2 0 2 1 A N N U A L R E P O R T
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, industrial,
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 our Golden (50th) Anniversary Cover. This year’s cover of our annual report celebrates our bold
50-year history as a global leader in engineered materials, optoelectronic components, and optical
systems. Read below about the elements used to create our cover:
Gold represents prosperity, quality, and good fortune. This color is emblematic of our company’s
continued growth and success, as well as our high standards for excellence.
White represents purity and renewal. White light is the combination of all of the colors in the spectrum,
and is symbolic of our broad portfolio of products and technologies that harness the power of light.
Our hexagonal brand pattern connotes stability, technology, and balance. This pattern speaks to our
core knowledge of materials science, as it represents our engineering expertise and is reminiscent of
our name and its relationship to the periodic table of elements.
Clockwise from top left: Nasdaq 50th anniversary celebration; semiconductor laser fab in
Sherman, Texas; co-founder Carl Johnson in Saxonburg, Pennsylvania, in the 1970s; 6-inch wafer
of semiconductor lasers for 3D sensing; optics for CO2 lasers. Bottom right: Inaugural celebration
for the II-VI Technology and R&D Center in Shanghai, China.
II-VI.COM 1
FINANCIAL SUMMARY
For the year ended June 30
2021
2020
($000 except per share data)
Revenues
$ 3,105,891
$ 2,380,071
Net earnings - GAAP
$
297,552
$
(67,029)
Net earnings - Non-GAAP
$
460,235
$
258,616
Diluted earnings per share - GAAP
$
2.37
$
(0.79)
Diluted earnings per share - Non-GAAP
$
3.73
$
2.85
As of June 30
($000)
Total assets
$ 6,512,650
$ 5,234,714
Total shareholders’ equity
$ 3,406,170
$ 2,076,803
Working capital
$ 2,297,805
$ 1,116,076
Cash flow from operations
$ 574,353
$
297,292
EBITDA
$ 682,600
$
246,400
Reconciliation of Net Earnings to Non-GAAP Net Earnings ($ in millions)
2021
2020
Net Earnings
297.6
(67.0)
Preliminary fair value adjustment on acquired inventory
-
87.7
Amortization of acquired intangibles
82.2
64.2
Stock-based compensation
78.9
63.1
Restructuring, transaction expenses and other
26.9
72.2
Severance, restructuring, and related costs
-
27.6
Foreign currency exchange losses
5.5
14.4
(Gain on)/impairment of investments
(17.9)
5.0
Debt extinguishment expense
24.7
3.9
Additional interest expense related to the Finisar acquisition
-
1.7
Finisar results
-
(1.6)
Tax impact of Non-GAAP measures and fair value adjustments
(37.6)
15.1
Net Earnings - Non-GAAP
460.2
258.6
Amounts may not recalculate due to rounding. Non-GAAP amounts
exclude certain adjustments for stock-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.
CAGR – Compound annual growth rate
EBITDA – Earnings before interest, income taxes, depreciation,
and amortization
Reconciliation of Net Earnings to EBITDA ($ in millions)
2021
2020
2019
2018
2017
Net earnings
297.6
(67.0)
107.5
88.0
95.3
Depreciation
and
amortization
270.1
220.9
92.4
80.8
63.6
Interest
expense
59.9
89.4
22.4
18.4
6.8
Income tax
expense
(benefit)
55.0
3.1
21.3
34.2
23.5
EBITDA
682.6
246.4
243.6
221.4
189.2
Non-GAAP Reconciliation Tables
$800
$0
$1,600
$2,400
$3,200
26% CAGR
FY17
FY18
FY19
FY20
FY21
Revenues ($ in millions)
972.0
1,158.8
1,362.5
2,380.1
3,105.9
$300
$400
$500
$600
$700
$200
$100
$0
FY19
FY18
FY17
FY20
FY21
29% CAGR
EBITDA ($ in millions)
243.6
221.4
189.2
246.4
682.6
$300
$400
$500
$600
$200
$100
$0
FY19
FY18
FY17
FY20
FY21
37% CAGR
Cash Flow from Operations ($ in millions)
118.6
161.0
178.5
297.3
574.4
$1,000
$1,500
$2,500
$3,500
$3,000
$2,000
$500
$0
30% CAGR
FY18
FY17
FY20
FY19
Total Shareholders’ Equity ($ in millions)
FY21
1,024.3
900.6
2,076.8
3,406.2
1,133.2
2 II-VI INCORPORATED 2021 ANNUAL REPORT
STAKEHOLDER LETTER
Extraordinary achievements come from truly caring about
serving one another and those who will follow us. Our
fiscal year 2021 achievements were extraordinary and,
more importantly, we are well positioned to achieve much
more in the coming months, years, and decades.
