and
placing us at a competitive disadvantage to less leveraged competitors.
We may not generate sufficient cash flow from operations, together with any future borrowings, to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before its
maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. In addition, we
may incur additional indebtedness in order to finance our operations, fund acquisitions, or repay existing indebtedness. If we
cannot service our indebtedness, we may have to take actions such as selling assets; seeking additional debt or equity; or
reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances. Any such actions, if necessary, may
not be able to be effected on commercially reasonable terms or at all, or on terms that would be advantageous to our
stockholders, or on terms that would not require us to breach the terms and conditions of our existing or future debt agreements.
Unfavorable changes in tax rates, tax liabilities, or tax accounting rules could negatively affect future results.
As a global company, we are subject to taxation in the United States and various other countries and jurisdictions. As such, we
must exercise a level of judgment in determining our worldwide tax liabilities. Our future tax rates could be affected by changes
in the composition of earnings in countries with differing tax rates or changes in tax laws. Changes in tax laws or tax rulings
may have a significantly adverse impact on our effective tax rate.
The enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017 significantly affected U.S. tax law by changing
how the United States imposes tax on multinational corporations. The U.S. Department of Treasury has broad authority under
the Tax Act to issue regulations and interpretive guidance. We have applied available guidance to estimate our tax obligations,
but new guidance issued by the U.S. Treasury Department may cause us to make adjustments to our tax estimates in future
periods.
In addition, we are subject to regular examination of our income tax returns by the U.S. Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be
no assurance that any final determination will not be materially different from the treatment reflected in our historical income
tax provision and accruals, which could materially and adversely affect our business, results of operation, or financial condition.
Natural disasters or other global or regional catastrophic events could disrupt our operations, give rise to substantial
environmental hazards, and adversely affect our results.
We may be exposed to business interruptions due to extreme weather caused by climate change and deforestation, force
majeure catastrophes, natural disaster, pandemic, terrorism, or acts of war that are beyond our control. Disruptions to our
facilities or systems, or to those of our key suppliers, could also interrupt operational processes and adversely impact our ability
to manufacture our products and provide services and support to our customers. As a result, our business, results of operations,
or financial condition could be materially adversely affected.
Our success depends on our ability to attract, retain, and develop key personnel and requires continued good relations
with our employees.
We are highly dependent upon the experience and continuing services of certain scientists, engineers, production, and
management personnel. Competition for the services of these personnel is intense. There can be no assurance that we will be
able to retain or attract the personnel necessary for our success. The loss of the services of our key personnel could have a
material adverse effect on our business, results of operations, or financial condition.
We contract with a number of large end-user service providers and product companies that have considerable
bargaining power, which may require us to agree to terms and conditions that could have an adverse effect on our
business or ability to recognize revenues.
Large end-user service providers and product companies comprise a significant portion of our customer base. These customers
generally have greater purchasing power than smaller entities and, accordingly, often request and receive more favorable terms
from suppliers, including us. As we seek to expand our sales to existing customers and acquire new customers, we may be
required to agree to terms and conditions that are favorable to our customers and that may affect the timing of our ability to
recognize revenue, increase our costs, and have an adverse effect on our business, financial condition, and results of operations.
Furthermore, large customers have increased buying power and ability to require onerous terms in our contracts with them,
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including pricing, warranties, and indemnification terms. If we are unable to satisfy the terms of these contracts, it could result
in liabilities of a material nature, including litigation, damages, additional costs, loss of market share, and loss of reputation.
Additionally, the terms these large customers require, such as most-favored customer or exclusivity provisions, may impact our
ability to do business with other customers and generate revenues from such customers.
We may be adversely affected by climate change regulations.
In many of the countries in which we operate, government bodies are increasingly enacting legislation and regulations in
response to potential impacts of climate change. These laws and regulations may be mandatory. They have the potential to
impact our operations directly or indirectly as a result of required compliance by our customers or our supply chain.
Inconsistency of regulations may also affect the costs of compliance with such laws and regulations. Assessments of the
potential impact of future climate change legislation, regulation, and international treaties and accords are uncertain, given the
wide scope of potential regulatory change in countries in which we operate.
We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations,
added costs to purchase raw materials, lower profits from sales of our products, allowances or credits under a “cap and trade”
system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, changes in
competitive position relative to industry peers, changes to profit or loss arising from increased or decreased demand for goods
produced by us, or changes in costs of goods sold.
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
represent greater than 10% of total revenues. Our success will depend on our continued ability to develop and manage
relationships with our major customers. Although we are attempting to expand our customer base, we expect that significant
customer concentration will continue for the 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. In addition,
governmental trade action or economic sanctions may limit or preclude our ability to do business with certain customers. 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 incorporate into our subsystem products; in other cases, we provide
components to contract manufacturers to produce finished goods. For some of the components and finished goods, we are the
sole manufacturer. Our manufacturing processes are highly complex, and issues are often difficult to detect and correct. From
time to time we have experienced problems achieving acceptable yields in our manufacturing facilities, resulting in delays in
the availability of our products. In addition, if we experience problems with our manufacturing facilities, it would be costly and
require a 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 voluntarily, or be required to, 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
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suppliers based outside of the United States, primarily in Asia. Uncertainty with respect to tax and trade policies, tariffs, and
government regulations affecting trade between the United States and other countries has recently increased. Major
developments in tax policy or trade relations, such as the imposition of tariffs on imported products, could increase our product
and product-related costs or require us to seek alternative suppliers, either of which could result in decreased sales or increased
product and product-related costs.
Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or
noncancellable purchase commitments.
We base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends that
are highly unpredictable. Some of our purchase commitments are not cancellable, and in some cases we are required to
recognize a charge representing an amount of material or capital equipment purchased or ordered that exceeds our actual
requirements. Should revenues in future periods fall substantially below our expectations, or should we fail to accurately
forecast changes in demand mix, we could be required to record substantial charges for obsolete or excess inventories or
noncancellable purchase commitments.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability
to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“the
Exchange Act”), the Sarbanes-Oxley Act of 2002, as amended ("the Sarbanes-Oxley Act”), and Nasdaq listing requirements.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting. In order to 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 delay the reporting of our financial results or cause us to be subject to investigations, enforcement actions by regulatory
agencies, stockholder lawsuits, or other adverse actions requiring us to incur defense costs or pay fines, settlements, or
judgments. Any such failures or difficulties could also cause investors to lose confidence in our reported financial and other
information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable
to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Stock Market.
Risks Relating to Our Capital Stock
Our stock price has been volatile in the past and may be volatile in the future.
The market price for our common stock on the Nasdaq Global Select Market Composite varied between a high of $51.90 and a
low of $19.00 in the fiscal year ended June 30, 2020. The market price of our common stock could fluctuate significantly for
many reasons, including the following:
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future announcements concerning us or our competitors;
the overall performance of equity markets;
the trading volume of our common stock;
additions or changes to our board of directors, management, or key personnel;
regulatory actions (including, but not limited to, developments in international trade policy) and enforcement actions
bearing on manufacturing, development, marketing, or sales;
the commencement or outcome of litigation;
reports and recommendations of analysts and whether or not we meet the milestones, metrics, and other expectations
set forth in such reports;
gaining or losing large customers;
the introduction of new products or services and market acceptance of such products or services;
the impact of the COVID-19 pandemic on our business, financial condition, results of operations, or prospects or those
of our customers and suppliers;
the acquisition or loss of significant manufacturers, distributors, or suppliers or an inability to obtain sufficient
quantities of materials needed to provide our services;
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35
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the issuance of common stock or other securities (including, without limitation, the shares of common stock issued
upon conversion of any shares of Mandatory Convertible Preferred Stock and the shares issued upon conversion of
outstanding convertible notes);
incurrence of indebtedness;
quarterly variations in operating results;
our ability to accurately forecast future performance;
business acquisitions or divestitures;
fluctuations in the economy, political events, or general market conditions; and
changes in our operating industry generally.
In addition, stock markets have experienced extreme price and volume fluctuations in recent years and are experiencing
exceptional volatility as a result of the effects of the COVID-19 pandemic. Moreover, these fluctuations frequently have been
unrelated to the operating performance or underlying fundamentals of the affected companies. These broad market fluctuations
may adversely affect the market price of our common stock. These fluctuations may be unrelated to our performance or out of
our control, and could lead to securities class action litigation that could result in substantial expenses and diversion of
management’s attention and corporate resources, any or all of which could adversely affect our business, financial condition,
and results of operations.
In addition, we expect that the market price of the Mandatory Convertible Preferred Stock will be influenced by yield and
interest rates in the capital markets, the time remaining to the Mandatory Conversion Date, our creditworthiness, and the
occurrence of certain events affecting us that do not require an adjustment to the fixed conversion rates of the Mandatory
Convertible Preferred Stock. Fluctuations in yield rates in particular may give rise to arbitrage opportunities based upon
changes in the relative values of the Mandatory Convertible Preferred Stock and our common stock. Any such arbitrage could,
in turn, affect the market prices of our common stock and the Mandatory Convertible Preferred Stock. The market price of our
common stock could also be affected by possible sales of our common stock by investors who view the Mandatory Convertible
Preferred Stock as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we
expect to develop involving our common stock. This trading activity could, in turn, affect the market price of the Mandatory
Convertible Preferred Stock.
Provisions in our Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) and Amended and
Restated By-Laws (the “By-Laws”) and the Pennsylvania Business Corporation Law (the “BCL”) may delay or prevent
our acquisition by a third party, which could also reduce the market price of our capital 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:
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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 BCL contains provisions that may have the effect of delaying or preventing a change in our control 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:
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•
provide the other shareholders of the corporation with certain rights against the acquiring group or person;
prohibit the corporation from engaging in a broad range of business combinations with the acquiring group or person;
restrict the voting and other rights of the acquiring group or person; and
provide that certain profits realized by the acquiring group or person from the sale of our equity securities belong to
and are recoverable by us.
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36
Regardless of the amount of a person’s holdings, if a shareholder or shareholder group (including affiliated persons) would be a
party to certain proposed transactions with us or would be treated differently from other shareholders of ours in certain
proposed transactions, the BCL requires approval by a majority of votes entitled to be cast by all shareholders other than the
interested shareholder or affiliate group, unless the transaction is approved by independent directors or other criteria are
satisfied. Furthermore, under the BCL, a “short-form” merger of II-VI cannot be implemented without the consent of our board
of directors.
In addition, as permitted by Pennsylvania law, an amendment to our Articles of Incorporation or other corporate action that is
approved by shareholders may provide mandatory special treatment for specified groups of nonconsenting shareholders of the
same class. For example, an amendment to our Articles of Incorporation or other corporate action may provide that shares of
common stock held by designated shareholders of record must be cashed out at a price determined by the Company, subject to
applicable dissenters’ rights.
Furthermore, the BCL provides that directors, in discharging their duties, may consider, to the extent they deem appropriate, the
effects of any action upon shareholders, employees, suppliers, customers, and the communities in which the corporation’s
offices are located. Directors are not required to consider the interests of shareholders to a greater degree than other
constituencies’ interests. The BCL expressly provides that directors do not violate their fiduciary duties solely by relying on
“poison pills” or the anti-takeover provisions of the BCL. We do not currently have a “poison pill.”
All of these provisions may limit the price that investors may be willing to pay for shares of our capital stock.
In addition, certain rights of the holders of the Mandatory Convertible Preferred Stock could make it more difficult or more
expensive for a third party to acquire us. For example, if a fundamental change were to occur on or prior to July 1, 2023,
holders of the Mandatory Convertible Preferred Stock may have the right to convert their Mandatory Convertible Preferred
Stock, in whole or in part, at an increased conversion rate and will also be entitled to receive a make-whole amount equal to the
present value of all remaining dividend payments on their Mandatory Convertible Preferred Stock, as described in the
applicable Statement with Respect to Shares governing the Mandatory Convertible Preferred Stock. These features of the
Mandatory Convertible Preferred Stock could increase the cost of acquiring us or otherwise discourage a third party from
acquiring us or removing incumbent management.
Because we do not currently intend to pay dividends, holders 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 nor 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 capital stock will depend entirely upon future appreciation in its
value. There is no guarantee that our common stock will maintain its value or appreciate in value.
Our ability to declare and pay dividends on our capital stock may be limited, including by the terms of our existing
Credit Agreement.
Our declaration and payment of dividends on our capital stock in the future will be determined by our board of directors (or an
authorized committee thereof) in its sole discretion and will depend on our financial condition, earnings, growth prospects,
other uses of cash, funding requirements, applicable Pennsylvania law, and other factors our board of directors deems relevant.
The terms of the Credit Agreement contain a restriction on our ability to pay cash dividends on our capital stock. If the terms of
the Credit Agreement restrict our ability to pay cash dividends on the Mandatory Convertible Preferred Stock, we will pay any
dividends declared by our board of directors (or an authorized committee thereof) on the Mandatory Convertible Preferred
Stock in the form of shares of common stock. In addition, credit facilities, indentures, or other financing agreements that we
enter into in the future may contain provisions that restrict or prohibit our ability to pay cash dividends on our capital stock.
In addition, under Pennsylvania law, our board of directors may not pay dividends if after giving effect to the relevant dividend
payment we (i) would not be able to pay our debts as they become due in the usual course of our business or (ii) our total assets
would not be greater than or equal to the sum of our total liabilities plus the amount that would be needed if we were to be
dissolved at the time as of which the dividend is measured, in order to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the dividend. Even if we are permitted under our
contractual obligations and Pennsylvania law to pay cash dividends on the Mandatory Convertible Preferred Stock, we may not
have sufficient cash to pay cash dividends on the Mandatory Convertible Preferred Stock.
The Mandatory Convertible Preferred Stock may adversely affect the market price of our common stock.
The market price of our common stock is likely to be influenced by the Mandatory Convertible Preferred Stock. For example,
the market price of our common stock could become more volatile and could depress possible sales of our common stock to
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shareholders who view the Mandatory Convertible Preferred Stock as a more attractive means of equity participation in us than
owning shares of our common stock.
Our common stock is subordinate to our existing and future indebtedness; the Mandatory Convertible Preferred Stock,
when issued; and any other preferred stock we may issue in the future. Our Mandatory Convertible Preferred Stock
ranks junior to all of our and our subsidiaries’ consolidated liabilities.
Shares of our common stock are equity interests that rank junior to all indebtedness and other non-equity claims on us with
respect to assets available to satisfy our claims, including in a liquidation of the Company. Additionally, holders of our common
stock may be subject to prior dividend and liquidation rights of any holders of our preferred stock or depositary shares
representing such preferred stock then outstanding.
Our common stock ranks junior to our Mandatory Convertible Preferred Stock with respect to the payment of dividends and
amounts payable in the event of our liquidation, dissolution, or winding-up of our affairs. This means that, unless accumulated
dividends have been paid on all the Mandatory Convertible Preferred Stock then outstanding through the most recently
completed dividend period, no dividends may be declared or paid on our common stock and we will not be permitted to
repurchase any of our common stock, subject to limited exceptions. Likewise, in the event of our voluntary or involuntary
liquidation, dissolution, or winding-up of our affairs, no distribution of our assets may be made to holders of our common stock
until we have paid to holders of the Mandatory Convertible Preferred Stock then outstanding a liquidation preference equal to
$200.00 per share plus accumulated and unpaid dividends.
In the event of a bankruptcy, liquidation, dissolution, or winding-up of our affairs, our assets will be available to pay obligations
on the Mandatory Convertible Preferred Stock only after all of our consolidated liabilities have been paid. In addition, the
Mandatory Convertible Preferred Stock ranks structurally junior to all existing and future liabilities of our subsidiaries. In the
event of a bankruptcy, liquidation, dissolution, or winding-up of our affairs, there may not be sufficient assets remaining, after
paying our and our subsidiaries’ liabilities, to pay amounts due on any or all of the Mandatory Convertible Preferred Stock then
outstanding.
As of June 30, 2020, our total consolidated indebtedness was approximately $2.3 billion, of which an aggregate of
approximately $1.9 billion was secured indebtedness of ours, to which the Mandatory Convertible Preferred Stock would have
been subordinated. In addition, we have the ability to, and may, incur additional indebtedness in the future.
Our board of directors can issue, without approval of the holders of our common stock, preferred stock with voting and
conversion rights that could adversely affect the voting power of the holders of our common stock, the rights of holders
of shares of our capital stock, or the market price of our capital stock.
Our Articles of Incorporation authorize our board of directors to issue one or more additional series of preferred stock and set
the terms of the preferred stock without seeking any further approval from our shareholders. Any preferred stock that is issued
will rank ahead of our common stock in terms of dividends and liquidation rights. If we issue additional preferred stock, it may
adversely affect the market price of our common stock. Our board of directors also has the power, without shareholder
approval, subject to applicable law, to set the terms of any such series of preferred stock that may be issued, including voting
rights, dividend rights, preferences over our common stock with respect to dividends, and other terms, or upon our liquidation,
dissolution, or winding-up of our affairs. If we issue additional preferred stock in the future that has a preference over our
common stock with respect to the payment of dividends or upon our liquidation, dissolution, or winding-up of our affairs, or if
we issue additional preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of
our capital stock or the market price of our capital stock could be adversely affected. The issuance of preferred stock or even the
ability to issue preferred stock could also have the effect of delaying, deterring, or preventing a change of control or other
corporate action.
Reports published by securities or industry analysts, freelance bloggers and credit rating agencies, including projections
in those reports that exceed our actual results, could adversely affect our share price and trading volume.
Research analysts and freelance bloggers publish their own quarterly projections regarding our operating results. These
projections may vary widely from one another and may not accurately predict the results we actually achieve. Our share price
may decline if we fail to meet securities research analysts’ projections. Similarly, if one or more of the analysts who cover us
change their recommendations regarding our common stock or publish inaccurate or unfavorable research about our business,
our share price could decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, our
share price or trading volume could decline.
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Regulatory actions may adversely affect the trading price and liquidity of the Mandatory Convertible Preferred Stock.
Holders of Mandatory Convertible Preferred Stock who employ, or seek to employ, a convertible arbitrage strategy with respect
to the Mandatory Convertible Preferred Stock may be adversely impacted by regulatory developments that may limit or restrict
such a strategy. The SEC and other regulatory and self-regulatory authorities have implemented various rules and may adopt
additional rules in the future that restrict and otherwise regulate short selling, over-the-counter swaps, and security-based
swaps, which restrictions and regulations may adversely affect the ability of investors in, or potential purchasers of, the
Mandatory Convertible Preferred Stock to conduct a convertible arbitrage strategy with respect to the Mandatory Convertible
Preferred Stock. This could, in turn, adversely affect the trading price and liquidity of the Mandatory Convertible Preferred
Stock.
Holders of Mandatory Convertible Preferred Stock have no voting rights with respect to the Mandatory Convertible
Preferred Stock, except under limited circumstances.