Super-Cycles and Irreversible
Megatrends
Fiscal year 2021 was driven by a super-cycle in the
buildout of computing, optical communications,
and wireless infrastructure; an acceleration of the
electrification of the global transportation infrastructure;
and the early stages of recovery in the world’s industrial
economies. Inventory levels decreased, resulting in
customers throughout our ecosystems experiencing
shortages of critical component supplies. We
experienced an increased demand from customers for
the differentiated products we make that are enabling
many irreversible market megatrends.
Among these market megatrends are the digital
transformation of information networks and the
convergence of communications, computing, and
sensing as seen in the growth in 5G, augmented reality
and virtual reality, machine learning, artificial intelligence,
smart factories, and smart vehicles. Combined with the
imperative of establishing green and clean transportation
as part of the world’s efforts to mitigate climate change
and the risks associated with it, fiscal year 2021 was a
turning point, as society’s demands for applications that
are mobile, intelligent, and electric continued to provide
secular tailwinds.
Accomplishments for Fiscal Year 2021
We had three objectives this year: take care of our
people; serve our customers; and invest, manage, and
grow to drive long-term value for our shareholders. I am
pleased to say we accomplished all three objectives and
rang the bell on a number of records along the way.
• Our people: Since the earliest days of the pandemic, we
acted swiftly to safeguard our people and our facilities
around the world. We have since further invested in
To our customers, business partners,
shareholders, and the people around
the world who we serve with our
products, services, and our presence
in your communities: I CARE.
For all of us who are a part of the One II-VI Family, our
I CARE values of Integrity, Collaboration, Accountability,
Respect, and Enthusiasm describe what we do, how we
achieve success, and ultimately who we are. We care about
serving our customers. We care about being trusted and
reliable business partners. We care about our colleagues
by creating a culture of opportunity, diversity, inclusion,
fairness, and the personal and collective achievement that
comes from an open, supportive, diverse, and inclusive
environment. We care about our mission of enabling the
world to be safer, healthier, closer, and more efficient. We
care about achieving sustainability for future generations,
which is among the highest callings of our time.
II-VI.COM 3
resources to support our employees, retained the
consulting services of medical professionals, implemented
regular testing programs and contact tracing protocols,
hosted vaccination drives at various sites globally, and
began other initiatives for those who work at our sites or
from home.
• Our customers: Across our company, our teams worked
tirelessly to keep essential operations running smoothly
and meet the needs of our customers. We invented new-
to-the-world materials and manufacturing processes while
increasing engagements with strategic customers to
develop next-generation products based on novel materials
and disruptive technologies at scales that aim to sustain
our mutual success.
• Our shareholders: Investments in product development
and increased production capacity to drive long-term
shareholder value included:
‐ 400/800 gigabit Ethernet transceivers:
We accelerated shipments of these next-generation
high-speed transceivers. Our breakthroughs
in semiconductor laser technology were key
innovations that enable these transceivers.