Holders of Mandatory Convertible Preferred Stock have no voting rights with respect to the Mandatory Convertible Preferred
Stock, except with respect to certain amendments to the terms of the Mandatory Convertible Preferred Stock, in the case of
certain dividend arrearages, in certain other limited circumstances, and except as specifically required by applicable
Pennsylvania law or by our amended and restated Articles of Incorporation. Holders of Mandatory Convertible Preferred Stock
have no right to vote for any members of our board of directors, except in the case of certain dividend arrearages.
If dividends on any Mandatory Convertible Preferred Stock have not been declared and paid for the equivalent of six or more
dividend periods (including, for the avoidance of doubt, the dividend period beginning on, and including, the initial issue date
of the Mandatory Convertible Preferred Stock and ending on, but excluding, October 1, 2020), whether or not for consecutive
dividend periods, the holders of such Mandatory Convertible Preferred Stock, voting together as a single class with holders of
all other series of preferred stock ranking equally with the Mandatory Convertible Preferred Stock and having similar voting
rights, will be entitled at our next special or annual meeting of shareholders to vote for the election of a total of two additional
members of our board of directors, subject to certain limitations.
We depend on our subsidiaries for cash to fund our operations and expenses, including future dividend payments with
respect to the Mandatory Convertible Preferred Stock.
A significant portion of our operations is conducted through our subsidiaries, and our ability to generate cash to meet our debt
service obligations or to make future dividend payments with respect to the Mandatory Convertible Preferred Stock is highly
dependent on the earnings and the receipt of funds from our subsidiaries. Our subsidiaries are separate legal entities that have
no obligation to make any funds available to us, whether by dividends, loans, or other payments.
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Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Information regarding our principal U.S. properties at June 30, 2020, is set forth below:
Location
Primary Use(s)
Primary Business Segment(s)
Sherman, TX
Manufacturing
Easton, PA*
Saxonburg, PA
Warren, NJ
Newark, DE
Sunnyvale, CA
Murrieta, CA
Fremont, CA
Manufacturing and Research and
Development
Manufacturing and Research and
Development
Manufacturing and Research and
Development
Manufacturing and Research and
Development
Manufacturing, Research and
Development, and Corporate
Administrative Offices
Manufacturing and Research and
Development
Manufacturing and Research and
Development
Compound Semiconductors
Compound Semiconductors
Approximate
Square Footage
700,000
281,000
Compound Semiconductors
235,000
Compound Semiconductors
159,000
Ownership
Owned
Leased
Owned and
Leased
Leased
Compound Semiconductors
135,000
Leased
Photonic Solutions
112,000
Leased
Compound Semiconductors
108,000
Leased
Compound Semiconductors
107,000
Leased
*Approximately 48,000 square feet are currently used in connection with the Company’s manufacturing operations. The
remainder is subleased to a third party.
Information regarding our principal foreign properties at June 30, 2020, is set forth below:
Primary Use(s)
Primary Business Segment(s)
Location
China
Malaysia
Manufacturing, Research and
Development, and Distribution
Manufacturing
United Kingdom Manufacturing, Research and
Philippines
Vietnam
Switzerland
Development
Manufacturing
Manufacturing
Manufacturing, Research and
Development, and Distribution
Compound Semiconductors and
Photonic Solutions
Photonic Solutions
Compound Semiconductors and
Photonic Solutions
Compound Semiconductors
Compound Semiconductors and
Photonic Solutions
Compound Semiconductors
Approximate
Square Footage
3,232,363
640,000
319,000
318,000
189,000
118,000
Ownership
Owned and
Leased
Owned
Owned and
Leased
Leased
Owned and
Leased
Leased
The square footage listed for each of the above properties represents facility square footage, except in the case of the
Philippines location, which includes land.
Item 3.
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various claims and lawsuits incidental to its business. The resolution of each
of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the
Company. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from such
legal proceedings will not materially affect the Company’s financial condition, liquidity, or results of operations.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
Item 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
The Company’s common stock is traded on the Nasdaq Global Select Market under the symbol “IIVI.” As of August 20, 2020,
there were approximately 839 holders of record of our common stock. The Company historically has not paid cash dividends on
its common stock and does not presently anticipate paying cash dividends on its common stock in the future. Dividends on the
Company’s Mandatory Convertible Preferred Stock will be payable on a cumulative basis when, as and if declared by our board
of directors, or an authorized committee of our board of directors, at an annual rate of 6.00% of the liquidation preference of
$200.00 per share. The Company may pay declared dividends on the Mandatory Convertible Preferred Stock in cash or, subject
to certain limitations, in shares of our common stock or in any combination of cash and shares of our common stock on January
1, April 1, July 1 and October 1 of each year, commencing on October 1, 2020 and ending on, and including, July 1, 2023.
ISSUER PURCHASES OF EQUITY SECURITIES
In August 2017, in conjunction with the Company’s offering and sale of our 0.25% outstanding convertible senior notes, the
Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock with a portion of the
net proceeds received from the offering and sale of those convertible notes. The shares that were purchased by the Company
pursuant to this authorization were retained as treasury stock and are available for general corporate purposes. The Company
purchased 1,414,900 shares of its common stock for approximately $49.9 million pursuant to this authorization.
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private
transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares
purchased by the Company are retained as treasury stock and available for general corporate purposes. During each of the fiscal
years ended June 30, 2020 and June 30, 2019, the Company purchased 50,000 shares of its common stock for $1.6 million
under this program. As of June 30, 2020, the Company has cumulatively purchased 1,416,587 shares of its common stock
pursuant to the Program for approximately $22.3 million. The dollar value of shares as of June 30, 2020 that may yet be
purchased under the Program is approximately $27.7 million.
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41
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, 2015, through June 30, 2020. The Company’s current fiscal year peer group includes Cabot
Microelectronics Corporation, Franklin Electric Co. Inc., MKS Instruments, Inc., Silicon Laboratories Inc., Lumentum
Holdings Inc., Coherent, Inc. and Corning Incorporated.
In our Annual Report on Form 10-K for our fiscal year ended June 30, 2019, our fiscal year peer group included Finisar.
Finisar has been excluded from the current fiscal year peer group as a result of our acquisition of Finisar in September 2019.
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Item 6.
SELECTED FINANCIAL DATA
Five-Year Financial Summary
The following selected financial data for the five fiscal years presented are derived from the Company’s audited Consolidated
Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements and the related notes
thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30,
($000 except per share data)
Statement of Earnings
Net revenues
Net earnings (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
2020
2019
2018
2017
2016
$ 2,380,071 $ 1,362,496 $ 1,158,794 $ 972,046 $ 827,216
(67,029) 107,517
88,002
95,274
65,486
(0.79)
(0.79)
1.69
1.63
1.41
1.35
1.52
1.48
1.07
1.04
Diluted weighted average shares outstanding
84,828
65,804
65,133
64,507
62,909
June 30,
($000)
Balance Sheet
Working capital
Total assets
Long-term debt
Total debt
Retained earnings
Shareholders' equity
2020
2019
2018
2017
2016
$ 1,116,076 $ 542,348 $ 525,370 $ 517,344 $ 411,721
5,234,714
1,953,773
1,761,661
1,477,297
1,211,981
2,186,092
443,163
419,013
322,022
215,307
2,255,342
466,997
439,013
342,022
235,307
876,552
943,581
836,064
748,062
652,788
2,076,803
1,133,209
1,024,311
900,563
782,338
Item 7.
OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Forward-Looking Statements
Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations
("Management Discussion and Analysis") are forward-looking statements as defined by Section 21E of the Securities Exchange
Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial
position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as
“expects,” “anticipates,” “believes,” “intends,” “plans,” “projects” or similar expressions.
Although our management considers these expectations and assumptions to have a reasonable basis, there can be no assurance
that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or
prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to
differ materially from those discussed in the forward-looking statements in this Annual Report on Form 10-K include, but are
not limited to: (i) the failure of any one or more of the assumptions stated above to prove to be correct; and (ii) the risks relating
to forward-looking statements and other “Risk Factors” discussed herein at Item 1A. The Company disclaims any obligation to
update information contained in these forward-looking statements whether as a result of new information, future events or
developments, or otherwise.
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In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not
possible for management to anticipate all such risk factors, or to assess the impact of all such risk factors on our business or the
extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those
contained in any forward-looking statement. The forward-looking statements included in this Annual Report on Form 10-K are
based only on information currently available to us and speak only as of the date of this Report. We do not assume any
obligation, and do not intend to, update any forward-looking statements, whether as a result of new information, future
developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further
disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.
Investors should also be aware that, while the Company does communicate with securities analysts from time to time, such
communications are conducted in accordance with applicable securities laws. Investors should not assume that the Company
agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.
Overview
II-VI Incorporated (“II-VI,” the “Company,” “we,” “us” or “our”), a worldwide leader in engineered materials and opto-
electronic components, is a vertically integrated manufacturing company that develops innovative products for industrial
materials processing, communications, aerospace and defense, consumer electronics, semiconductor capital equipment, life
sciences and automotive end markets. The Company produces a wide variety of application-specific photonic and electronic
materials and components, and deploys them in various forms, including integration with advanced software.
The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of
products for our end markets. 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 original equipment manufacturers, laser end users, system integrators of high-power lasers,
manufacturers of equipment and devices for industrial, optical communications, consumer electronics, security and monitoring
applications, U.S. government prime contractors, and various U.S. government agencies.
In September 2019, the Company completed its acquisition Finisar Corporation (“Finisar”), See Note 3. Acquisitions, to our
Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K. The operating results of this
acquisition have been reflected in the selected financial information of the Company’s Photonic Solutions segment and
Compound Semiconductors Segment beginning on October 1, 2019, with the results from September 24, 2019 to September 30,
2019 reflected in Unallocated and Other.
Finisar is a global technology leader in optical communications, providing components and subsystems to networking
equipment manufacturers, data center operators, telecom service providers, consumer electronics and automotive companies.
Finisar, headquartered in Sunnyvale, California, designs products that meet the increasing demands for network bandwidth,
data storage and 3D sensing subsystems. As part of the Finisar acquisition, the Company entered into a new Amended and
Restated Credit Agreement, dated as of September 24 2019. This agreement secured $2.425 billion in aggregate principle
amount of senior secured credit facilities. See Note 9. Debt, to our Consolidated Financial Statements contained in Item 8 of
this Annual Report on Form 10-K.
On June 30, 2020, the Company announced its intention to offer, in concurrent underwritten public offerings, newly issued
shares of its common stock and newly issued shares of its Series A Mandatory Convertible Preferred Stock, "Mandatory
Convertible Preferred Stock"). In addition, the underwriters were granted a 30-day option to purchase additional shares of its
common stock at the applicable public offering price, less underwriting discounts and commissions, and shares of Series A
Mandatory Convertible Preferred Stock at the applicable public offering price, less underwriting discounts and commissions
and solely to cover over-allotments with respect to the preferred stock offering. See Note 21. Subsequent Event, to our
Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further details.
As we grow, we are focused on scaling our Company and deriving the continued benefits of vertical integration as we strive to
be a best in class competitor in all of our highly competitive markets. The Company may elect to change the way in which the
Company operates or is organized in the future to enable the most efficient implementation of our strategy.
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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in
the United States 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. Nature of Business and Summary of
Significant Accounting Policies, of the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual
Report on Form 10-K describes the significant accounting policies and accounting methods used in the preparation of the
Company’s Consolidated Financial Statements. Management bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results may differ from these estimates.
Management has discussed the development and selection of the critical accounting policies and estimates described below with
the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. In addition, there
are other items within our Consolidated Financial Statements that require estimation but are not deemed critical. Changes in
estimates used in these and other items could impact the Consolidated Financial Statements.
Business Combinations
The Company accounts for business acquisitions under the acquisition method of accounting whereby the total purchase price is
allocated to tangible and intangible assets acquired and liabilities assumed based on the respective fair values. In determining
the fair value of intangible assets acquired, the Company must make assumptions about the future performance of the acquired
business, including among other things, the forecasted revenue growth attributable to the asset group and projected operating
expenses inclusive of expected synergies, including future cost savings, and other benefits expected to be achieved by
combining the Company and Finisar. The Company’s intangible assets are comprised of customer relationships, trade names
and developed technology. The estimated fair value of the customer relationships, trade names and developed technology are
determined using the multi-period excess earnings method and relief from royalty methods. Both methods require forward
looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is
reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future
economic and market conditions. The estimated fair value of the developed technology is also dependent on the selection of the
royalty rate used in the valuation method. Different assumptions for certain intangible assets may result in materially different
values for these assets, which would impact the Company’s financial position and future results of operations.
Goodwill
The Company tests goodwill for impairment annually, and when events or changes in circumstances indicate that goodwill
might be impaired. The determination of whether goodwill is 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. For fiscal year 2020, the fair values of the reporting units were determined using a discounted cash flow
analysis with projected financial information 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. As of June 30, 2020, no
reporting units are at risk for impairment. Due to the cyclical nature of our business, and the other factors described in the
section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our individual reporting
units may periodically be affected by downturns in customer demand, operational challenges and other factors. If material
adverse conditions occur that impact one or both of our reporting units, our determination of future fair value might not support
the carrying amount of one or both of our reporting units, and the related goodwill would need to be impaired.
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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. The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and
circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of
regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an
examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay
assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties
related to unrecognized tax benefits in income tax expense.
Management evaluates the realizability of deferred tax assets for each jurisdiction in which it operates. If the Company
experiences cumulative pretax income in a particular jurisdiction in a three-year period including the current and prior two
years, management normally concludes that the income tax assets will more likely than not be realizable and no valuation
allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to
conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in a three-year
period, management then considers a series of factors in the determination of whether the deferred tax assets can be realized.
The Company has recorded valuation allowances against certain of its deferred tax assets, primarily those that have been
generated from net operating losses in certain foreign taxing jurisdictions and acquired U.S. carryforwards. In evaluating
whether the Company would more likely than not recover these deferred tax assets, it has not assumed any future taxable
income or tax planning strategies in the jurisdictions associated with these carryforwards 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.
COVID-19 Update
On March 11, 2020, the World Health Organization designated the novel coronavirus known as COVID-19 as a global
pandemic. In response to the global spread of COVID-19, governments at various levels have implemented unprecedented
response measures. Overall, the COVID-19 pandemic has significantly curtailed global economic activity and caused
significant volatility and disruption in global financial markets. Certain of the measures taken in response to the COVID-19
pandemic have adversely affected, and could in the future materially adversely impact, our business, results of operations,
financial condition and stock price.
In particular, the COVID-19 pandemic is having a significant impact on global markets due to resulting supply chain and
production disruptions, workforce and travel restrictions, quarantines and shelter-in-place orders, reduced spending and other
similar measures implemented by many companies and other factors. Following the initial outbreak of COVID-19, we
experienced temporary disruptions to our operations in China. While these operations have returned to active service,
approximately 45% of our global facilities are subject to a government order, including approximately 10% that are currently
closed, most of which are administrative facilities where employees are working remotely. Certain of our customers and
suppliers currently are impacted by similar operational restrictions.
Our focus has been on the protection of the health and safety of our employees and business partners. In our facilities, we have
deployed new safety measures, including guidance to employees on matters such as effective hygiene and disinfection, social
distancing, limited and remote access working where feasible and use of protective equipment. We also are prioritizing efforts
to understand and support the changing business needs of our customers and suppliers in light of restrictions that are applicable
to them.
At this time, we believe that our existing balances of cash and cash equivalents, along with our existing committed borrowing
availability and other short-term liquidity arrangements, will be sufficient to satisfy our working capital needs, make necessary
capital asset purchases and debt repayments and meet other liquidity requirements associated with our existing operations.
Likewise, our current estimates indicate that we will remain in compliance with financial covenants applicable under our debt
arrangements.
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The full extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial
performance is currently uncertain and will depend on many factors outside our control, including, without limitation, the
duration and severity of the pandemic, the imposition of protective public safety measures, and the impact of the pandemic on
the global economy as a whole and, in particular, demand for our products. Due to these uncertainties, we cannot reasonably
estimate the related impact on us at this time.
For additional information regarding the risks that we face as a result of the COVID-19 pandemic, please see Item 1A, Risk
Factors, in Part I of this Form 10-K. Further, to the extent the COVID-19 pandemic adversely affects our business and financial
results, it also may have the effect of heightening many of the other risks described in the risk factors in Item 1A of this Form
10-K.
Fiscal Year 2020 Compared to Fiscal Year 2019
The Company aligns its organizational structure into the following two reporting segments for the purpose of making
operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The
Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report
on Form 10-K.
The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30,
2020 and 2019 ($ in millions except per share information):
Year Ended June 30,
2020
Year Ended June 30,
2019
Total revenues
Cost of goods sold
Gross margin
Operating expenses:
Internal research and development
Selling, general and administrative
Interest and other, net
Earnings (Loss) before income tax
Income taxes
Net earnings (loss)
Diluted earnings (loss) per share
Consolidated
% of
Revenues
$ 2,380.1
100.0 % $ 1,362.4
1,560.5
819.6
65.6 %
34.4
% of
Revenues
100.0 %
61.7 %
38.3
10.2
17.1
1.5
9.5
1.6
841.1
521.3
139.2
233.5
19.8
128.8
21.3
14.2
18.5
4.3
(2.7)
0.1
339.1
441.0
103.4
(63.9)
3.1
(67.0)
(0.79)
$
$
(2.8) % $
107.5
7.9 %
$
1.63
Revenues. Revenues for the year ended June 30, 2020 increased 75% to $2,380.1 million, compared to $1,362.4 million for the
prior fiscal year. The increase in revenues is primarily attributed to the acquisition of Finisar, which contributed $938.4 million
of revenues for the fiscal year ended June 30, 2020. In addition to the acquisition of Finisar, the increase in revenues within
Photonic Solutions was driven by increased demand from customers in the optical communication market, ROADM and other
optical communication products addressing the growing deployment of 5G optical networks. Compound Semiconductors
recorded a 13% revenue increase during the current fiscal year, which in addition to revenues from Finisar, was driven by
strengthening demand for SiC substrate products addressing RF electronics and high-power switching systems. This segment
also realized increased revenues from its aerospace and defense products addressing strengthening demand from customers in
the intelligence, surveillance and reconnaissance markets.
Gross margin. Gross margin for the year ended June 30, 2020 was $819.6 million, or 34.4%, of total revenues, compared to
$521.3 million, or 38.3% of total revenues, for the same period last fiscal year. Gross margin as a percentage of revenues
decreased 380 basis points compared to the prior fiscal year despite the 75% increase in revenues during this same period.
Gross margin was negatively impacted by additional cost of goods sold of $87.7 million related to the fair value adjustment of
the acquired Finisar inventory, and as the result of product mix relating to Finisar's Transceiver product line which has a lower
gross margin profile than the Company's historical margins.
47
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Internal research and development. Company-funded internal research and development (“IR&D”) expenses for the fiscal
year ended June 30, 2020 were $339.1 million, or 14.2% of revenues, compared to $139.2 million, or 10.2%. 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, indium phosphide, LIDAR and other emerging
market trends.