‐ Silicon carbide materials and devices:
We announced a series of investments to
enable the electrification of the transportation
infrastructure, acquired differentiated epitaxial
and ion implantation capabilities, licensed
key IP from General Electric, and announced
our bold plan to invest $1 billion over the next
10 years in our silicon carbide platform.
‐ Optical filter capacity expansion: We began
the work to double over the next five years our
manufacturing capacity in the optical filters that are
in high demand for PCR testing due to COVID-19,
as well as for 5G optical access networks.
‐ Cooperation with Coherent: We announced
a partnership with Coherent to co-market our
remote laser processing heads with their fiber
lasers, to meet the high demand for a variety
of welding processes in electric vehicles.
Business Execution and Results
We completed another great year with record numbers,
passing the $3 billion in revenue milestone. Our results
demonstrated our disciplined execution of a diversified
growth strategy and focus on operational excellence, cash
flow, and prudent capital management. We strengthened
our balance sheet through performance, including record
full-year cash flow from operations of $574.4 million and
record full-year free cash flow of $428.0 million, in addition
to a strategic investment by Bain Capital. Not only are we
delighted that Bain joined our shareholder community, but
we also warmly welcome Steve Pagliuca, Managing Director
of Bain Capital Private Equity, LP, to our Board of Directors.
Looking Forward
While we have been reflecting on our remarkable
growth trajectory over the last 50 years, our gaze is
already on the future, as we anticipate the combination
with Coherent. We look forward to welcoming another
generation of leaders who will become a part of the
One II-VI Family and carry forward our vision of a world
transformed through innovative materials vital to a better
life today and the sustainability of future generations.
Acknowledgments
In this, our 50th year, I would especially like to
acknowledge II-VI’s second CEO, Fran Kramer, for his role
as Board Chair, helping guide us through the changes
that the world is experiencing today. We are delighted
that Fran will continue his long legacy with II-VI in his new
role as Chair Emeritus, beginning in November 2021.
Finally, I would like to express my deep personal gratitude
to each and every one of our employees who care
deeply and uphold our corporate values day in and day
out. In that spirit, we all say with one voice, I CARE.
Dr. Vincent D. (Chuck) Mattera, Jr.
Chief Executive Officer
4 II-VI INCORPORATED 2021 ANNUAL REPORT
1999 - 2010
1971 - 1998
Company founded by Dr. Carl J. Johnson
Introduced Optics for CO2 Laser Market
1971
Completed IPO of Stock
(Nasdaq: IIVI)
FY87 Revenue:
$10 million
1987
FY98 Revenue:
$61 million
Initiated SiC Technology
1998
Thermoelectrics
2004
Fran Kramer named CEO
Laser Processing Heads
FY07 Revenue:
$255 million
2007
Micro-Optics
2010
Not all acquisitions included. Timeline reflects calendar years.
50 YEARS OF
INNOVATION
II-VI.COM 5
2016 - 2021
2011 - 2015
Optical Channel Monitors
FY11 Revenue: $503 million
2011
Advanced Coatings
Aerospace & Defense
Optical Systems
Ceramics and Metal-Matrix
Composites
2012
Optical Amplifiers
Pump Lasers
2013
New Ventures & Wide-Bandgap
Electronics Technologies
FY20 Revenue: $2.4 billion
2020
High-Speed Transceivers
Tunable Laser Technology
InP Optoelectronics
Wavelength-Selective Switch Based
on Liquid Crystal on Silicon (LCoS)
2019
High-Energy Laser Systems
Wavelength-Selective Switch
Based on Liquid Crystal
FY18 Revenue: $1.2 billion
2018
Faraday Rotators
2017
2016
Dr. Chuck Mattera
Named President and CEO
VCSEL Arrays for
3D Sensing
RF and Photonic
Epitaxial Wafers
Fifty-Year Anniversary
2021
FY21 Revenue: $3.1 billion
II-VI was founded 50 years ago on a vision to
meet the evolving needs of many industries
facing limits to their innovations and
advancement due to limitations in materials.