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2020
were $441.0 million, or 18.5% of revenues, compared to $233.5 million, or 17.1% of revenues, last fiscal year. The increase in
SG&A was primarily the result of transaction costs incurred relating to the acquisition of Finisar as well as the SG&A from the
Finisar acquisition.
Interest and other, net. Interest and other, net for the year ended June 30, 2020 was expense of $103.4 million compared to
expense of $19.8 million last fiscal year. Interest and other, net primarily includes $89.4 million for interest expense on
borrowings, $14.4 million of foreign currency losses, and $2.8 million of equity earnings from unconsolidated investments.
Interest expense increased due to the higher levels of outstanding debt incurred in conjunction with the acquisition of Finisar. In
addition, the Company expensed $4.0 million of debt extinguishment costs during the current fiscal year and recorded a $5.0
million impairment charge for an unconsolidated investment as its carrying value was determined to be unrecoverable.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2020 was a (4.9)% benefit, compared to an
effective tax rate of 16.6% last fiscal year. The current fiscal year’s effective tax rate was negatively impacted by the U.S.
enacted tax legislation related to global intangible low tax income (“GILTI”) partially offset by research and development
incentives in certain jurisdictions.
Segment Reporting
Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from
income from operations in that operating income excludes certain operational expenses included in other expense (income), net,
as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment
performance over which management has direct control and is used by management in its evaluation of segment performance.
See Note 14. Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of
operating income to net earnings, which is incorporated herein by reference.
Effective July 1, 2019, the Company realigned its composition of its operating segments. The Company combined II-VI Laser
Solutions and II-VI Performance Products, and renamed the combined segment Compound Semiconductors. All applicable
segment information has been restated to reflect this change. Additionally, the Company changed the name of II-VI Photonics
to Photonic Solutions.
Photonic Solutions ($ in millions)
Revenues
Operating income
Year Ended
June 30,
2020
2019
$
$
1,536.8 $
49.9 $
638.9
81.9
%
Increase/
(Decrease)
141 %
(39) %
The above operating results for the year ended June 30, 2020 include the Company’s acquisition of Finisar in September 2019.
Revenues for the year ended June 30, 2020 for Photonic Solutions increased 141% to $1,536.8 million, compared to $638.9
million for last fiscal year. Included in the current year’s revenues were $903.5 million of revenues from the Finisar
acquisition. Exclusive of the acquisition, the increase in revenues was attributed to increased demand of our 5G optical
networks driven by the China broadband initiative.
Operating income for the year ended June 30, 2020 for Photonic Solutions decreased 39% to $49.9 million, compared to an
operating income of $81.9 million last fiscal year. The decrease in operating income was primarily due to acquisition related
expenses related to amortization expense on acquired intangible assets and the expensing of acquired inventory fair value step-
up partially offset by incremental margin realized on increased revenues during the year.
48
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Compound Semiconductors ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase/
(Decrease)
2020
2019
$
$
821.2 $
62.3 $
723.6
82.4
13%
(24%)
The above operating results for the year ended June 30, 2020 include the Company’s acquisition of Finisar in September 2019.
Revenues for the fiscal year ended June 30, 2020 for Compound Semiconductors increased 13% to $821.2 million, compared to
revenues of $723.6 million last fiscal year. The increase in revenues during the current fiscal year was primarily driven by
increased VCSEL product shipments addressing the 3D sensing commercial market, and increased revenues to customers in the
aerospace and defense market.
Operating income for the fiscal year ended June 30, 2020 for Compound Semiconductors decreased 24% to $62.3 million,
compared to operating income of $82.4 million last fiscal year. The decrease in operating income during the current fiscal year
was primarily driven by the acquisition of Finisar, which includes unabsorbed operating costs incurred at the segment's
Sherman, Texas water fabrication facility, during the qualification phase. In addition, the segment incurred acquisition related
expenses associated with expensing of the fair value inventory write-up and other related acquisition expenses.
Fiscal Year 2019 Compared to Fiscal Year 2018
The Company aligned its organizational structure into the following two reporting segments for the purpose of making
operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The
Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report
on Form 10-K.
The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 2019 and
2018 ($ 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
Diluted earnings per share
Year Ended
June 30, 2019
Year Ended
June 30, 2018
% of
Revenues
% of
Revenues
$ 1,362.4
100.0 % $ 1,158.8
100.0 %
841.1
521.3
139.2
233.5
19.8
128.8
21.3
107.5
1.63
$
$
61.7
38.3
10.2
17.1
1.5
9.5
1.6
7.9 % $
696.6
462.2
116.9
208.6
14.6
122.2
34.2
88.0
$
1.35
60.1
39.9
10.1
18.0
1.3
10.5
3.0
7.5 %
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49
Consolidated
Revenues. Revenues for the year ended June 30, 2019 increased 18% to $1,362.4 million, compared to $1,158.8 million for
fiscal year 2018. The increase in revenues during fiscal year 2019 was driven by strong demand from customers across the
majority of the Company’s business units. In particular, Photonic Solutions experienced a 31% revenue growth from the prior
fiscal year 2018, primarily driven by increased demand from customers in the optical communication market. Specifically, the
segment saw increased demand for ROADM and other optical communication products addressing the growing deployment of
5G optical networks. Compound Semiconductors recorded an 8% revenue increase during the current fiscal year, driven by
strengthening demand for SiC substrate products addressing RF electronics and 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.
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 fiscal year 2018. 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 Photonic
Solutions’ gross margin was negatively impacted by a shift in product mix to lower margin products while Compound
Semiconductors 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 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, for fiscal year 2018. The increase in IR&D
expenses is primarily due to the Company continuing to invest in new products and processes across all its businesses including
investments in 5G technology, 3D Sensing and other engineered material applications. IR&D expenses as a percentage of
revenues were consistent between both fiscal years, and the Company anticipates this percentage to continue to range between
10% and 15% of revenues as the Company continues investing in new product and process development.
Selling, general and administrative. SG&A expenses for the year ended June 30, 2019 were $233.5 million, or 17.1% of
revenues, compared to $208.6 million, or 18.0% of revenues, for fiscal year 2018. During fiscal year 2019, the Company
announced its intention to acquire Finisar, and incurred approximately $15.6 million of related transaction expenses. In addition
to the 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 for fiscal year 2018. 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 $4.1 million due to the higher levels of outstanding
debt.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2019 was 16.6%, compared to an effective tax
rate of 28.0% for fiscal year 2018. Fiscal year 2018’s effective tax rate was negatively impacted by the U.S. enacted tax
legislation and the recording the provision for the transition tax under the new tax law.
Photonic Solutions ($ 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 Holdings, Inc. in
September 2018 and the product line which was acquired in November 2018.
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50
Revenues for the year ended June 30, 2019 for Photonic Solutions increased 31% to $638.8 million, compared to $486.5
million for fiscal year 2018. Included in the fiscal year’s 2019 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 saw 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 Photonic Solutions increased 30% to $81.9 million, compared to an
operating income of $63.2 million for fiscal year 2018. The increase in operating income was primarily due to incremental
margin realized on increased revenues.
Compound Semiconductors ($ in millions)
Revenues
Operating income
Year Ended
June 30,
%
Increase
2019
2018
$
$
723.6 $
82.4 $
672.3
73.6
8%
12%
Revenues for the fiscal year ended June 30, 2019 for Compound Semiconductors increased 8% to $723.6 million, compared to
revenues of $672.3 million for fiscal year 2018. The increase in revenues during fiscal year 2019 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 fiscal year ended June 30, 2019 for Compound Semiconductors increased 12% to $82.4 million,
compared to operating income of $73.6 million for fiscal year 2018. The increase in operating income during fiscal year 2019
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 from operations, long-term borrowing, and advance funding from
customers. Other sources of cash include proceeds received from the exercises of stock options and sale of equity investments
and businesses. Our historic uses of cash have been for capital expenditures, investments in research and development, business
acquisitions, payments of principal and interest on outstanding debt obligations, payments of debt issuance costs to obtain
financing, payments in satisfaction of employees’ minimum tax obligations and purchases of treasury stock. Supplemental
information pertaining to our sources and uses of cash for the periods indicated is presented as follows:
Sources (uses) of Cash (millions):
Year Ended June 30,
Net cash provided by operating activities
Proceeds on new long-term borrowings
Proceeds from exercises of stock options
Proceeds from prior credit facility and other borrowings
Purchases of businesses, net of cash acquired
Payments of Finisar Notes
Payments under prior term loan and credit facility
Payments under new long-term borrowings and credit facility
Additions to property, plant & equipment
Debt issuance costs
Payments in satisfaction of employees' minimum tax obligations
Common stock repurchases
Effect of exchange rate changes on cash and cash equivalents and other items
51
2020
2019
2018
$
297.3 $
178.5 $
161.0
2,121.0
13.5
10.0
—
8.7
150.0
(1,036.6)
(83.1)
—
10.5
445.0
(80.5)
—
(560.1)
(176.6)
(137.9)
(136.9)
(63.5)
(28.7)
(1.6)
(11.7)
—
(135.0)
(292.0)
—
—
(137.1)
(153.4)
(5.6)
(7.1)
(1.6)
(9.9)
(10.1)
(6.6)
(49.9)
(48.9)
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Net cash provided by operating activities:
Net cash provided by operating activities was $297.3 million and $178.5 million for the fiscal years ended June 30, 2020 and
2019, respectively. The increase in cash flows provided by operating activities during the current fiscal year ended compared to
the same period last fiscal year was primarily driven by increased non-cash charges for depreciation and amortization as well as
overall favorable changes in working capital offset by lower earnings as a result of acquisition-related expenses incurred for the
acquisition of Finisar. Acquisition-related expenses include transaction expenses, expensing of the fair value write-up of
acquired inventory and increased depreciation and amortization charges for acquired property, plant and equipment and
intangible assets.
Net cash provided by operating activities was $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 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 used in investing activities:
Net cash used in investing activities was $1,179.3 million and $224.0 million for the fiscal years ended June 30, 2020 and 2019,
respectively. Net cash used in investing activities during the current period primarily included $1,036.6 million for net cash
paid for the acquisition of Finisar, and $136.9 million of cash paid for property, plant and equipment to increase capacity to
meet the growing demand for the Company’s product portfolio.
Net cash used in investing activities was $224.0 million and $285.0 million for the fiscal years ended June 30, 2019 and 2018,
respectively. The 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 provided by financing activities:
Net cash provided by financing activities was $1,173.6 million for the year ended June 30, 2020 compared to net cash provided
by financing activities of $4.9 million for the year ended June 30, 2019. Net cash provided by financing activities during the
current fiscal year included net borrowings on long-term debt of $1,256.4 million primarily to fund the acquisition of Finisar,
and $13.5 million of cash received from exercises of stock options. Net cash provided by financing activities was offset by
$63.5 million of debt issuance costs associated with the increased borrowings, $28.7 million of cash payments in satisfaction of
employees’ minimum tax obligations from the vesting of equity awards and a $1.6 million payment to repurchase common
stock through the Company's share repurchase program.
Net cash provided by financing activities was $4.9 million for the year ended June 30, 2019 compared to net cash provided by
financing activities of $97.0 million for the year ended June 30, 2018. During the year ended June 30, 2019, the Company had
net borrowings of $15.0 million. The Company realized $8.7 million of proceeds received from the exercise of stock options
offset, by $7.1 million of cash payments in satisfaction of employees’ minimum tax obligations on the vesting of the
Company’s restricted and performance shares during the current fiscal year. In addition, the Company incurred approximately
$1.6 million of purchases of treasury stock and $5.6 million of debt issuance costs associated with its pending financing of the
cash consideration payable in connection with its Finisar acquisition.
Senior Credit Facilities
On September 24, 2019, in connection with the Finisar acquisition, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other
lenders party thereto.
The Credit Agreement provides for senior secured financing of $2.425 billion in the aggregate, consisting of
(i)
(ii)
(iii)
Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan
facility (the “Term A Facility”),
Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the
“Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”) and
Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit
facility (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Senior
Credit Facilities”).
52
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The 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.
The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to
1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable
on the fifth anniversary of the Closing Date. Similarly, the Company is obligated to repay the outstanding principal amount of
the Term B Facility in quarterly installments equal to 0.25% of the initial aggregate principal amount of the Term B Facility,
with the remaining outstanding balance due and payable on the seventh anniversary of the Closing Date. The Company is
obligated to repay the aggregate principal amount of all outstanding revolving loans made under the Revolving Credit Facility
on the fifth anniversary of the Closing Date.
The Company’s obligations under the Senior Credit Facilities are guaranteed by each of the Company’s existing or future direct
and indirect domestic subsidiaries, including Finisar and its domestic subsidiaries (collectively, the “Guarantors”). Borrowings
under the Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and
the Guarantors, except that no real property is collateral under the Senior Credit Facilities.
All amounts outstanding under the Senior Credit Facilities will become due and payable 120 days prior to the maturity of the
Company’s currently outstanding 0.25% Convertible Senior Notes due 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain
outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI
Notes.
The Company voluntarily may prepay, at any time or from time to time, any amounts outstanding under the Senior Credit
Facilities in whole or in part without premium or penalty; except for the Term B Facility, pursuant to which in the event of (a) a
repayment made before September 24, 2020, (b) the occurrence of a repricing event, or (c) a change to the lenders, the
Company will be subject to a prepayment premium in an amount equal to one percent of: (i) the principal amount of the Term B
Facility that is prepaid under an optional or mandatory prepayment due to a repricing event, (ii) the aggregate outstanding
principal amount of the Term B Facility resulting from an amendment to the Credit Agreement, and (iii) the principal amount of
the Term B Facility that is mandatorily assigned. The Company may be subject to mandatory prepayment of amounts
outstanding under the Senior Credit Facilities under certain circumstances, including in connection with certain asset sales or
other dispositions of property and debt issuances.
The Company also may be required to prepay amounts under the Term B Facility based on the Company’s excess cash flow (as
calculated in accordance with the terms of the Credit Agreement) for the Company’s prior fiscal year beginning with its fiscal
year ending June 30, 2020 and the Company’s consolidated secured net leverage ratio (as calculated in accordance with the
terms of the Credit Agreement) as of the end of such fiscal year.
Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to an applicable margin over
a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate
plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in
accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances
relating to events of default. The Company has entered into an interest rate swap contract to hedge its exposure to interest rate
risk on its variable rate borrowings under the Senior Credit Facilities. Refer to Note 15 for further information regarding this
interest rate swap.
The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities,
including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets
and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated
in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00:1.00. The
Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the
Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Closing Date, commencing with
the first full fiscal quarter after the Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth
fiscal quarter after the Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2020, the Company
was in compliance with all financial covenants under the Credit Agreement.
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53
The Company incurred $69.8 million of debt issuance costs in connection with the Senior Credit Facilities. The Company
evaluated these costs to determine appropriate recognition of expense under Accounting Standards Codification 470, Debt to
account for debt modification and extinguishment. As a result of the Company’s assessment, $65.8 million have been
capitalized in the Consolidated Balance Sheet. Debt extinguishment costs of $4.0 million were expensed in other expense
(income), net in the Consolidated Statement of Earnings (Loss) during the twelve months ended June 30, 2020. The Company
expensed $2.9 million and $8.8 million of capitalized debt issuance costs during the three and twelve months ended June 30,
2020, respectively, in interest expense in the Consolidated Statement of Earnings (Loss). The capitalized costs are being
amortized to interest expense using the effective interest rate method from the issuance date of September 24, 2019, through the
end of each facility. The unamortized debt issuance costs of $56.9 million as of June 30, 2020 are being amortized over five and
seven years, for the Term A Facility and Revolving Credit Facility, and the Term B Facility, respectively.
On June 30, 2020, the Company announced its intention to offer, in concurrent underwritten public offerings, newly issued
shares of its common stock and newly issued shares of its Series A Mandatory Convertible Preferred Stock. On July 7, 2020,
the Company used the proceeds from the public offerings to pay off the remaining balance of $715.2 million of the Term B
Loan Facility. See Note 21 for further details.
0.50% Finisar Convertible Notes
Finisar’s outstanding 0.50% Convertible Senior Notes due 2036 (the “Finisar Notes”) may be redeemed at any time on or after
December 22, 2021 in whole or in part at the option of the Company at a redemption price equal to one hundred percent (100%)
of the principal amount of such Finisar Notes plus accrued and unpaid interest. Each holder of Finisar Notes also may require
Finisar to repurchase all or any portion of such holder’s outstanding Finisar Notes for cash on December 15, 2021,
December 15, 2026 and December 15, 2031 at a repurchase price equal to one hundred percent (100%) of the principal amount
of such Finisar Notes plus accrued and unpaid interest. The Finisar Notes will mature on December 15, 2036. Interest on the
Finisar Notes accrues at 0.50% per annum, paid semi-annually, in arrears, on June 15 and December 15 of each year.
In connection with the acquisition of Finisar, the Company, Finisar and Wells Fargo Bank, National Association, as trustee,
entered into a First Supplemental Indenture, dated as of September 24, 2019 (the “First Supplemental Indenture”). The First
Supplemental Indenture supplements the base indenture (as supplemented, the “Finisar Indenture”), which governs the Finisar
Notes. Pursuant to the terms of the First Supplemental Indenture, the Company has fully and unconditionally guaranteed, on a
senior unsecured basis, the due and punctual payment and performance of all obligations of Finisar to the holders of the Finisar
Notes. The First Supplemental Indenture also provides that the right of holders of Finisar Notes to convert Finisar Notes into
cash and/or shares of Finisar’s common stock, is changed to a right to convert Finisar Notes into cash and/or shares of the
Company’s common stock, subject to the terms of the Finisar Indenture.
Under the terms of the Finisar Indenture, the consummation and effectiveness of the Merger on the Closing Date constituted a
Fundamental Change (as defined in the Finisar Indenture) and a Make-Whole Fundamental Change (as defined in the Finisar
Indenture). Accordingly, in accordance with the terms of the Finisar Indenture, each holder of Finisar Notes had the right to
(i) convert its Finisar Notes into cash and/or shares of Company Common Stock, at Finisar’s option, or (ii) require that Finisar
repurchase such holder’s Finisar Notes for an amount in cash equal to one hundred percent (100%) of the principal amount of
such Finisar Notes plus accrued and unpaid interest.
Holders of approximately $560.1 million in aggregate principal amount of Finisar Notes exercised the repurchase right. The
Company repurchased those Finisar Notes on October 23, 2019 for an aggregate consideration of approximately $561.1 million
in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed
$561.0 million under a delayed draw on its Term Loan A to fund the payment to the holders of Finisar Notes that exercised the
repurchase right. As of June 30, 2020, approximately $14.9 million in aggregate principal amount of Finisar Notes remain
outstanding.
Aggregate Availability
The Company had aggregate availability of $374.6 million under its Revolving Credit Facility as of June 30, 2020.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 3.4% and 1.6% for the year ended June 30, 2020 and 2019,
respectively.