Since then, there have been countless heroes
among us in our history who have made
that vision a reality. During the first 50 years,
we made many bold moves. Turning the
page now to the future, we will continue to
work toward a world transformed through
innovative materials vital to a better life today
and the sustainability of future generations.
6 II-VI INCORPORATED 2021 ANNUAL REPORT
MOBILE
Enhancing our
Mobility Experience,
Safety, and Security
with 3D Sensing
Today, II-VI produces vertical-cavity surface emitting
laser (VCSEL) arrays for multiple end customers and
applications. We envision the number of disruptive
applications growing over time.
On the front of a smartphone, VCSEL arrays are used for
facial biometrics, to unlock the screen, or to authenticate
a user performing a secure financial transaction.
On the world-facing side of smartphones, VCSELs
improve the quality of photos taken with embedded
cameras. VCSELs could be used to scan and digitally
recreate, with a smartphone app, a three-dimensional
representation of a user’s surroundings. That allows
additional information relevant to that user to be
superimposed on the real scene, which is what is
called augmented reality, or AR. For example, users
can make measurements in their home or check the
way a piece of furniture looks inside an apartment
before making a purchase online. We can already see
commercials on television illustrating these features.
VCSELs on Front Side of Smartphones
Facial biometrics to unlock the screen or to authenticate
a user performing a secure financial transaction.
VCSELs for Augmented Reality
Users can check the way a piece of furniture looks inside
their home before making a purchase online.
VCSEL Arrays for 3D Sensing
6 II-VI INCORPORATED 2021 ANNUAL REPORT
II-VI.COM 7
Vertical Integration: VCSELs Illumination Modules
U.S. and European transportation safety regulators are increasingly recommending
or requiring driver and occupancy monitoring systems in vehicles.
VCSEL arrays can be used for safety features in
automotive cabins. They can provide information about
the alertness of the driver and the position of passengers,
which can prevent accidents or reduce injury with more
accurate and timely deployment of airbags.
The growing adoption of advanced driver-assistance
systems (ADAS) in next-generation vehicles is spurring
the development of ultra-compact light detection
and ranging (LiDAR) systems that can be seamlessly
integrated in vehicles. In 2021, II-VI announced the
introduction of its eye-safe pulsed lasers for LiDAR in
automotive applications.
LiDAR Laser
II-VI’s semiconductor lasers deliver high peak
powers, making them ideal for LiDAR applications.
940 nm VCSEL Flood
Illumination Module
Semiconductor Laser for LiDAR
8 II-VI INCORPORATED 2021 ANNUAL REPORT
Communications Infrastructure from Edge to Core
New applications enabled by the digital transformation continue to drive increased bandwidth at the edge of the
network that in turn drives the need for bandwidth upgrades throughout the entire optical network infrastructure.
INTELLIGENT
SUBSCRIBERS
ACCESS NETWORKS
TRANSPORT NETWORKS
Smartphones
Tablets/Computers
Connected Cars
Internet of Things
5G Wireless
Fiber-to-the-Home
Broadband Cable
Low-Orbit Satellites
Metro
Regional
Long-Haul
Submarine
DATACENTERS
Video Streaming
Cloud Services
Social Media
Big Data/AI/ML
Connecting the World to
Intelligence in the Cloud
NETWORK EDGE
NETWORK CORE
Each time we click on an app on our smartphones, we enter a
datacenter, and that one tap on the screen generates several
server-to-server and server-to-memory communications within
the datacenter and between datacenters. This capability is now
embedded in the lives of all of us as we access vital services.
In fact, COVID-19 has shown us that these services are a lot
more than a convenience. They are increasingly essential to
our lives, and we can expect investments in the optical network
infrastructure to continue for the foreseeable future.
Data Communication Networks
II-VI.COM 9
Semiconductor Lasers for Optical Communications
The laser is at the heart of any transceiver and is a key enabling component for higher-speed optical communications.
We have a variety of laser platforms including our vertical-cavity surface emitting laser, or VCSEL, for short-reach applications,
our edge emitting directly modulated laser (DML) and our electro-absorption modulated laser (EML) for longer reach, and our
tunable lasers for even longer reach. We are now getting ready for the next wave of high-speed optics at 800G with our 100G
and 200G capable lasers.
The 5G buildout continues around the world,
with over a million base stations planned for
deployment in 2021. Significant roll-out plans have
been announced recently in the U.S. and Europe.
Other broadband access networks such as fiber-
to-the-home and low-orbit satellite networks are
also being deployed. Collectively, these networks are
known as access networks, because they provide
access to internet services. All of the data generated
through these access networks then travels over
the optical network infrastructure, also known as
transport networks. New applications enabled
by the digital transformation, including artificial
intelligence, machine learning, and the internet of
things (IoT), continue to drive increased bandwidth
at the edge of the network that in turn drives the
need for bandwidth upgrades throughout the entire
optical network infrastructure.
Access and Transport
Communication Networks
VERTICAL-CAVITY
SURFACE EMITTING
LASER (VCSEL)
DIRECTLY
MODULATED LASER
(DML)
ELECTRO-ABSORPTION
MODULATED LASER
(EML)
TUNABLE LASER
Up to 300 m
Up to 10 km
Up to 40 km
1000's of km
10 II-VI INCORPORATED 2021 ANNUAL REPORT
ELECTRIC
Enabling the
Electrification
of the Energy
Infrastructure
Power Electronics
Advantages of SiC over Si for Power Electronics
10%
Increases driving range of
electric vehicles by 10% or
more on a single charge, or
a reduction in battery size
by 10% or more.
°C/°F
Operates at much
higher temperatures,
eliminating the need for
cooling components.
V 10x, A 5x
Sustains voltages 10 times
higher and carries currents of up
to 5 times higher, enabling faster
charging at higher voltages and
smaller devices and systems.
10x
Switches 10 times faster,
reducing the size and
complexity of circuits,
therefore reducing the size
of integrated systems.
All of these advantages in total reduce the size, weight, and power budget of the vehicle in addition to achieving cost savings.
In August 2020, we added an industry-leading silicon
carbide epitaxy technology to our platform by acquiring
Ascatron in Kista, Sweden, now called II-VI Kista, a
pioneer in silicon carbide epitaxial wafer technology. II-VI
Kista has been developing a proprietary technology since
the early ‘90s, now under the trademark 3DSiC®. In 2016,
3DSiC was commercialized at scale on 100 and 150 mm
diameter wafers. 3DSiC’s differentiated performance
stems from the ability to grow very thick epitaxial layers,
not only in one step, but in multiple regrowth steps, to
create a buried-grid structure.
The value of 3DSiC is that it enables us to address a sweet
spot in the market, which is power devices for applications
above 1 kilovolt. We believe that the availability of our
products will be well-timed with the market demand for
these products.
Leveraging 3DSiC® for >1 kV SiC Devices
3DSiC®
3DSiC® enables the growth of very thick epitaxial
layers in multiple regrowth steps to create buried-grid
structures that enable power devices operating at >1 kV.
Increases Driving Range
Enables Affordability and Compact Size
II-VI.COM 11
Integration of the motor
drive with the inverter
Integration of multiple
powertrain converters
We envision being part of the lithium battery supply chain
with new battery cathode materials that will greatly enhance
lithium battery performance. These materials leverage
elements in Group VI of the periodic table, an extension of
our core competency. The performance that we are already
seeing with lithium-sulfur cathodes exceeds our original
expectations in terms of energy capacity, power delivery,
and charging time. More importantly, sulfur is available in
great abundance. A 2020 report from the U.S. Geological
Survey indicates the U.S. is the world’s largest producer of
sulfur, with 20% of the world total sulfur source. In contrast,
cobalt is a conflict mineral of which the U.S. produces less
than 1% of the world total, an important consideration for
the establishment of domestic and resilient supply chains.