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54
Share Repurchase Programs
In August 2017, in conjunction with the Company’s offering and sale of our 0.25% outstanding convertible senior notes, the
Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock with a portion of the
net proceeds received from the offering and sale of those convertible notes. The shares that were purchased by the Company
pursuant to this authorization were retained as treasury stock and are available for general corporate purposes. The Company
purchased 1,414,900 shares of its common stock for approximately $49.9 million pursuant to this authorization.
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private
transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares
purchased by the Company are retained as treasury stock and available for general corporate purposes. During each of the fiscal
years ended June 30, 2020 and June 30, 2019, the Company purchased 50,000 shares of its common stock for $1.6 million
under this program. As of June 30, 2020, the Company has cumulatively purchased 1,416,587 shares of its common stock
pursuant to the Program for approximately $22.3 million. The dollar value of shares as of June 30, 2020 that may yet be
purchased under the Program is approximately $27.7 million.
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, 2020
June 30, 2019
$
493.0 $
374.6
2,255.3
204.9
211.9
467.0
The Company believes cash flow from operations, existing cash reserves and available borrowing capacity from its credit
facilities and its recent equity raise will be sufficient to fund its needs for working capital, capital expenditures, repayment of
scheduled long-term borrowings and lease obligations, investments in internal research and development, share repurchases,
and internal and external growth objectives at least through fiscal year 2021. Refer to Note 21 of the Company’s Consolidated
Financial Statements for subsequent event information regarding use of proceeds from the underwritten public offerings in July
2020 and the impact to existing debt obligations.
The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world,
including amounts held outside the United States. As of June 30, 2020, the Company held approximately $350.8 million of cash
and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the
United States.
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55
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the purchase obligations disclosed in the contractual obligations table
below. 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
Total
Payments Due By Period
1-3
Years
Less Than 1
Year
3-5
Years
More Than 5
Years
($000)
Long-term debt obligations (4)
Interest payments (1) (4)
Operating lease obligations, including imputed
interest
Finance lease obligations, including imputed
interest
Purchase and sponsorship obligations (2) (3)
$
$
$
$
$
2,342,951 $
69,250 $
498,388 $
1,096,713 $
678,600
262,554 $
53,549 $
101,431 $
77,574 $
30,000
161,288 $
31,100 $
44,585 $
33,287 $
52,316
32,199 $
2,419 $
199,660 $
196,937 $
5,040 $
2,723 $
5,321 $
19,419
— $
—
Total
$ 2,998,651 $
353,255 $
652,167 $ 1,212,895 $
780,335
(1)
(2)
(3)
(4)
Interest payments represent both variable and fixed rate interest obligations based on the interest rates in
effect at June 30, 2020 relating to the Senior Credit Facilities, the currently outstanding 0.50% convertible
senior notes assumed in the Finisar Acquisition, and the currently outstanding 0.25% Convertible Senior
Notes due 2022. These interest payments do not reflect the impact of the interest rate swap that hedges our
variable interest payments to fixed interest payments.
A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally
binding on the Company and that specifies all significant terms, including fixed or minimum quantities to be
purchased, minimum or variable price provisions, and the approximate timing of the transaction. These
amounts are primarily composed of open purchase order commitments to vendors for the purchase of supplies
and materials.
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.
Refer to Note 21. Subsequent Event for additional information regarding use of proceeds from the
underwritten public offerings in July 2020.
Pension obligations are not included in the table above. 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 16 to the Company’s Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.
The Company’s gross unrecognized income tax benefit at June 30, 2020 has been excluded from the table above because the
Company is not currently able to reasonably estimate the amount by which the liability will increase or decrease over time.
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56
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 a variety of techniques and derivative financial instruments as part of its
overall risk management strategy, which is primarily focused on its exposure in relation to the Japanese Yen, Chinese
Renminbi, Swiss Franc, Euro. and the Malaysian Ringgit. No significant changes have occurred in the techniques and
instruments used.
Interest Rate Risk
As of June 30, 2020, the Company’s total borrowings include variable rate borrowings, which exposes the Company to changes
in interest rates. In November 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable
interest rate debt by effectively converting a portion of interest payments to fixed interest rate debt. If the Company had not
hedged its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have
resulted in additional interest expense of $15.8 million for the year ended June 30, 2020.
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57
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, 2020. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included
reviewing the documentation of its controls, evaluating the design effectiveness of controls and testing their operating
effectiveness. Management excluded from the scope of its assessment of internal control over financial reporting the internal
controls of Finisar Corporation, which was acquired in September 2019. The recent acquisition excluded from management’s
assessment of internal controls over financial reporting represented approximately $3.1 billion and $2.8 billion of total assets
and net assets, respectively, as of June 30, 2020, and approximately $938.4 million and $94.6 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, 2020, the
Company’s internal controls over financial reporting were effective.
Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal
control over financial reporting as of June 30, 2020. Its report is included herein.
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58
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of II-VI Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries (the Company) as of
June 30, 2020 and 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’
equity and cash flows for each of the three years in the period ended June 30, 2020, and the related notes and the financial
statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
at June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended
June 30, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated August 26, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
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59
Description of the
Matter
How We Addressed
the Matter in Our
Audit
Valuation of customer relationship and technology intangible assets in the acquisition of Finisar
Corporation
As discussed in Note 3 to the consolidated financial statements, during the year ended June 30, 2020,
the Company completed the acquisition of Finisar Corporation ("Finisar") for a total purchase price of
approximately $2,908.5 million. The acquisition was accounted for as a business combination. The
consideration paid in the acquisition must be allocated to the acquired assets and liabilities assumed
generally based on their fair value with the excess of the purchase price over those fair values allocated
to goodwill.
Auditing the Company’s accounting for its acquisition of Finisar was complex due to the significant
estimation uncertainty involved in estimating the fair value of certain customer relationship and
technology intangible assets. The total fair value ascribed to customer relationship and technology
intangible assets amounted to $323.8 million and $334.7 million, respectively. The Company used the
multi-period excess earnings method and the relief from royalty method to value the customer
relationship and technology intangible assets, respectively. The significant assumptions used to estimate
the fair value of customer relationships included the forecasted revenue growth and projected operating
expenses inclusive of expected synergies, including future cost savings, and other benefits expected to
be achieved by combining the Company and Finisar. The significant assumptions used to estimate the
fair value of technology included the forecasted revenue growth and an estimated royalty rate. These
significant assumptions are forward-looking and could be affected by future economic and market
conditions.
We obtained an understanding, evaluated the design and tested the operating effectiveness of the
Company’s controls over its accounting for the acquisition of Finisar. For example, we tested controls
that address the risks of material misstatement relating to the valuation of the customer relationship and
technology intangible assets, including management’s review of the methods and significant
assumptions used to develop such estimates.
To test the estimated fair value of the acquired customer relationship and technology intangible assets,
our audit procedures included, among others, assessing the appropriateness of the valuation
methodologies used, evaluating the significant assumptions discussed above, and evaluating the
completeness and accuracy of the underlying data supporting the significant assumptions and estimates.
For the forecasted revenue growth and projected operating expenses inclusive of expected synergies,
including future cost savings, and other benefits expected to be achieved by combining the Company
and Finisar, we compared the financial projections to current industry and economic trends, the historic
financial performance of the acquired business, the Company’s history with other acquisitions, and
forecasted performance of guideline public companies. We also performed sensitivity analyses to
evaluate the changes in the fair value of the intangible assets that would result from changes in the
significant assumptions. We involved our valuation specialist to assist in evaluating the methodologies
used to estimate the fair value of the customer relationship and technology intangible assets and to test
certain significant assumptions, including the royalty rate, which included a comparison of the selected
royalty rate to a range of royalty rates we identified by performing an independent search of comparable
licensing agreements.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Pittsburgh, Pennsylvania
August 26, 2020
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60
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of II-VI Incorporated
Opinion on Internal Control over Financial Reporting
We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2020, 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, 2020, based on
the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of Finisar Corporation (“Finisar”), which is included in the June 30, 2020 consolidated financial statements of the
Company and constituted $3.1 billion and $2.8 billion of total and net assets, respectively, as of June 30, 2020 and $938.4
million and $94.6 million of revenues and net loss, respectively, for the fiscal year then ended. Our audit of internal control
over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of
Finisar.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of June 30, 2020 and 2019, the related consolidated statements of
earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period
ended June 30, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our
report dated August 26, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’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.
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61
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
August 26, 2020
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62
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
($000)
June 30,
Assets
Current Assets
2020
2019
Cash and cash equivalents
$
493,046 $
204,872
Accounts receivable - less allowance for doubtful accounts of $1,698 at June 30, 2020 and
$1,292 at June 30, 2019
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
Operating lease current liabilities
Accrued income taxes payable
Other accrued liabilities
Total Current Liabilities
Long-term debt
Deferred income taxes
Operating lease liabilities
Other liabilities
Total Liabilities
Shareholders' Equity
598,124
619,810
12,279
65,710
1,788,969
1,214,772
1,239,009
758,368
73,767
22,938
136,891
269,642
296,282
11,778
30,337
812,911
582,790
319,778
139,324
76,208
8,524
14,238
$
5,234,714 $
1,953,773
$
69,250 $
268,773
157,557
24,634
33,341
119,338
672,893
2,186,092
45,551
94,701
158,674
3,157,911
23,834
104,462
71,847
—
20,476
49,944
270,563
443,163
23,913
—
82,925
820,564
Preferred stock, no par value; authorized - 5,000,000 shares; none issued
—
—
Common stock, no par value; authorized - 300,000,000 shares; issued - 105,916,068 shares at
June 30, 2020; 76,315,337 shares at June 30, 2019
Accumulated other comprehensive loss
Retained earnings
Treasury stock, at cost - 13,356,447 shares at June 30, 2020 and 12,603,781 shares at June 30,
2019
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
See Notes to Consolidated Financial Statements.
1,486,947
(87,383)
876,552
382,423
(24,221)
943,581
2,276,116
1,301,783
(199,313)
2,076,803
$
5,234,714 $
(168,574)
1,133,209
1,953,773
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63
II-VI Incorporated and Subsidiaries
Consolidated Statements of Earnings (Loss)
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
2020
2019
2018
$
2,380,071 $
1,362,496 $
1,158,794
1,560,521
339,073
440,998
89,409
13,998
841,147
139,163
233,518
22,417
(2,562)
696,591
116,875
208,565
18,352
(3,783)
Total Costs, Expenses and Other Expense (Income)
2,443,999
1,233,683
1,036,600
Earnings (Loss) Before Income Taxes
(63,928)
128,813
122,194
Income Tax Expense
Net Earnings (Loss)
Basic Earnings (Loss) Per Share
Diluted Earnings (Loss) Per Share
See Notes to Consolidated Financial Statements.
3,101
21,296
34,192
(67,029) $
107,517 $
88,002
(0.79) $
1.69 $
1.41
(0.79) $
1.63 $
1.35
$
$
$
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64
II-VI Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Year Ended June 30,
($000)
Net earnings (loss)
Other comprehensive income (loss):
Foreign currency translation adjustments
Change in fair value of interest rate swap
Pension adjustment, net of taxes of ($851), ($1,642) and $763 for the years
ended June 30, 2020, 2019, and 2018, respectively
Other comprehensive income (loss)
Comprehensive income (loss)
See Notes to Consolidated Financial Statements.
2020
2019
2018
$
(67,029) $
107,517 $
88,002
(15,969)
(44,085)
(3,108)
(63,162)
(14,319)
—
(6,122)
(20,441)
$
(130,191) $
87,076 $
7,152
—
2,846
9,998
98,000
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65
II-VI Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Accumulated
Other
Common Stock
Comprehensive Retained
Treasury Stock
Shares
Amount
Income (Loss)
Earnings
Shares
Amount
Total
($000, including share amounts)
Balance - June 30, 2017
74,081 $ 269,638 $
(13,778) $ 748,062
(10,940) $ (103,359) $ 900,563
Share-based and deferred compensation
activities
1,612
25,717
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
—
—
—
—
—
—
—
—
56,406
—
—
—
—
7,152
—
2,846
—
88,002
(41)
—
(6,500)
—
19,217
88,002
—
—
—
—
(1,415)
(49,875)
(49,875)
—
—
—
—
—
—
7,152
56,406
2,846
Balance - June 30, 2018
75,693 $ 351,761 $
(3,780) $ 836,064
(12,396) $ (159,734) $ 1,024,311
Share-based and deferred compensation
activities
622
30,662
Net earnings
Purchases of treasury stock
Foreign currency translation adjustments
Pension adjustment, net of taxes of ($1,642)
—
—
—
—
—
—
—
—
—
—
—
(14,319)
(6,122)
—
(158)
(7,224)
23,438
107,517
—
—
—
—
(50)
—
—
—
107,517
(1,616)
(1,616)
—
—
(14,319)
(6,122)
Balance - June 30, 2019
76,315 $ 382,423 $
(24,221) $ 943,581
(12,604) $ (168,574) $ 1,133,209
Share-based and deferred compensation
activities
Purchases of treasury stock
2,888
116,817
—
—
Shares issued related to Finisar acquisition
26,713
987,707
Net loss
Foreign currency translation adjustments
Change in fair value of interest rate swap
Pension adjustment, net of taxes of ($851)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(67,029)
(15,969)
(44,085)
(3,108)
—
—
—
(702)
(29,114)
87,703
(50)
(1,625)
(1,625)
—
—
—
—
—
—
—
—
—
—
987,707
(67,029)
(15,969)
(44,085)
(3,108)
Balance - June 30, 2020
105,916 $ 1,486,947 $
(87,383) $ 876,552
(13,356) $ (199,313) $ 2,076,803
See Notes to Consolidated Financial Statements.
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66
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
($000)
Cash Flows from Operating Activities
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation
Amortization
Share-based compensation expense
Amortization of discount on convertible debt and debt issuance costs
Debt extinguishment expense
Gains on disposals of property, plant and equipment
Losses on foreign currency remeasurements and transactions
Earnings from equity investments
Deferred income taxes
Impairment of investment
Increase (decrease) in cash from changes in (net of effects of acquisitions):
Accounts receivable
Inventories
Accounts payable
Income taxes
Other operating net assets
Net cash provided by operating activities
Cash Flows from Investing Activities
Additions to property, plant & equipment
Purchases of businesses, net of cash acquired
Purchases of technology intangible assets
Purchase of equity investments and other investing activities
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from borrowings of Term A Facility
Proceeds from borrowings of Term B Facility
Proceeds from borrowings of Revolving Credit Facility
Proceeds from borrowings under prior Credit Facility
Proceeds from issuance of 0.25% convertible senior notes due 2022
Payment of Finisar Notes
Payments on borrowings under prior Term Loan, Credit Facility, and other loans
Payments on borrowings under Term A Facility
Payments on borrowings under Term B Facility
Payments on borrowings under Revolving Credit Facility
Debt issuance costs
Proceeds from exercises of stock options
Common stock repurchases
Payments in satisfaction of employees' minimum tax obligations
Other financing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
Cash paid for interest
Non cash transactions:
Purchases of business - earnout consideration recorded in accrued liabilities
Additions to property, plant & equipment included in accounts payable
See Notes to Consolidated Financial Statements.
$
$
$
$
67
2020
2019
2018
$
(67,029) $
107,517 $
88,002
156,690
64,192
68,480
22,150
3,960
(1,461)
14,442
(2,775)
(42,454)
4,980
(91,981)
112,572
45,026
40,061
(29,561)
297,292
(136,877)
(1,036,609)
(3,750)
(2,054)
(1,179,290)
1,241,000
720,000
160,000
10,000
—
(560,112)
(176,618)
(46,538)
(5,400)
(86,000)
(63,510)
13,467
(1,625)
(28,700)
(2,339)
1,173,625
(3,453)
288,174
204,872
75,745
16,620
21,946
12,550
—
—
3,155
(3,214)
(10,462)
—
(50,764)
(36,392)
15,999
366
25,409
178,475
(137,122)
(83,067)
—
(3,787)
(223,976)
—
—
—
150,000
—
—
66,202
14,568
15,312
10,057
—
—
850
(3,594)
945
—
(21,044)
(38,732)
17,436
7,380
3,632
161,014
(153,438)
(80,503)
—
(51,009)
(284,950)
—
—
—
100,000
345,000
—
(135,000)
(292,000)
—
—
—
(5,589)
8,698
(1,616)
(7,092)
(4,524)
4,877
(1,542)
(42,166)
247,038
—
—
—
(10,061)
10,469
(49,875)
(6,564)
—
96,969
2,117
(24,850)
271,888
247,038
6,555
493,046 $
204,872 $
62,190 $
8,680 $
900 $
21,801 $
4,397 $
10,986 $
—
12,313
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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.
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread
throughout the United States and world. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our
business including the impact to our suppliers and customers as well as the impact to the countries and markets in which we
operate. At the onset of the COVID-19 outbreak, we began focusing intensely on mitigating the adverse impacts of COVID-19
on our foreign and domestic operations starting by protecting our employees, suppliers and customers.
Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company. All intercompany
transactions and balances have been eliminated.
Business Segments. Effective July 1, 2019, the Company realigned its organizational structure into two reporting segments for
the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii)
Photonic Solutions. Refer to Note 14 for further information on reporting segments.
Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United
States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation. For all foreign subsidiaries whose functional currency is not the U.S. dollar, the functional
currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end
exchange rates while income and expenses are translated using the average exchange rates for the reporting period. Translation
adjustments are recorded as accumulated other comprehensive income (loss) within shareholders’ equity in the accompanying
Consolidated Balance Sheets.
Cash and Cash Equivalents. The Company considers highly liquid investment instruments with an original maturity of three
months or less to be cash equivalents. We place our cash and cash equivalents with high credit quality financial institutions and
to date have not experienced credit losses in these instruments.
Accounts Receivable. 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, current market conditions and any specific customer collection issues that it has identified.
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 nature of 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.
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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 on property, plant and equipment and amortization on finance lease
right-of-use assets for financial reporting purposes is computed primarily by the straight-line method over the estimated useful
lives for building, building improvements and land improvements of 10 to 20 years and 3 to 20 years for machinery and
equipment.
Leases. Leases are recognized under ASC 842, Leases. The Company determines whether a contract contains a lease at contract
inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. Operating
lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease
liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and
lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The
Company uses the incremental borrowing rate in determining the present value of lease payments, unless the implicit rate is
readily determinable. If lease terms include options to extend or terminate the lease, the ROU asset and lease liability are
measured based on the reasonably certain decision. The Company has lease agreements with lease and non-lease components,
which are accounted for as a single lease component for all classes of leased assets for which the Company is the lessee.
Additionally, for certain equipment leases, the portfolio approach is applied to account for the operating lease ROU assets and
lease liabilities. In the Consolidated Statements of Earnings (Loss), lease expense for operating lease payments is recognized on
a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the ROU
asset is amortized over the lease term. Some leasing arrangements require variable payments that are dependent upon usage or
output, or may vary for other reasons, such as insurance or tax payments. Variable lease payments are recognized as incurred
and are not presented as part of the ROU asset or lease liability. See Notes 2 and 12 for additional information.
Business Combinations. The Company accounts for 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.
On September 24, 2019, the Company completed the acquisition of Finisar Corporation (“Finisar”). The Company’s
Consolidated Financial Statements include the operating results of Finisar from the date of acquisition. Refer to Note 3 for
further information regarding the Finisar acquisition.
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 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 2020 and 2019, the Company completed its annual impairment tests of its reporting
units using the quantitative assessment. Based on the results of these analyses the Company’s goodwill was not impaired.
Intangibles. Intangible assets are initially recorded at their cost or fair 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 3 to 20 years. Indefinite-lived intangible assets are not amortized but tested annually for impairment at April 1, or when
events or changes in circumstances indicate that indefinite-lived intangible assets might be impaired.
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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, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities.
If an entity fails to meet the characteristics of a VIE, management then evaluates such entity under the voting model. Under the
voting model, management consolidates the entity if they determine that the Company, directly or indirectly, has greater than
50% of the 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, 2020 related to commitments and contingencies.
Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the Consolidated
Financial Statements and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences
are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the
amount more likely than not to be realized. The Company’s accounting policy is to apply acquired deferred tax liabilities to pre-
existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in
facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the
issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or
resolution of an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient
to pay assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and
penalties related to unrecognized tax benefits in income tax expense.
Revenue Recognition. Revenue is recognized under Accounting Standards Codification 606, Revenue from Contracts with
Customers (ASC 606), when or as obligations under the terms of a contract with the Company’s customer have been satisfied
and control has transferred to the customer. The Company has elected the practical expedient to exclude all taxes from the
measurement of the transaction price.
For contracts with commercial customers, which comprise the majority of the Company’s performance obligations, ownership
of the goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a 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 90 days after transfer of ownership to the customer.
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Contracts with the U.S. government through its prime contractors are typically for products or 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 90 days after
transfer of ownership to the customer.
Service revenue includes repairs, non-recurring engineering, tolling arrangements and installation. Repairs, tolling and
installation activities are usually completed in a short period of time (normally less than one month) and therefore recorded at a
point in time when the services are completed. Non-recurring engineering arrangements are typically recognized over time
under the time 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 90 days.
The Company's revenue recognition policy is consistently applied across the Company's segments, product lines, and
geographical locations. For the periods covered herein, the Company measures revenue based on the amount of consideration it
expects to be entitled to in exchange for products, reduced by the amount of variable consideration related to products expected
to be returned. The Company determines variable consideration, which primarily consists of product returns and distributor
sales price reductions resulting from price protection agreements, by estimating the impact of such reductions based on
historical analysis of such activity.
Under ASC 606, the Company expenses sales commissions when incurred because the amortization period would have been
one year or less. These costs are recorded within selling, general and administrative 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
goods sold.
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 offers an assurance-type limited warranty that products will be free from defects in materials and workmanship.
The Company establishes an accrual for estimated warranty expenses at the time revenue is recognized. The warranty is
typically one year, although can be longer periods for certain products, and is limited to either (1) the replacement or repair of
the product or (2) a credit against future purchases.
Research and Development. Internal research and development costs are expensed as incurred.
Share-Based Compensation. Share-based compensation arrangements require the recognition in net earnings (loss) of the
grant date fair value of stock compensation (for equity-classified awards). The Company recognizes the share-based
compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period.
Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss 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 is a component of shareholders’ equity and consists of accumulated foreign currency
translation adjustments, changes in the fair value of interest rate swap derivative instruments, 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 Consolidated Financial Statements. Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the
principal or most advantageous market in which the Company would transact, and the market-based risk measurements or
assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and
credit risk.
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Note 2.
Recently Issued Financial Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-02,
Leases (Topic 842). This ASU 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 Company
adopted this standard on July 1, 2019, and has elected to utilize the optional transition method. See Note 12.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities (“ASU 2017-12”), which more closely aligns an entity’s risk management activities and financial
reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging
relationships and the presentation of hedge results. The Company adopted this standard on July 1, 2019. The adoption of this
standard did not have a material effect on the Consolidated Financial Statements.
Pronouncements Currently Under Evaluation
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 annual periods beginning after December 15,
2019, and interim periods within those fiscal years. The Company has completed the evaluation of the impact of ASU 2016-13.
This pronouncement is not expected to have a material impact to the Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight
Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
(“ASU 2018-16”), which permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate eligible for hedge
accounting purposes. For public business entities that already have adopted the amendments in ASU 2017-12, the amendments
in ASU 2018-16 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
Early adoption is permitted in any interim period upon issuance of this update if an entity already has adopted ASU 2017-12.
The Company is in the process of evaluating the impact of the update.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting, which provides optional expedients to ease the potential burden of accounting for the
effects of reference rate reform as it pertains to contract modifications of debt and lease contracts and derivative contracts
identified in a hedging relationship. These amendments are effective immediately and may be applied prospectively to contract
modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is in
the process of evaluating the impact of the pronouncement.
Note 3.
Acquisitions
Finisar Corporation
On September 24, 2019 (the “Closing Date”), the Company completed its acquisition of Finisar, a global technology leader for
subsystems and components for fiber optic communications.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of November 8, 2018 (the “Merger Agreement”),
Mutation Merger Sub Inc., a wholly owned subsidiary of the Company (“Merger Sub”), merged with and into Finisar (the
“Merger”), with Finisar surviving the Merger. Each issued and outstanding share of Finisar’s common stock was automatically
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cancelled and converted into the right to receive the following consideration (collectively, the “Merger Consideration”), at the
election of the holder of the share of Finisar’s common stock:
•
•
•
$26.00 in cash, without interest (the “Cash Consideration”),
0.5546 of a share of the Company’s common stock (the “Stock Consideration”), or
a combination of $15.60 in cash, without interest, and 0.2218 of a share of the Company’s common stock (the
“Mixed Consideration”).
The per share Cash Consideration and Stock Consideration were subject to adjustment pursuant to the terms of the Merger
Agreement such that the aggregate Merger Consideration consisted of approximately 60.0% cash and approximately 40.0%
shares of the Company’s common stock (assuming a per share price of the Company’s common stock equal to the closing price
as of November 8, 2018, which was $46.88 per share) across all shares of Finisar’s common stock (the “Proration
Adjustment”). Following the Proration Adjustment, the resulting consideration for Cash Consideration was adjusted to $15.94
in cash and 0.2146 shares of the Company’s Common Stock. No adjustment was made to the Stock Consideration and Mixed
Consideration.
The total fair value of consideration paid in connection with the acquisition of Finisar consisted of the following (in $000):
Cash paid for outstanding shares of Finisar common stock
II-VI common shares issued to Finisar stockholders
26,712,822 $
36.98
Replacement equity awards attributable to pre-combination service
Shares
Per Share
Total
Consideration
$
1,879,086
987,707
41,710
$
2,908,503
The Company recorded $44.4 million of acquisition related costs in the year ended June 30, 2020, representing professional and
other direct acquisition costs. These costs are recorded within selling, general, and administrative expense in our Consolidated
Statements of Earnings (Loss).
On the Closing Date, the Company entered into an Amended and Restated Credit Agreement, dated as of September 24, 2019
(the “Credit Agreement”), by and among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender
and an L/C Issuer, and the other lender parties thereto. Refer to Note 9 for additional information on the credit facility.
From the Closing Date, Finisar contributed $938.4 million of our consolidated revenue for the year ended June 30, 2020.
Finisar’s contribution to our consolidated net loss for the year ended June 30, 2020 was a loss of $94.6 million. Finisar's
contribution included amortization expense of $47.4 million for the year ended June 30, 2020. Finisar's contribution to our
consolidated net loss includes $26.1 million of severance, restructuring, and related expense for the year ended June 30, 2020.
Additionally, a $87.7 million fair value adjustment to inventory was expensed through cost of goods sold during the year ended
June 30, 2020.
The Company allocated the fair value of the purchase price consideration to the tangible assets, liabilities, and intangible assets
acquired, based on estimated fair values. The excess purchase price over those fair values is recorded as goodwill. Our
valuation assumptions of acquired assets and assumed liabilities require significant estimates with respect to intangible assets.
In determining the fair value of intangible assets acquired, the Company must make assumptions about the future performance
of the acquired business, including among other things, the forecasted revenue growth attributable to the asset group and
projected operating expenses inclusive of expected synergies, future cost savings, and other benefits expected to be achieved by
combining the Company and Finisar. The Company’s intangible assets are comprised of customer relationships, trade names
and developed technology. The estimated fair value of the customer relationships, trade names and developed technology are
determined using the multi-period excess earnings method and relief from royalty methods. Both methods require forward
looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is
reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future
economic and market conditions. The estimated fair value of the developed technology is also dependent on the selection of the
royalty rate used in the valuation method.
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Certain data necessary to complete the purchase price allocation remains preliminary, including, but not limited to, finalization
of certain income tax computations and other assumed liabilities. The Company expects to complete the purchase price
allocation within 12 months from the Closing Date, at which time the purchase price allocation set forth herein may be revised.
Any such revisions or changes may be material. The Company utilized widely accepted income-based, market-based, and cost-
based valuation approaches to perform the preliminary purchase price allocation. Income-based valuation approaches included
the use of the multi-period excess earnings and relief-from-royalty methods for certain acquired intangible assets.
Our preliminary allocation of the purchase price of Finisar, based on the estimated fair value of the assets acquired and
liabilities assumed as of the Closing Date, is as follows (in $000):
Previously
Reported
Preliminary Purchase Price Allocation
Measurement
Reclassification
Period
September 30, 2019
Adjustments
Adjustments (a)
As Adjusted
(preliminary)
Cash and cash equivalents
$
842,764 $
(287) $
— $
Accounts receivable
Inventories
Property, plant & equipment (b)
Intangible assets (c)
Other assets (d) (h)
Deferred tax assets (e)
Accounts payable
Other accrued liabilities (d) (f) (h)
Deferred tax liabilities (e)
Debt
Goodwill
Total Purchase Price (g)
260,864
437,867
748,858
827,689
82,624
—
(123,707)
(148,425)
(197,809)
(575,000)
759,239
—
—
—
—
287
—
—
(43,964)
43,964
—
—
(1,523)
1,841
(91,145)
(162,489)
(6,443)
16,267
—
(9,727)
86,805
—
159,953
842,477
259,341
439,708
657,713
665,200
76,468
16,267
(123,707)
(202,116)
(67,040)
(575,000)
919,192
$
2,914,964 $
— $
(6,461) $
2,908,503
(a) The Company recorded measurement period adjustments to its preliminary acquisition date fair values due to the
refinement of its valuation models, assumptions and inputs. The following measurement period adjustments were
based upon information obtained about facts and circumstances that existed at the acquisition date that, if known,
would have affected the measurement of the amounts recognized at that date.
(b) The Company estimated the fair value of the property, plant, and equipment acquired as part of the Finisar
acquisition to be $657.7 million. Upon finalization of the valuation, the fair value of the property, plant, and equipment
was decreased by $91.1 million as of June 30, 2020 with a corresponding increase to goodwill.
(c) The Company estimated the fair value of the intangible assets acquired as part of the Finisar acquisition to be
$665.2 million. Upon finalization of the valuation, the fair value of the intangible assets was decreased by $162.5
million as of June 30, 2020 with a corresponding increase to goodwill.
(d) The Company reassessed the lease term and discount rates on the right of use assets acquired as part of the Finisar
acquisition. As a result, the preliminary fair value of the right of use assets acquired were decreased by $16.0 million
during the measurement period with a corresponding decrease in the lease liability.
(e) The Company has adjusted its deferred tax asset and liability positions as of June 30, 2020, to $16.3 million and
$67.0 million respectively, as a result of measurement period adjustments.
(f) In addition to the $16.0 million reduction of lease liabilities described in (d) above, the Company recorded
approximately $11.5 million of uncertain tax positions, approximately $13.4 million of warranty reserve liabilities, and
approximately $5.5 million of increases in other liabilities, as measurement period adjustments.
(g) Total purchase price decreased $6.5 million for the deferred tax impact of the purchase price component associated
with replacement equity awards attributable to pre-combination service of Finisar employees.
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(h) Other assets and other accrued liabilities increased $6.8 million for a litigation matter and related insurance
recovery.
As of June 30, 2020, the goodwill has been recorded within the Photonic Solutions reporting unit. As of June 30, 2020, the
other intangible assets have been recorded within the Photonic Solutions and Compound Semiconductors segments. The
preliminary goodwill of $919.2 million arising from the acquisition is attributed to the expected synergies, including future cost
savings, and other benefits expected to be generated by combining II-VI and Finisar. Substantially all of the goodwill
recognized is not expected to be deductible for tax purposes. See Note 8 for additional information on goodwill and intangibles.
Supplemental Pro Forma Information (Unaudited)
The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily
indicative of the financial position or results of operations that would have been realized if the acquisition had been completed
on the date indicated, does not reflect synergies that might have been achieved, and is not indicative of future operating results
or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that
we believe are reasonable under the circumstances.
The following unaudited supplemental pro forma information presents the combined results of operations for the years ended
June 30, 2020 and 2019 as if Finisar had been acquired as of July 1, 2018. The supplemental pro forma information includes
adjustments to amortization and depreciation for acquired intangible assets, property, plant and equipment, adjustments to
share-based compensation expense, fair value adjustments on the inventories acquired, transaction costs, and interest expense
and amortization of debt issuance costs related to the Senior Credit Facilities as defined in Note 9.
The unaudited supplemental pro forma financial information for the period presented is as follows (in $000):
Revenue
Net Earnings (Loss)
Note 4.
Other Investments
Purchase of Equity Investment
Year Ended
June 30, 2020
Year Ended
June 30, 2019
$
$
2,638,278 $
2,625,714
12,902 $
(138,452)
The Company holds an equity investment in a privately-held company (“Equity Investment”), which it acquired for $51.5
million. The Company’s pro-rata share of earnings from this investment was $1.1 million and $1.3 million for the years ended
June 30, 2020 and 2019, respectively, and was recorded in other expense (income), net in the Consolidated Statements of
Earnings (Loss).
This investment is accounted for under the equity method of accounting. The following table summarizes the Company's equity
in this nonconsolidated investment:
Location
USA
Interest Type
Equity Investment
Ownership % as of June 30,
2020
Equity as of June 30, 2020 ($000)
93.8%
$
58,751
The Equity Investment has been determined to be a variable interest entity because the Company has an overall 93.8%
economic position in the investee, comprising a significant portion of its capitalization, but has only a 25% voting interest. The
Company’s obligation to receive rewards and absorb expected losses is disproportionate to its voting interest. The Company is
not the primary beneficiary because it does not have the power to direct the activities of the equity investment that most
significantly impact its economic performance. Certain business decisions, including decisions with respect to operating
budgets, material capital expenditures, indebtedness, significant acquisitions or dispositions, and strategic decisions, require the
approval of owners holding a majority percentage in the Equity Investment. Beginning on the date it was 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.
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As of June 30, 2020, the Company’s maximum financial statement exposure related to the Equity Investment was
approximately $58.8 million, which is included in Investments on the Consolidated Balance Sheet as of June 30, 2020.
In August 2020, the Company agreed to purchase the remaining 6.2% ownership from the minority holders.
Note 5.
Revenue from Contracts with Customers
The following table summarizes disaggregated revenue by market and product for the year ended June 30, 2020 ($000):
Commercial
Direct Ship Parts
Services
U.S. Government
Direct Ship Parts
Services
Total Revenues
Photonic
Solutions
Year Ended June 30, 2020
Compound
Semiconductors
Unallocated
& Other
Total
$
1,524,799 $
607,318 $
22,051 $
2,154,168
11,991
36,224
—
48,215
—
—
158,790
18,898
—
—
158,790
18,898
$
1,536,790 $
821,230 $
22,051 $
2,380,071
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
Photonic
Solutions
Year Ended June 30, 2019
Compound
Semiconductors
Unallocated
& Other
Total
$
631,407 $
563,102 $
— $
1,194,509
7,482
14,164
—
21,646
—
—
130,313
16,028
—
—
130,313
16,028
$
638,889 $
723,607 $
— $
1,362,496
Contracts with the U.S. government disclosed above are through the U.S. Government's prime contractors.
Contract Liabilities
Payments received from customers are based on invoices or billing schedules as established in contracts with customers.
Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue
when the performance obligation has been performed. During the year ended June 30, 2020, the Company recognized revenue
of $9.4 million related to customer payments that were included in the consolidated balance sheet as of July 1, 2019. As of
June 30, 2020, the Company had $38.7 million of contract liabilities recorded in the consolidated balance sheet.
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Note 6.
Inventories
The components of inventories were as follows:
June 30,
($000)
Raw materials
Work in progress
Finished goods
Total Inventories
Note 7.
Property, Plant & Equipment
Property, plant & equipment consists of the following:
June 30,
($000)
Land and land improvements
Buildings and improvements
Machinery and equipment
Construction in progress
Finance lease right-of-use asset
Less accumulated depreciation
Property, plant, and equipment, net
2020
2019
$
$
190,237 $
298,577
130,996
619,810 $
119,917
101,091
75,274
296,282
2020
2019
$
18,396 $
345,736
1,352,835
111,394
25,000
9,001
249,238
739,330
71,425
—
1,853,361
1,068,994
(638,589)
$
1,214,772 $
(486,204)
582,790
Included in the table above is a building acquired under a finance lease. As of June 30, 2020 and June 30, 2019, the
accumulated depreciation of the finance lease right-of-use asset was $5.8 million and $4.2 million, respectively.
Note 8.
Goodwill and Other Intangible Assets
Effective July 1, 2019, the Company realigned its organizational structure into two reporting segments for the purpose of
making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions.
All applicable information has been restated to reflect this change. See Note 14 for further information regarding this segment
realignment.
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses.
Identifiable intangible assets acquired in business combinations are recorded based upon fair value at the date of acquisition.
Changes in the carrying amount of goodwill were as follows ($000):
Balance-beginning of period
Goodwill acquired
Foreign currency translation
Balance-end of period
Year Ended June 30, 2020
Photonic
Solutions
Compound
Semiconductors
Total
$
134,057 $
185,721 $
919,192
(755)
—
794
319,778
919,192
39
$
1,052,494 $
186,515 $
1,239,009
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77
Balance-beginning of period
Goodwill acquired
Foreign currency translation
Balance-end of period
Year Ended June 30, 2019
Photonic
Solutions
Compound
Semiconductors
Total
$
$
109,670 $
161,008 $
270,678
26,069
(1,682)
25,569
(856)
51,638
(2,538)
134,057 $
185,721 $
319,778
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30,
2020 and 2019 were as follows ($000):
Gross
Carrying
Amount
June 30, 2020
Accumulated
Amortization
Net
Book
Value
Gross
Carrying
Amount
June 30, 2019
Accumulated
Amortization
$
444,315 $
(68,048) $
376,267 $
91,637 $
(39,679) $
22,369
456,223
1,570
(3,669)
(92,822)
(1,570)
18,700
363,401
—
15,759
132,872
1,572
(1,601)
(59,664)
(1,572)
Net
Book
Value
51,958
14,158
73,208
—
$
924,477 $
(166,109) $
758,368 $
241,840 $
(102,516) $
139,324
Technology
Trade Names
Customer Lists
Other
Total
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2020, 2019 and 2018 was $64.2
million, $16.6 million, and $14.6 million, respectively. The technology intangible assets are being amortized over a range of 60
to 240 months with a weighted-average remaining life of approximately 133 months. The customer lists are being amortized
over 60 to 240 months with a weighted-average remaining life of approximately 134 months.