Battery Technology of the Future
Accelerating Time-to-Market with GE Technology
II-VI Cathode Technology Performance
In June 2020, II-VI licensed technology from GE to manufacture
silicon carbide devices and modules for power electronics.
GE is a trademark of General Electric Company
Up to 2x Energy
1000
100
10
Energy (Wh/kg)
Lithium-ion Battery
II-VI has been developing cathode technology since 2014.
SiC Power Electronics for EV System Integration
The EV industry is moving toward system integration to reduce size, weight, and cost. This
requires power electronics subsystems that are more compact to fit into a smaller space.
Industrial
Robots
Electric
Trains
Datacenters
Heavy
Machinery
Solar Energy Wind Power Smart Power
Grids
Microgrids
Electric
Planes
Additional Markets for >1 kV SiC Devices
6" device
fabrication and
packaging.
2015
200°C rated
surface mount.
1.2 kV, 25mΩ Gen3
AEC-Q101 qualified.
2017
Aviation
industry-first SiC
converter with GE
SiC certified.
2020
Separator
Anode
Electrolyte
Electrolyte
Cathode
1000
10000
100
Power (W/kg)
Existing Li-ion
Batteries
Li-ion
Batteries with
SeS-C Cathodes
Up to 10x Power
12 II-VI INCORPORATED 2021 ANNUAL REPORT
SUSTAINABILITY
PROGRAMS
Since July 2019, II-VI has converted 15 sites to
renewable-electricity contracts, with 17% of our
worldwide electricity needs currently supplied
by renewable sources.
Renewable Energy
II-VI is a proud participant in Apple’s Supplier
Clean Energy Program and powers all of our Apple
production with 100% renewable energy.
Clean Energy Program
Our Fremont, California, and Dallas, Texas, facilities are
multiyear award recipients for continued compliance
with local wastewater treatment programs.
Wastewater Treatment
Our Wuxi, China, site earned the Environmental Protection
Outstanding Contribution Award for helping nearby
companies significantly improve their EHS performance.
Community Engagement
II-VI contributed to Water.org to support their mission
to empower millions worldwide with access to safe
water and sanitation.
Clean Water Advocate
II-VI pledged $1,000,000 to fund STEM
educational and research programs in 2021.
Science, Technology,
Engineering, and
Mathematics (STEM)
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, 2021
#"
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
25-1214948
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
375 Saxonburg Blvd.
Saxonburg, PA
16056
(Address of principal executive offices)
(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
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
IIVI
Nasdaq Global Select Market
Series A Mandatory Convertible Preferred
Stock, no par value
IIVIP
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ! No "
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes " No !
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ! No "
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 !
Accelerated filer
"
Non-accelerated filer
"
Smaller reporting company
"
Emerging growth company
"
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
#
Indicate by check mark whether the registrant 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,
2020, was approximately $7,871,289,598 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 16, 2021, was 105,718,326.
3
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2021 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 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 risk factors described in more detail herein under Item 1A. “Risk Factors” and summarized below under “Risk Factor
Summary,” 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 2022 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.
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.
4
•
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.
•
A widespread health crises could materially and adversely affect us.
•
Global economic downturns may adversely affect us.
•
Our products may contain defects that are not detected until deployed.
•
Foreign currency risk may negatively affect us 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.
•
We may not realize expected benefits from our acquisition or be able to retain those benefits even if realized.
•
Our global operations are complex and present multiple challenges to manage.
•
We are subject to complex and rapidly changing import and export regulations.
•
Changes in trade policies could increase the costs of goods imported into the United States or China.
•
Any inability to access financial markets from time to time to raise funds could negatively impact us.
•
We may not be able to settle conversions of our convertible senior notes in cash or repurchase the notes when required.