In conjunction with the acquisition of Finisar, the Company recorded the following intangible assets ($000):
Technology
Trade Names
Customer Lists
Gross
Carrying
Amount
Weighted Average
Assigned Useful Life
(Years)
$
334,700
6,700
323,800
$
665,200
12.5
3.0
10.2
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these
trade names of $14.3 million as of June 30, 2020 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 2020 and 2019. Based on the
results of these tests, the trade names were not impaired.
The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows ($000):
Year Ending June 30,
2021
2022
2023
2024
2025
$
77,011
74,252
73,380
64,394
62,334
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Note 9.
Debt
The components of debt for the periods indicated were as follows ($000):
June 30, 2020
June 30, 2019
Term A Facility, interest at LIBOR, as defined, plus 2.00%
$
1,194,463 $
Revolving Credit Facility, interest at LIBOR, as defined, plus 2.00%
Debt issuance costs, Term A Facility and Revolving Credit Facility
Term B Facility, interest at LIBOR, as defined, plus 3.50%
Debt issuance costs, Term B Facility
0.50% convertible senior notes, assumed in the Finisar acquisition
0.25% convertible senior notes
0.25% 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%
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
74,000
(32,174)
714,600
(24,747)
14,888
345,000
(30,688)
—
—
—
—
—
Total debt
Current portion of long-term debt
Long-term debt, less current portion
2,255,342
(69,250)
2,186,092 $
$
The scheduled maturities of principal amounts of debt obligations for the next five years and thereafter is as follows ($000):
—
—
—
—
—
—
345,000
(43,859)
45,000
115,000
(761)
2,783
3,834
466,997
(23,834)
443,163
2021
2022
2023
2024
2025
Thereafter
Total
Senior Credit Facilities
Year Ending
June 30,
69,250
84,138
414,250
69,250
1,027,463
678,600
2,342,951
$
$
On September 24, 2019, in connection with the Finisar acquisition, the Company entered into a Credit Agreement (the "Credit
Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other
lenders party thereto.
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The Credit Agreement provides for senior secured financing of $2.425 billion in the aggregate, consisting of
(i)
(ii)
(iii)
Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan
facility (the “Term A Facility”),
Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the
“Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”) and
Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit
facility (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Senior
Credit Facilities”).
The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25.0 million and a swing loan sub-facility
initially not to exceed $20.0 million.
The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to
1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable
on the fifth anniversary of the Closing Date. Similarly, the Company is obligated to repay the outstanding principal amount of
the Term B Facility in quarterly installments equal to 0.25% of the initial aggregate principal amount of the Term B Facility,
with the remaining outstanding balance due and payable on the seventh anniversary of the Closing Date. The Company is
obligated to repay the aggregate principal amount of all outstanding revolving loans made under the Revolving Credit Facility
on the fifth anniversary of the Closing Date.
The Company’s obligations under the Senior Credit Facilities are guaranteed by each of the Company’s existing or future direct
and indirect domestic subsidiaries, including Finisar and its domestic subsidiaries (collectively, the “Guarantors”). Borrowings
under the Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and
the Guarantors, except that no real property is collateral under the Senior Credit Facilities.
All amounts outstanding under the Senior Credit Facilities will become due and payable 120 days prior to the maturity of the
Company’s currently outstanding 0.25% Convertible Senior Notes due 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain
outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI
Notes.
The Company voluntarily may prepay, at any time or from time to time, any amounts outstanding under the Senior Credit
Facilities in whole or in part without premium or penalty; except for the Term B Facility, pursuant to which in the event of (a) a
repayment made before September 24, 2020, (b) the occurrence of a repricing event, or (c) a change to the lenders, the
Company will be subject to a prepayment premium in an amount equal to one percent of: (i) the principal amount of the Term B
Facility that is prepaid under an optional or mandatory prepayment due to a repricing event, (ii) the aggregate outstanding
principal amount of the Term B Facility resulting from an amendment to the Credit Agreement, and (iii) the principal amount of
the Term B Facility that is mandatorily assigned. The Company may be subject to mandatory prepayment of amounts
outstanding under the Senior Credit Facilities under certain circumstances, including in connection with certain asset sales or
other dispositions of property and debt issuances.
The Company also may be required to prepay amounts under the Term B Facility based on the Company’s excess cash flow (as
calculated in accordance with the terms of the Credit Agreement) for the Company’s prior fiscal year beginning with its fiscal
year ending June 30, 2020 and the Company’s consolidated secured net leverage ratio (as calculated in accordance with the
terms of the Credit Agreement) as of the end of such fiscal year.
Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to an applicable margin over
a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate
plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in
accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances
relating to events of default. The Company has entered into an interest rate swap contract to hedge its exposure to interest rate
risk on its variable rate borrowings under the Senior Credit Facilities. Refer to Note 15 for further information regarding this
interest rate swap.
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The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities,
including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets
and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated
in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00:1.00. The
Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the
Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Closing Date, commencing with
the first full fiscal quarter after the Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth
fiscal quarter after the Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2020, the Company
was in compliance with all financial covenants under the Credit Agreement.
The Company incurred $69.8 million of debt issuance costs in connection with the Senior Credit Facilities. The Company
evaluated these costs to determine appropriate recognition of expense under Accounting Standards Codification 470, Debt, to
account for debt modification and extinguishment. As a result of the Company’s assessment, $65.8 million have been
capitalized in the Consolidated Balance Sheet. Debt extinguishment costs of $4.0 million were expensed in other expense
(income), net in the Consolidated Statements of Earnings (Loss) during the year ended June 30, 2020. The Company expensed
$8.8 million of capitalized debt issuance costs during the year ended June 30, 2020, in interest expense in the Consolidated
Statements of Earnings (Loss). The capitalized costs are being amortized to interest expense using the effective interest rate
method from the issuance date of September 24, 2019, through the end of each facility. The unamortized discount amounted to
$56.9 million as of June 30, 2020 and is being amortized over five and seven years, for the Term A Facility and Revolving
Credit Facility, and the Term B Facility, respectively.
On June 30, 2020, the Company announced its intention to offer, in concurrent underwritten public offerings, newly issued
shares of its common stock and newly issued shares of its Series A Mandatory Convertible Preferred Stock. On July 7, 2020,
the Company used the proceeds from the public offerings to pay off the remaining balance of $715 million of the Term B Loan
Facility. See Note 21 for further details.
0.50% Finisar Convertible Notes
Finisar’s outstanding 0.50% Convertible Senior Notes due 2036 (the “Finisar Notes”) may be redeemed at any time on or after
December 22, 2021 in whole or in part at the option of the Company at a redemption price equal to one hundred percent (100%)
of the principal amount of such Finisar Notes plus accrued and unpaid interest. Each holder of Finisar Notes also may require
Finisar to repurchase all or any portion of such holder’s outstanding Finisar Notes for cash on December 15, 2021,
December 15, 2026 and December 15, 2031 at a repurchase price equal to one hundred percent (100)% of the principal amount
of such Finisar Notes plus accrued and unpaid interest. The Finisar Notes will mature on December 15, 2036. Interest on the
Finisar Notes accrues at 0.50% per annum, paid semi-annually, in arrears, on June 15 and December 15 of each year.
In connection with the acquisition of Finisar, the Company, Finisar and the trustee entered into a First Supplemental Indenture,
dated as of September 24, 2019 (the “First Supplemental Indenture”). The First Supplemental Indenture supplements the base
indenture (as supplemented, the “Finisar Indenture”), which governs the Finisar Notes. Pursuant to the terms of the First
Supplemental Indenture, the Company has fully and unconditionally guaranteed, on a senior unsecured basis, the due and
punctual payment and performance of all obligations of Finisar to the holders of the Finisar Notes. The First Supplemental
Indenture also provides that the right of holders of Finisar Notes to convert Finisar Notes into cash and/or shares of Finisar’s
common stock, is changed to a right to convert Finisar Notes into cash and/or shares of the Company’s common stock, subject
to the terms of the Finisar Indenture.
Under the terms of the Finisar Indenture, the consummation and effectiveness of the Merger on the Closing Date constituted a
Fundamental Change (as defined in the Finisar Indenture) and a Make-Whole Fundamental Change (as defined in the Finisar
Indenture). Accordingly, in accordance with the terms of the Finisar Indenture, each holder of Finisar Notes had the right to
(i) convert its Finisar Notes into cash and/or shares of Company Common Stock, at Finisar’s option, or (ii) require that Finisar
repurchase such holder’s Finisar Notes for an amount in cash equal to one hundred percent (100)% of the principal amount of
such Finisar Notes plus accrued and unpaid interest.
Holders of approximately $560.1 million in aggregate principal amount of Finisar Notes exercised the repurchase right. The
Company repurchased those Finisar Notes on October 23, 2019 for an aggregate consideration of approximately $561.1 million
in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed
$561.0 million under a delayed draw on its Term Loan A to fund the payment to the holders of Finisar Notes that exercised the
repurchase right. As of June 30, 2020, approximately $14.9 million in aggregate principal amount of Finisar Notes remain
outstanding.
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81
0.25% Convertible Senior Notes
In August 2017, the Company issued and sold $345 million aggregate principal amount of the II-VI Notes in a private
placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.
As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option
as a debt discount. The value of the embedded conversion option was determined based on the estimated fair value of the debt
without the conversion feature, which was determined using an expected present value technique (income approach) to estimate
the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over
the term of the II-VI Notes using the effective interest method.
The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial
conversion rate is 21.25 shares of common stock per $1,000 principal amount of II-VI Notes, which is equivalent to an initial
conversion price of $47.06 per share of common stock. Throughout the term of the II-VI Notes, the conversion rate may be
adjusted upon the occurrence of certain events. The if-converted value of the II-VI Notes amounted to $346.2 million as of
June 30, 2020 and $268.0 million as of June 30, 2019 (based on the Company’s closing stock price on the last trading day of the
fiscal periods then ended). The Notes mature on September 1, 2022, unless earlier repurchased by the Company or converted by
holders in accordance with the terms of the Notes. As of June 30, 2020, the II-VI Notes are not yet convertible based upon the
II-VI Notes’ conversion features. Holders of the II-VI Notes will not receive any cash payment representing accrued and
unpaid interest upon conversion of a II-VI Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion
rather than cancelled, extinguished or forfeited.
The following table sets forth total interest expense recognized related to the II-VI Notes for the years ended June 30, 2020,
2019 and 2018:
0.25% contractual coupon
Amortization of debt discount and debt issuance costs including initial
purchaser discount
Interest expense
Year Ended
June 30, 2020
Year Ended
June 30, 2019
Year Ended
June 30, 2018
$
$
876 $
874 $
731
13,172
12,550
14,048 $
13,424 $
10,058
10,789
The effective interest rate on the liability component for the periods presented was 4.5%. The unamortized discount amounted
to $26.8 million as of June 30, 2020, and is being amortized over 3 years.
Aggregate Availability
The Company had aggregate availability of $374.6 million under its line of credit as of June 30, 2020.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 3.4% and 1.6% for the years ended June 30, 2020 and 2019,
respectively.
Note 10.
Income Taxes
The components of earnings (loss) before income taxes were as follows:
Year Ended June 30,
($000)
U.S. loss
Non-U.S. income
Earnings (loss) before income taxes
2020
2019
2018
$
$
(302,027) $
(34,241) $
(15,207)
238,099
163,054
(63,928) $
128,813 $
137,401
122,194
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82
The components of income tax expense were as follows:
Year Ended June 30,
2020
2019
2018
($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
Interest rate swap
Non-deductible accruals
Accrued employee benefits
Net-operating loss and credit carryforwards
Share-based compensation expense
Other
Right of use asset
Valuation allowances
Total deferred income tax assets
Deferred income tax liabilities
Tax over book accumulated depreciation
Intangible assets
Tax on unremitted earnings
Convertible debt
Lease liability
Other
Total deferred income tax liabilities
Net deferred income taxes
$
$
$
$
$
7 $
1,755 $
496
45,052
472
29,531
45,555 $
31,758 $
699
401
32,147
33,247
(43,955) $
(3,764) $
(3,064)
1,007
494
(2,010)
(4,688)
(42,454) $
(10,462) $
1,615
2,394
945
3,101 $
21,296 $
34,192
2020
2019
$
19,372 $
9,847
9,325
11,095
182,625
8,110
9,736
31,573
(54,559)
227,124 $
(25,926) $
(160,577)
(21,785)
(6,006)
(29,768)
(5,676)
(249,738) $
(22,614) $
$
$
$
$
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)
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83
The reconciliation of income tax expense at the statutory U.S. federal rate to the reported income tax expense is as follows:
Year Ended June 30,
($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
U.S. Tax Reform
2020
%
2019
%
2018
%
$ (13,425)
21 $ 27,051
21 $ 34,284
28
1,194
(915)
(9,365)
(2)
(1,212)
(1)
1,426
1
15
(5,857)
(6,703)
(5) (16,058)
(5)
(6,008)
4,334
—
(15,836)
25
(11,756)
(7)
(1,914)
(9)
(7,024)
(1)
(4,103)
—
14,108
11
36,777
36,067
(56)
6,437
—
1,047
$ 3,101
—
—
(2)
1,142
(5) $ 21,296
5
—
1
—
(4,209)
(893)
17 $ 34,192
1
(13)
(5)
(6)
(3)
30
—
(3)
(1)
28
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 $21.8 million.
Furthermore, the Tax Act includes certain changes such as introducing a new category of income, referred to as global
intangible low tax income (“GILTI”), related to earnings taxed at a low rate of foreign entities without a significant fixed asset
base, and imposes additional limitations on the deductibility of interest and officer compensation. The Company made a final
accounting policy election to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period
expense when incurred. These changes are included in the Company’s 2020 fiscal year income tax expense.
During the fiscal years ended June 30, 2020, 2019, and 2018, net cash paid by the Company for income taxes was $39.5
million, $26.3 million, and $21.3 million, respectively.
Our foreign subsidiaries in various tax jurisdictions operate under tax holiday arrangements. The impact of the tax holidays on
our effective rate is a reduction in the rate of (8.91)%, 0.25% and 0.17% for the fiscal years ended June 30, 2020, 2019 and
2018, respectively, and the impact of the tax holidays on diluted earnings per share is immaterial.
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84
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2020:
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
$
$
71,694
14,354
14,364
40,316
166,643
110,587
10,683
36,806
June 2021-June 2040
June 2022-June 2030
June 2021-June 2035
Indefinite
June 2021-June 2036
June 2021-June 2039
June 2021-June 2040
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.
Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2020, 2019 and 2018 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
Expiration of statute of limitations
Ending balance
2020
2019
2018
$
11,520 $
9,892 $
1,506
—
—
31,791
191
376
—
6,036
(2,014)
(4,975)
$
42,803 $
11,520 $
7,577
2,536
224
(9)
—
(436)
9,892
The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2020, 2019
and 2018, there was $0.6 million, $(0.1) million and $0.3 million of interest and penalties within income tax expense,
respectively. The Company had $3.8 million, $1.2 million and $0.6 million of interest and penalties accrued at June 30, 2020,
2019 and 2018, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the
amounts are not expected to be paid within one year, except for $7.4 million which is expected to be paid within a year.
Including tax positions for which the Company determined that the tax position would not meet the more likely than not
recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated
unrecognized tax benefit that, if recognized, would affect our effective tax rate, was approximately $24.3 million, $6.2 million
and $1.6 million at June 30, 2020, 2019 and 2018, respectively. The Company expects a decrease of $4.9 million of
unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.
Fiscal years 2017 to 2020 remain open to examination by the Internal Revenue Service, fiscal years 2015 to 2020 remain open
to examination by certain state jurisdictions, and fiscal years 2009 to 2019 remain open to examination by certain foreign taxing
jurisdictions. The Company is currently under examination for the certain subsidiary companies in Australia for the years ended
April 30, 2010 through April 30, 2014; India for the year ended March 31, 2016; Philippines for the year ended June 30, 2018;
Germany for the years ended June 30, 2012 through June 30, 2015; and Vietnam for the years June 30, 2015 through June 30,
2016. The Company believes its income tax reserves for these tax matters are adequate.
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85
Note 11.
Earnings Per Share
The following table sets forth the computation of earnings (loss) per share for the periods indicated. Basic earnings (loss) per
share has been computed using the weighted average number of shares of common stock outstanding during the period. Diluted
earnings (loss) per share has been computed using the weighted average number of common shares outstanding during the
period plus dilutive potential shares of common stock from (1) stock options, performance and restricted shares (under the
treasury stock method) and (2) convertible debt (under the If-Converted method) outstanding during the period.
Year Ended June 30,
($000 except per share)
Net earnings (loss)
Divided by:
Weighted average shares
2020
2019
2018
$
(67,029) $ 107,517 $
88,002
84,828
63,584
62,499
Basic earnings (loss) per common share
$
(0.79) $
1.69 $
1.41
Net earnings (loss)
Divided by:
Weighted average shares
Dilutive effect of common stock equivalents
Diluted weighted average common shares
$
(67,029) $ 107,517 $
88,002
84,828
—
84,828
63,584
2,220
65,804
62,499
2,634
65,133
Diluted earnings (loss) per common share
$
(0.79) $
1.63 $
1.35
The following table presents potential shares of common stock excluded from the calculation 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
0.50% Finisar Convertible Notes
Total anti-dilutive shares
2020
2019
2018
2,345
7,331
289
9,965
115
7,331
—
7,446
135
7,331
—
7,466
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86
Note 12.
Leases
On July 1, 2019, the Company adopted Topic 842 using the modified retrospective transition approach. The reported results for
the year ended June 30, 2020 reflect the application of Topic 842, while prior period amounts have not been adjusted and
continue to be reported in accordance with our historical accounting under Topic 840.
The Company elected the practical expedient package permitted under the transition approach. As such, the Company did not
reassess whether any expired or existing contracts are or contain leases, did not reassess historical lease classification, and did
not reassess initial direct costs for any leases that existed prior to July 1, 2019.
As of the date of adoption, the Company recognized operating lease assets and liabilities of approximately $80.1 million on the
Consolidated Balance Sheet. In addition, we acquired approximately $29 million of operating lease assets and liabilities through
the acquisition of Finisar.
All existing leases that were classified as capital leases under Topic 840 are classified as finance leases under Topic 842. As of
the date of adoption, the Company recognized finance lease assets of $25 million in property, plant and equipment, net, with
corresponding finance lease liabilities of $24 million on the Consolidated Balance Sheet.
We determine if an arrangement is a lease at inception and classify it as either finance or operating.
Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life.
Finance leases are recorded in property, plant and equipment, net, and finance lease liabilities within other current and other
non-current liabilities on our Consolidated Balance Sheet. Finance lease assets are amortized in operating expenses on a
straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component for
lease liabilities included in interest expense and recognized using the effective interest method over the lease term.
Operating leases are recorded in other assets and operating lease liabilities, current and non-current on the Company’s
Consolidated Balance Sheet. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease
term.
The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease
term, using a discount rate of similarly secured borrowings available to the Company. For the purpose of lease liability
measurement, we consider only payments that are fixed and determinable at the time of commencement. Any variable payments
that depend on an index or rate are expensed as incurred. We account for non-lease components, such as common area
maintenance, as a component of the lease, and include it in the initial measurement of our lease assets and corresponding
liabilities. The Company’s lease terms and conditions may include options to extend or terminate. An option is recognized
when it is reasonably certain that we will exercise that option.
The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to
commencement. Our lease assets are tested for impairment in the same manner as long-lived assets used in operations.
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87
The following table presents lease costs, which include short-term leases, lease term, and discount rates ($000):
Year Ended
June 30, 2020
Finance Lease Cost
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease cost
Operating lease cost
Sublease income
Total lease cost
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases
Operating cash flows from operating leases
Financing cash flows from finance leases
Assets Obtained in Exchange for Lease Liabilities
Right-of-use assets obtained in Finisar acquisition
Right-of-use assets obtained in exchange for new operating lease liabilities
Total assets obtained in exchange for new operating lease liabilities
Weighted-Average Remaining Lease Term (in Years)
Finance leases
Operating leases
Weighted-Average Discount Rate
Finance leases
Operating leases
$
$
1,667
1,328
2,995
32,466
368
35,093
1,328
30,816
1,026
29,247
29,458
58,705
11.5
7.2
5.6 %
7.3 %
The following table presents future minimum lease payments, which include short-term leases ($000):
Future Years
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total minimum lease payments
Less: amounts representing interest
Present value of total lease liabilities
Operating Leases
Finance Leases
Total
$
$
$
31,100 $
23,964
20,621
17,906
15,381
52,316
161,288 $
41,953
119,335 $
2,419 $
2,486
2,554
2,624
2,697
19,419
32,199 $
8,752
23,447 $
33,519
26,450
23,175
20,530
18,078
71,735
193,487
50,705
142,782
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88
Note 13.
Share-Based Compensation
The Company’s Board of Directors adopted the II-VI Incorporated 2018 Omnibus Incentive Plan (the “II-VI 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.
Upon consummation of the acquisition, the Company assumed approximately 6.6 million restricted stock units previously
granted by Finisar under the Amended and Restated Finisar Corporation 2005 Stock Incentive Plan (each an “Assumed RSU”).
Each Assumed RSU is subject to substantially the same terms and conditions as applied to the Assumed RSU immediately prior
to the consummation of the acquisition, except that the number of shares of the Company’s common stock subject to each
Assumed RSU has been adjusted in accordance with the terms of the Merger Agreement. Other than the Assumed RSUs, the
Company did not assume any other awards outstanding under the Amended and Restated Finisar Corporation 2005 Stock
Incentive Plan (the “Finisar Plan”). As of the Closing Date, the Company also assumed the unused capacity under the Finisar
2005 Plan.
As of June 30, 2020, there were approximately 3.1 million shares available to be issued under the II-VI Plan and the Finisar
Plan collectively, including forfeited shares from predecessor plans.
The Company records share-based compensation expense for these awards, which requires the recognition of the grant-date fair
value of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the
requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-
based stock appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as
liability awards, in accordance with applicable accounting standards.
Share-based compensation expense for the fiscal years ended June 30, 2020, 2019 and 2018 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
2020
2019
2018
$
$
11,893 $
6,801 $
49,957
11,977
73,827 $
9,242
8,920
24,963 $
6,605
7,850
5,221
19,676
Share-based compensation expense associated with liability awards was $5.3 million, $3.0 million, and $4.4 million, in the
fiscal years ended June 30, 2020, 2019 and 2018, respectively.
Stock Options and Cash-Based Stock Appreciation Rights:
The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense. During the
fiscal years ended June 30, 2020, 2019 and 2018, the weighted-average fair value of options granted under the stock option plan
was $14.79, $20.66 and $14.23, respectively, per option using the following assumptions:
Year Ended June 30,
Risk-free interest rate
Expected volatility
Expected life of options
Dividend yield
2020
2019
2018
1.50 %
39 %
6.91 years
None
2.80 %
37 %
6.96 years
None
2.00 %
37 %
6.43 years
None
The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in
effect at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted
average rate for all options granted during the fiscal year. Expected volatility is based on the historical volatility of the
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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. 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, 2020 was as follows:
Outstanding - July 1, 2019
Granted
Exercised
Forfeited and Expired
Outstanding - June 30, 2020
Exercisable - June 30, 2020
Stock Options
Number of
Shares
Weighted Average
Exercise Price
Cash-Based Stock Appreciation Rights
Weighted Average
Exercise Price
Number of
Rights
3,761,283 $
774,116 $
(774,382) $
(39,216) $
3,721,801 $
2,192,315 $
23.74
34.75
17.39
32.99
26.99
21.53
227,496 $
76,651 $
(65,488) $
(8,285) $
230,374 $
79,459 $
28.09
34.95
21.25
33.76
32.13
31.75
As of June 30, 2020, 2019 and 2018, the aggregate intrinsic value of stock options and cash-based stock appreciation rights
outstanding and exercisable was $79.8 million, $56.4 million and $96.1 million, respectively. Aggregate intrinsic value
represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of
the year ended June 30, 2020, and the option’s exercise price, multiplied by the number of in-the-money options) that would
have been received by the option holders had all option holders exercised their options on June 30, 2020. This amount varies
based on the fair market value of the Company’s stock. The total intrinsic value of stock options and cash-based stock
appreciation rights exercised during the fiscal years ended June 30, 2020, 2019, and 2018 was $20.2 million, $14.7 million, and
$14.7 million, respectively. As of June 30, 2020, total unrecognized compensation cost related to non-vested stock options and
cash-based stock appreciation rights was $15.4 million. This cost is expected to be recognized over a weighted-average period
of approximately three years.
Outstanding and exercisable stock options at June 30, 2020 were as follows:
Stock Options and Cash-Based Stock
Appreciation Rights Outstanding
Stock Options and Cash-Based Stock
Appreciation Rights Exercisable
Number of
Weighted
Average Remaining
Weighted
Average
Number of
Weighted
Average Remaining
Range of
Shares or
Contractual Term
Exercise
Shares or
Contractual Term
Exercise Prices
Rights
(Years)
Price
Rights
(Years)
Weighted
Average
Exercise
Price
$13.34 - $17.69
$17.70 - $19.15
$19.16 - $26.46
$26.47 - $36.32
$36.33 - $49.90
618,493
763,173
842,141
799,316
929,052
3,952,175
3.21 $
15.25
611,301
4.18 $
18.62
635,346
5.21 $
21.38
658,659
8.09 $
33.77
226,693
8.62 $
42.20
139,775
6.08 $
27.29
2,271,774
3.19 $
3.88 $
4.91 $
6.88 $
7.86 $
4.54 $
15.21
18.43
20.86
34.56
47.18
21.65
Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Unit Awards:
Restricted share awards, restricted share units, and cash-based restricted share unit awards compensation expense was
calculated based on the number of shares or units expected to be earned by the grantee multiplied by the stock price at the date
of grant (for restricted share awards) or the stock price at the period end date (for cash-based restricted share unit awards), and
is being recognized over the vesting period. Generally, the restricted share awards, restricted share units, and cash-based
restricted share unit awards have a three-year tranche vesting provision and an estimated forfeiture rate of 4.6%.
Restricted share, restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30, 2020,
was as follows:
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90
Restricted Share Awards
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Restricted Share Units
Cash-Based Restricted Share
Units
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Number
of
Units
Weighted
Average
Grant Date Fair
Value
183,429 $
30.30
175,737
$
47.13
77,642 $
— $
— $
(130,382) $
(2,520) $
—
—
28.03
35.34
3,652,191
250,736
$
$
(1,475,663) $
(360,589) $
36.98
36.35
37.49
36.97
— $
49,444 $
(43,699) $
(1,384) $
50,527 $
35.92
2,242,412
$
39.46
82,003 $
37.19
—
34.84
32.31
40.99
38.31
Nonvested - June 30,
2019
Assumed in Finisar
Acquisition
Granted
Vested
Forfeited
Nonvested - June 30,
2020
As of June 30, 2020, total unrecognized compensation cost related to non-vested restricted share, restricted share unit, and cash-
based restricted share unit awards was $63.2 million. This cost is expected to be recognized over a weighted-average period of
approximately two years. The restricted share and restricted share unit compensation expense was calculated based on the
number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the
vesting period. The cash-based restricted share unit compensation expense was calculated based on the number of shares
expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. The
total fair value of the restricted share, restricted share unit, and cash-based restricted share unit awards granted during the years
ended June 30, 2020, 2019 and 2018, was $10.9 million, $9.9 million and $7.5 million, respectively. The total fair value of
restricted share, restricted share unit and cash-based restricted share unit awards vested was $75.2 million, $19.9 million and
$17.0 million during fiscal years 2020, 2019 and 2018, respectively.
Performance Share Awards and Cash-Based Performance Share Unit Awards:
The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees
performance share awards and performance share unit awards under the Plan. As of June 30, 2020, the Company had
outstanding grants covering performance periods ranging from 12 to 36 months. These awards are intended to provide
continuing emphasis on specified financial performance goals that the Company considers important contributors to the
creation of long-term shareholder value. These awards are payable only if the Company achieves specified levels of financial
performance during the performance periods.
The performance share compensation expense was calculated based on the number of shares expected to be earned, multiplied
by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit
compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the
period-end date, and is being recognized over the vesting period. Performance share and cash-based performance share unit
award activity relating to the Plan during the year ended June 30, 2020, was as follows:
Nonvested - June 30, 2019
Granted
Vested
Forfeited
Nonvested - June 30, 2020
Performance Share Awards
Weighted
Average
Grant Date Fair
Value
Number of
Shares
Cash-
Based Performance Share Units
Number of
Units
Weighted
Average
Grant Date Fair
Value
413,651 $
414,464 $
(414,582) $
(4,287) $
409,246 $
36.80
30.29
26.21
35.07
40.96
24,224 $
30,199 $
(17,200) $
(2,035) $
35,188 $
37.47
31.79
21.67
29.50
38.54
As of June 30, 2020, total unrecognized compensation cost related to non-vested performance share and cash-based
performance share unit awards was $13.0 million. This cost is expected to be recognized over a weighted-average period of
approximately one year. The total fair value of the performance share and cash-based performance share unit awards granted
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during the fiscal years ended June 30, 2020, 2019 and 2018 was $15.4 million, $10.0 million and $3.8 million, respectively. The
total fair value of performance shares vested during the fiscal years ended June 30, 2020, 2019 and 2018 was $6.2 million,
$10.5 million and $3.6 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.
Effective July 1, 2019, the Company realigned the composition of its operating segments. The Company combined II-VI Laser
Solutions and II-VI Performance Products and renamed the combined segment Compound Semiconductors. All applicable
segment information has been restated to reflect this change. Additionally, the Company changed the name of II-VI Photonics
to Photonic Solutions.
The Company reports its financial results in two segments, and the Company’s chief operating decision maker receives and
reviews financial information based on these segments. The Company evaluates business segment performance based upon
segment operating income, which is defined as earnings before income taxes, interest and other income or expense.
The Compound Semiconductors segment has locations in the United States, Singapore, China, Germany, Switzerland, Japan,
Belgium, the United Kingdom, Italy, South Korea, the Philippines, Vietnam, Sweden, and Taiwan. This segment designs,
manufactures and markets: (i) optical and electro-optical components and materials sold under the II-VI Infrared brand name
and used primarily in high-power CO2 lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers
for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names; (ii) infrared optical components
and high-precision optical assemblies for aerospace and defense, medical and commercial laser imaging applications; (iii)
semiconductor lasers and detectors for optical interconnects and sensing applications with InP; and (iv) unique engineered
materials for thermoelectric and silicon carbide applications servicing the semiconductor, aerospace and defense and medical
markets. Compound Semiconductors also manufactures compound semiconductor epitaxial wafers for applications in optical
components, wireless devices, and high-speed communication systems and manufactures 6-inch 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 Photonic Solutions segment has locations in the United States, China, Vietnam, Germany, Japan, the United Kingdom,
Italy, Malaysia, Australia, and Hong Kong. This segment manufactures crystal materials, optics, microchip lasers and
optoelectronic modules for use in optical communication networks and other diverse consumer and commercial
applications. In addition, the segment 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.
In September 2019, the Company completed its acquisition of Finisar. See Note 3. The operating results of this acquisition have
been reflected in the selected financial information of the Company’s Photonic Solutions segment and Compound
Semiconductors Segment beginning on October 1, 2019, with the results from September 24, 2019 to September 30, 2019
reflected in Unallocated and Other.
The accounting policies are consistent across both of the segments. 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. Unallocated
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:
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92
Photonic
Solutions
Compound
Semiconductors
Unallocated
& Other
Total
($000)
2020
Revenues
Inter-segment revenues
Operating income (loss)
Interest expense
Other income (expense), net
Income taxes
Net earnings (loss)
Depreciation and amortization
Expenditures for property, plant & equipment
Segment assets
Goodwill
$
1,536,790 $
821,230 $
22,051 $
2,380,071
31,515
49,930
—
—
—
—
112,203
45,795
3,502,467
1,052,494
164,884
62,279
(196,399)
(72,730)
—
—
—
—
104,936
88,318
1,732,247
186,515
—
—
—
—
3,743
2,764
—
—
—
39,479
(89,409)
(13,998)
(3,101)
(67,029)
220,882
136,877
5,234,714
1,239,009
Photonic
Solutions
Compound
Semiconductors
Unallocated
& Other
Total
($000)
2019
Revenues
Inter-segment revenues
Operating income (loss)
Interest expense
Other income (expense), net
Income taxes
Net earnings
Depreciation and amortization
Expenditures for property, plant & equipment
Segment assets
Goodwill
$
638,889 $
723,607 $
— $
1,362,496
12,568
81,898
—
—
—
—
26,273
44,851
681,610
134,057
94,405
82,414
—
—
—
—
66,092
83,899
1,272,163
185,721
(106,973)
(15,643)
—
—
—
—
—
—
—
—
—
148,668
(22,417)
2,562
(21,296)
107,517
92,365
128,750
1,953,773
319,778
($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
Photonic
Solutions
Compound
Semiconductors
Unallocated
& Other
Total
$
486,485 $
672,309 $
— $
1,158,794
37,723
73,611
—
—
—
—
57,528
125,201
(62,591)
—
—
—
—
—
—
—
—
136,763
(18,352)
3,783
(34,192)
88,002
80,770
161,323
24,867
63,152
—
—
—
—
23,242
36,122
93
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Geographic information for revenues from the legal country of origin, and long-lived assets from the country of origin, which
include property, plant and equipment, net of related depreciation, and certain other long-term assets, were as follows:
Year Ended June 30,
($000)
United States
Non-United States
Hong Kong
China
Japan
Germany
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
Malaysia
Switzerland
Sweden
Germany
Australia
Vietnam
Philippines
Korea
Hong Kong
Other
Total Non-United States
2020
Revenues
2019
2018
$
1,432,492 $
405,404 $
373,735
299,359
292,138
146,325
124,934
35,895
22,152
8,537
5,791
4,479
4,226
3,743
—
—
947,579
2,380,071 $
319,601
290,287
109,670
155,000
32,770
22,322
11,674
6,868
4,179
2,712
2,005
4
—
957,092
1,362,496 $
186,978
253,672
89,153
132,161
49,557
26,898
9,757
5,941
3,909
9,359
1,705
4,511
11,458
785,059
1,158,794
$
Long-Lived Assets
2020
2019
$
754,815 $
345,866
369,544
55,028
46,162
37,129
24,270
18,631
12,321
11,140
7,607
3,438
2,870
1,965
590,105
1,344,920 $
108,688
60,369
—
35,592
—
14,857
—
11,656
7,793
—
5,032
1,190
245,177
591,043
$
94
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Note 15.
Fair Value of Financial Instruments
The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market
participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established
three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date as follows:
•
•
•
Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in
active markets.
Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets,
or other inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instruments.
Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value
measurements.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to
the measurement.
The Company entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to its variable
interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month
LIBOR and makes payments based on a fixed rate of 1.52%. The Company receives payments with a floor of 0.00%. The
interest rate swap agreement has an effective date of November 24, 2019, with an expiration date of September 24, 2024. The
initial notional amount of the interest rate swap is scheduled to decrease to $825 million in June 2022 and will remain at that
amount through the expiration date. The Company designated this instrument as a cash flow hedge and deemed the hedge
relationship effective at inception of the contract. The fair value of the interest rate swap of $44.1 million is recognized in the
Consolidated Balance Sheet within other liabilities. Changes in fair value are recorded within other comprehensive income
(loss) on the Consolidated Balance Sheet and reclassified into the Consolidated Statements of Earnings (Loss) as interest
expense in the period in which the underlying transaction affects earnings. Cash flows from hedging activities are reported in
the Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash
flows from operations. The fair value of the interest rate swap is determined using widely accepted valuation techniques and
reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in
active markets, it uses observable market-based inputs, including interest rate curves. The fair value analysis also considers a
credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The interest rate
swap is classified as a Level 2 item within the fair value hierarchy.
The Company estimated the fair value of the II-VI Notes and Finisar Notes based on quoted market prices as of the last trading
day prior to June 30, 2020; however, the II-VI Notes and Finisar Notes have only a limited trading volume and as such this fair
value estimate is not necessarily the value at which the II-VI Notes and Finisar Notes could be retired or transferred. The
Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the II-VI
Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 9. Debt for details on the Company’s debt
facilities. The fair value and carrying value of the II-VI Notes and Finisar Notes were as follows at June 30, 2020 ($000):
II-VI Notes
Finisar Notes
Fair Value
Carrying Value
$
$
413,379 $
14,404 $
314,312
14,888
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value
because of the short-term maturity of those instruments. The Company’s borrowings including its lease obligations, excluding
the 0.25% Convertible Notes and the 0.50% Finisar convertible notes, are considered Level 2 among the fair value hierarchy
and their principal amounts approximate fair value. Additionally, the Company remeasures certain assets to fair value, using
Level 3 measurements, as a result of the occurrence of triggering events such as purchase accounting for acquisitions. See Note
3 for further information.
The Company, from time to time, purchases foreign currency forward exchange contracts, 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
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95
sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis
of its aggregate net cash flows in respective currencies, to foreign currency risk.
Note 16.
Employee Benefit Plans
Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are
made at the discretion of the Company’s board of directors and were $6.1 million, $4.6 million, and $5.0 million for the years
ended June 30, 2020, 2019 and 2018, respectively.
On August 18, 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“2018 Plan”) for full time U.S. 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 lesser 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, 2020, there have been 80,469 shares purchased on behalf of the employees 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, 2020 and 2019 were $3.4
million and $3.0 million, respectively. Net periodic pension cost is not material for any year presented.
The underfunded pension liability was $26.9 million and $20.8 million as of June 30, 2020 and 2019, respectively. The pension
adjustment amount recognized in accumulated other comprehensive income was $3.1 million and $11.8 million for the fiscal
years ended June 30, 2020 and 2019, respectively. The accumulated benefit obligation was $84.9 million as of June 30, 2020,
compared to $69.7 million as of June 30, 2019.
Estimated future benefit payments under the Swiss Plan are estimated to be as follows:
Year Ending June 30,
($000)
2021
2022
2023
2024
2025
Next five years
Note 17.
Other Accrued Liabilities
The components of other accrued liabilities were as follows:
June 30,
($000)
Contract liabilities
Warranty reserves
Other accrued liabilities
$
$
4,100
3,400
3,700
4,300
5,300
28,400
2020
2019
$
$
17,328 $
27,620
74,390
119,338 $
10,390
4,478
35,076
49,944
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96
Note 18.
Commitments and Contingencies
The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of
the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase
commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary
nature of some of the Company’s materials and processes, certain contracts may contain 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 $2.5 million. Total future commitments held by II-VI as of June 30,
2020, were $196.9 million in fiscal 2021, and $2.7 million thereafter.
Note 19.
Share Repurchase Programs
In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock
through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private
transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares
purchased by the Company are retained as treasury stock and available for general corporate purposes. During each of the fiscal
years ended June 30, 2020 and June 30, 2019, the Company purchased 50,000 shares of its common stock for $1.6 million
under this program. As of June 30, 2020, the Company has cumulatively purchased 1,416,587 shares of its common stock
pursuant to the Program for approximately $22.3 million. The dollar value of shares as of June 30, 2020 that may yet be
purchased under the Program is approximately $27.7 million.
Note 20.
Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30,
2020, 2019, and 2018 were as follows ($000):
Foreign
Currency
Translation
Adjustment
Interest
Rate
Swap
Defined
Benefit
Pension Plan
Total
Accumulated
Other
Comprehensive
Income (Loss)
AOCI - June 30, 2017
$
(8,460) $
— $
(5,318) $
(13,778)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
7,152
—
7,152
—
—
—
2,643
203
2,846
AOCI - June 30, 2018
$
(1,308) $
— $
(2,472) $
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
(14,319)
—
(14,319)
—
—
—
(6,307)
185
(6,122)
AOCI - June 30, 2019
$
(15,627) $
— $
(8,594) $
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Net current-period other comprehensive income
(15,969)
—
(15,969)
(46,067)
1,982
(44,085)
(3,528)
420
(3,108)
AOCI - June 30, 2020
$
(31,596) $
(44,085) $
(11,702) $
9,795
203
9,998
(3,780)
(20,626)
185
(20,441)
(24,221)
(65,564)
2,402
(63,162)
(87,383)
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97
Note 21.
Subsequent Event
On July 2, 2020, II-VI announced the pricing of concurrent underwritten public offerings of (a) 9,302,235 shares of its
common stock at a public offering price of $43.00 per share for gross proceeds to II-VI from the offering of approximately
$400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the
“common stock offering”), and (b) 2,000,000 shares of its Series A Mandatory Convertible Preferred Stock at a public offering
price of $200.00 per share for gross proceeds to II-VI from the offering of $400 million, before deducting the underwriting
discounts and commissions and offering expenses payable by II-VI (the “preferred stock offering”). In addition, the
underwriters had a 30-day option to purchase up to an additional (a) 1,395,335 shares of its common stock at the applicable
public offering price, less underwriting discounts and commissions, and (b) 300,000 shares of Series A Mandatory Convertible
Preferred Stock at the applicable public offering price, less underwriting discounts and commissions and solely to cover over-
allotments with respect to the preferred stock offering. On July 2, 2020, the underwriters exercised both the common stock and
preferred stock options in full, raising an additional approximately $120 million in gross proceeds.
On July 7, 2020, the public offerings closed, and the Company raised a total of approximately $920 million in gross proceeds.
The Company used the net proceeds from the public offerings to repay the remaining balance of $715 million of the Term B
Loan Facility, and will use the remainder of net proceeds, to develop, enhance, invest in or acquire related, emerging or
complementary technologies, products, or businesses and for other general corporate purposes.
On August 12, 2020, the Company announced that it entered into a definitive agreement to acquire the outstanding shares of
Ascatron AB ("Ascatron"), which will add essential elements to the Company's vertically integrated SiC technology platform.
On August 20, 2020, the Company completed the acquisition of Ascatron.
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98
Quarterly Financial Data (unaudited)
Fiscal Year 2020
Quarter Ended
($000, except per share)
2020
Net revenues
Cost of goods sold
Internal research and development
Selling, general and administrative
Interest expense
Other expense (income) - net
Earnings (loss) before income taxes
Income taxes
Net Earnings (Loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
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
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
$
746,290 $
627,041 $
666,331 $
444,153
100,489
134,152
25,521
1,264
40,711
(10,550)
381,108
94,764
82,133
28,530
7,168
33,338
27,417
517,991
107,700
119,218
28,390
487
(107,455)
(9,242)
340,409
217,269
36,120
105,495
6,968
5,079
(30,522)
(4,524)
$
$
$
51,261 $
5,921 $
(98,213) $
(25,998)
0.56 $
0.07 $
(1.08) $
(0.39)
0.53 $
0.06 $
(1.08) $
(0.39)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
$
362,728 $
342,496 $
342,839 $
224,076
36,202
61,731
5,606
384
34,729
6,701
215,212
36,026
60,128
5,647
211,333
33,764
58,136
5,580
(1,532)
(701)
27,015
2,377
34,727
6,025
28,028 $
24,638 $
28,702 $
314,433
190,526
33,171
53,523
5,584
(713)
32,342
6,193
26,149
0.44 $
0.39 $
0.45 $
0.41
0.43 $
0.38 $
0.44 $
0.40
$
$
$
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99
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2020, 2019, AND 2018
(IN THOUSANDS OF DOLLARS)
Balance at
Beginning
of Year
Charged
to
Expense
Charged
to Other
Accounts
Deduction
from
Reserves
Balance
at End
of Year
YEAR ENDED JUNE 30, 2020:
Allowance for doubtful accounts
Warranty reserves
$
$
1,292 $
956 $
4,478 $
11,507 $
Deferred tax asset valuation allowance $
20,190 $
(2,186) $
—
$
37,453 (1) $
36,555 (2) $
(550) (3) $
$
(25,818)
1,698
27,620
—
$
54,559
YEAR ENDED JUNE 30, 2019:
Allowance for doubtful accounts
Warranty reserves
$
$
837 $
548 $
4,679 $
4,185 $
Deferred tax asset valuation allowance $
21,797 $
(1,607) $
—
—
—
$
$
$
(93) (3) $
$
(4,386)
1,292
4,478
—
$
20,190
YEAR ENDED JUNE 30, 2018:
Allowance for doubtful accounts
Warranty reserves
$
$
1,314 $
4,546 $
(129) $
3,821 $
Deferred tax asset valuation allowance $
42,562 $
(4,602) $
—
$
—
$
(16,163) (4) $
(348) (3) $
$
(3,688)
837
4,679
—
$
21,797
(1) Related to amounts assumed from the Finisar Acquisition.
(2) Related to the amounts assumed from the Finisar Acquisition.
(3) Primarily relates to write-offs of accounts receivable.
(4) Primarily relates to the Company’s deferred taxes on the conversion feature of the convertible debt.
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100
Item 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
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 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, 2020, the Company’s disclosure controls and procedures are
effective.
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.
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101
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 and Delinquent Section 16(a) Reports" in the Company’s
definitive proxy statement for the 2020 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 2020,” “Executive Compensation,” “Compensation Committee Report” and
“Compensation and Risk” in the Company’s Proxy Statement.
Item 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
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.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
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.
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102
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, 2020 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.
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103
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
Statement with Respect to Shares, filed with the
Pennsylvania Department of State Corporations Bureau and
effective July 6, 2020.
Indenture, dated as of August 29, 2017, by and between II-
IV Incorporated and U.S. Bank, National Association, as
Trustee
Form of 0.25% Convertible Senior Notes due 2022.
Description of II-VI's Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934.
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 19, 2014.
Filed herewith.
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.
Included in Exhibit 4.01.
Filed herewith
Indenture, dated as of December 21, 2016 by and between
Finisar Corporation and Wells Fargo Bank, National
Association, as trustee
Incorporated herein by reference to
Exhibit 4.1 to Finisar Corporation's
Current Report on Form 8-K (File No.
000-27999) filed on December 21, 2016.
First Supplemental Indenture, dated as of September 24,
2019, by and among II-VI Incorporated, Finisar Corporation
and Wells Fargo Bank, National Association, as trustee
Incorporated herein by reference to
Exhibit 4.2 to II-VI’s Current Report on
Form 8-K (File No. 000-16195) filed on
September 24, 2019.
3.03
4.01
4.02
4.03
4.04
4.05
4.06
Form of 0.50% Convertible Senior Notes due 2036
Included in Exhibit 4.04
4.07
10.01
10.02
Form of 6.00% Series A Mandatory Convertible Preferred
Stock Certificate.
Amended and Restated Credit Agreement, dated as of
September 24, 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
Amended and Restated Employment Agreement, effective
January 26, 2020, by and between II-VI Incorporated and
Vincent D. Mattera, Jr. *
Included in Exhibit 3.04.
Incorporated herein by reference to
Exhibit 10.1 to Amendment No. 1 to II-
VI’s Current Report on Form 8-K (File
No. 000-16195) filed on September 24,
2019.
Incorporated herein by reference to
Exhibit 10.1 to II-VI’s Current Report on
Form 8-K (File No. 000-16195) filed on
January 30, 2020.
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104
10.03
10.04
Form of Indemnification Agreement between II-VI
Incorporated and its directors and officers
II-VI Incorporated Amended and Restated Employees’
Profit-Sharing Plan and Trust Agreement, as amended (P)
10.05
Description of Bonus Incentive Plan*
10.06
10.07
10.08
10.09
Description of Discretionary Incentive Plan (now known as
the Goal/ Results Incentive Program)*
Amended and Restated II-VI Incorporated Deferred
Compensation Plan (applicable to periods prior to January 1,
2015)*
Amended and Restated II-VI Incorporated Deferred
Compensation Plan (applicable to periods after January 1,
2015)*
Trust Under the II-VI Incorporated Deferred Compensation
Plan*
10.10
II-VI Incorporated 2009 Omnibus Incentive Plan*
10.11
Form of Nonqualified Stock Option Agreement under the II-
VI Incorporated 2009 Omnibus Incentive Plan*
10.12
II-VI Incorporated 2012 Omnibus Incentive Plan*
10.13
Form of Nonqualified Stock Option under the II-VI
Incorporated 2012 Omnibus Incentive Plan*
10.14
10.15
II-VI Incorporated Amended and Restated 2012 Omnibus
Incentive Plan*
Form of Nonqualified Stock Option Agreement under the II-
VI Incorporated Amended and Restated 2012 Omnibus
Incentive Plan*
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 10.05 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 10.17 to II-VI’s Annual Report
on Form 10-K (File No. 000-16195) for
the fiscal year ended June 30, 2015.
Incorporated herein by reference to
Exhibit 10.18 to II-VI’s Annual Report
on Form 10-K (File No. 000-16195) for
the fiscal year ended June 30, 2015.
Incorporated herein by reference is
Exhibit 10.13 to II-VI’s Annual Report
on Form 10-K (File No. 000-16195) for
the fiscal year ended June 30, 1996.
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 10.01 to II-VI’s Current Report
on Form 8-K (File No. 000-16195) filed
on November 5, 2012.
Incorporated herein by reference is
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 10.1 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.
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105
10.16
10.17
10.18
10.19
10.20
II-VI Incorporated Second Amended and Restated 2012
Omnibus Incentive Plan*
Form of Nonqualified Stock Option 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 2012
Omnibus Incentive Plan*
Form of Restricted Share Unit Award Agreement under the
II-VI Incorporated Second Amended and Restated 2012
Omnibus Incentive Plan*
Form of Performance Share Award Agreement under the II-
VI Incorporated Second Amended and Restated 2012
Omnibus Incentive Plan*
10.21
II-VI Incorporated 2018 Employee Stock Purchase Plan*
10.22
II-VI Incorporated 2018 Omnibus Incentive Plan*
Form of Nonqualified Stock Option Agreement under the II-
VI Incorporated 2018 Omnibus Incentive Plan*
Form of Restricted Share Unit Settled In Shares Award
Agreement under the II-VI Incorporated 2018 Omnibus
Incentive Plan*
Form of Restricted Share Unit Settled In Cash Award
Agreement under the II-VI Incorporated 2018 Omnibus
Incentive Plan*
Form of Restricted Share Unit Settled In Shares Award
Agreement under the II-VI Incorporated 2018 Omnibus
Incentive Plan*
Form of Stock Appreciation Rights Agreement under the II-
VI Incorporated 2018 Omnibus Incentive Plan*
10.23
10.24
10.25
10.26
10.27
10.28
Incorporated herein by reference to
Exhibit 10.01 to II-VI’s Current Report
on Form 10-Q (File No. 000-16195) for
the quarter ended 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 10.05 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 10.07 to II-VI’s Quarterly Report
on Form 10-Q (File No. 000-16195) for
the quarter ended September 30, 2016.
Filed herewith.
Incorporated herein by reference to
Exhibit 10.1 to II-VI’s Current Report on
Form 8-K (File No. 000-16195) filed on
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.
Form of Performance Share Award Agreement under the II-
VI Incorporated 2018 Omnibus Incentive Plan*
Filed herewith.
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106
10.29
II-VI Incorporated Executive Severance Plan *
10.30
Form of Participation Agreement for the II-VI Incorporated
Executive Severance Plan*
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, 2019.
Incorporated herein by reference to
Exhibit 10.2 to II-VI''s Current Report on
Form 8-K (File No. 000-016195) filed on
August 22, 2019.
21.01
List of Subsidiaries of II-VI Incorporated
Filed herewith.
23.01
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
Filed herewith.
Filed herewith.
31.01
31.02
32.01
32.02
Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as
amended, and Section 302 of the Sarbanes-Oxley Act of
2002
Filed herewith.
Certification of the Chief Executive Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. § 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Furnished herewith.
Certification of the Chief Financial Officer pursuant to Rule
13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. § 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Furnished herewith.
101
Interactive Data File
(101.INS)
Inline XBRL Instance Document
Filed herewith.
(101.SCH)
Inline XBRL Taxonomy Extension Schema Document
Filed herewith.
(101.CAL)
Inline XBRL Taxonomy Extension Calculation Linkbase
Document
Filed herewith.
(101.DEF)
Inline XBRL Taxonomy Definition Linkbase
Filed herewith.
(101.LAB)
Inline XBRL Taxonomy Extension Label Linkbase
Document
Filed herewith.
(101.PRE)
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
Filed herewith.
*
(P)
Denotes management contract or compensatory plan, contract or arrangement.
Denotes filed via paper copy.
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the
issuance of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.
107
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Item 16.
FORM 10-K SUMMARY
None.
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108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 26, 2020
By:
/s/ Vincent D. Mattera Jr.
Vincent D. Mattera Jr.
Chief Executive Officer
II-VI INCORPORATED
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 26, 2020
Date: August 26, 2020
Date: August 26, 2020
Date: August 26, 2020
Date: August 26, 2020
Date: August 26, 2020
Date: August 26, 2020
Date: August 26, 2020
Date: August 26, 2020
Date: August 26, 2020
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:
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
/s/ Michael L. Dreyer
Michael L. Dreyer
Director
/s/ Patricia Hatter
Patricia Hatter
Director
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Corporate Information
Board of Directors
Executive Officers
Transfer Agent
American Stock Transfer
& Trust Company
6201 15th Ave.
Brooklyn, NY 11219
1.800.937.5449
Independent Registered
Public Accountants
Ernst & Young LLP
2100 One PPG Place
Pittsburgh, PA 15222
Securities Counsel
K&L Gates LLP
K&L Gates Center
210 Sixth Avenue
Pittsburgh, PA 15222
Francis J. Kramer, Chairman
Retired President and CEO
II-VI Incorporated
Dr. Vincent D. Mattera, Jr.
Chief Executive Officer
Walter R. Bashaw II
President
Mary Jane Raymond
Chief Financial Officer
Dr. Giovanni Barbarossa
Chief Strategy Officer and President,
Compound Semiconductors
Jo Anne Schwendinger
Chief Legal and Compliance Officer
and Secretary
Dr. Christopher S. Koeppen
Chief Technology Officer
Annual Meeting
Monday, November 9, 2020, at
3:00 PM Eastern U.S. time
Virtual Meeting
Stock Listing
The common stock of II-VI Incorporated
is traded on Nasdaq under the trading
symbol “IIVI.”
Marc Y. E. Pelaez, Lead
Independent Director
Rear Admiral
United States Navy (retired)
Dr. Vincent D. Mattera, Jr.
Chief Executive Officer
II-VI Incorporated
Joseph J. Corasanti
Retired President, CEO and Director
CONMED Corporation
Michael L. Dreyer
Director F5 Networks
Former Director Finisar Corporation
Retired COO Silicon Valley Bank
Enrico Digirolamo
Senior Advisor to Technology Companies
and Manufacturing Firms
Retired CFO and SVP Covisint
Patricia Hatter
Senior Vice President, Global Customer
Services
Palo Alto Networks
Dr. Shaker Sadasivam
Co-Founder, President and CEO
Auragent Bioscience, LLC
Retired President and CEO
SunEdison Semiconductor, LLC
Dr. Howard H. Xia
Retired General Manager
Vodafone China Limited
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.
Mission
Mission
Mission
Enabling the world to be safer,
Enabling the world to be safer,
Enabling the world to be safer,
healthier, closer, and more efficient
healthier, closer, and more efficient
healthier, closer, and more efficient
375 Saxonburg Boulevard, Saxonburg, PA 16056
375 Saxonburg Boulevard, Saxonburg, PA 16056
375 Saxonburg Boulevard, Saxonburg, PA 16056
724.352.4455
724.352.4455
724.352.4455
www.ii-vi.com
www.ii-vi.com
www.ii-vi.com