•
Our current credit agreement restricts our operations in certain regards.
•
We may fail to accurately estimate the size and growth of our markets and our customers’ demands.
•
We may encounter increased competition.
•
There are limitations on the protection of our intellectual property.
•
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
us.
•
We could be negatively impacted by data breach incidents and breakdowns of information and communication
technologies.
•
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 us and prevent us from fulfilling our 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 adversely affect us.
•
Our success depends on our ability to attract, retain, and develop key personnel and requires good employee relations.
•
We contract with a number of large customers that have considerable bargaining power.
•
We may be adversely affected by climate change regulations.
•
We depend on large purchases from a few significant customers.
•
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.
•
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.
Risks Relating to Our Pending Acquisition of Coherent, Inc. (“Coherent”)
•
The market prices of our securities after completion of our pending acquisition of Coherent may be affected by factors
different from those currently affecting the markets for our securities or securities issued by Coherent.
•
There can be no assurance that we will be able to secure the funds necessary to pay the cash portion of the merger
consideration payable in our acquisition of Coherent, in a timely manner or at all.
•
The agreements that will govern indebtedness to be incurred or assumed in connection with our acquisition of
Coherent are expected to contain various covenants that will impose restrictions on us that may affect our ability to
operate our businesses.
•
The significant additional indebtedness that we will incur in connection with our acquisition of Coherent could
adversely affect us.
•
Integrating Coherent may be more difficult, costly or time-consuming than expected, and we may fail to realize the
anticipated benefits of the acquisition.
Risk Factor Summary
The following is a summary of the material risks and uncertainties that could cause our business, financial condition or
operating results to be adversely impacted. We encourage you to carefully review the full risk factors contained in Item 1A.
“Risk Factors” herein in their entirety for additional information regarding these risks and uncertainties.
Risks Relating to Our Business and Our Industry
5
•
We and Coherent each are subject to business uncertainties and contractual restrictions while the acquisition is
pending.
•
Holders of our capital stock will have a reduced ownership and voting interest in us after the completion of the
acquisition.
•
Shareholder litigation could prevent or delay the closing of the acquisition or otherwise negatively impact us.
•
The issuance and sale of our Series B Preferred Stock reduces the relative voting power of holders of our other capital
stock, dilutes the ownership of such holders and may adversely affect the market price of our securities.
•
Our Series B Preferred Stock has rights that are not held by, and are preferential to, the rights of holders of our other
outstanding capital stock.
•
The redemption rights of the holders of Series B Preferred Stock may result in the use of our cash in such a way that
could adversely affect us and holders of our other capital stock.
•
Holders of our Series B Preferred Stock can exercise significant control over us.
•
The market prices of our securities may decline in the future as a result of the acquisition.
•
Our future results will suffer if we do not effectively manage our expanded operations.
•
We and Coherent face competition, which is expected to intensify after the closing of the acquisition.
•
We expect to incur substantial expenses related to the acquisition and the related integration.
•
Following the consummation of the acquisition, we will be bound by all obligations and liabilities of both companies.
•
The acquisition may result in a loss of suppliers and strategic alliances or the termination of existing contracts.
Risks Relating to Our Capital Stock
•
The trading prices for our securities have been volatile in the past and may be volatile in the future.
•
Provisions in our governing documents and applicable law may delay or prevent our acquisition by a third party.
•
We do not currently intend to pay dividends on our common stock.
•
Our ability to declare and pay dividends on our capital stock may be limited.
•
Trading in preferred stock that we have issued may adversely affect the market price of our common stock.
•
Our common stock is subordinate to our existing and future indebtedness and any preferred stock we may issue. Our
preferred stock ranks junior to all of our and our subsidiaries’ consolidated liabilities.
•
Our board of directors can issue, without approval of our stockholders, preferred stock with rights that could adversely
affect holders of our common stock.
•
Reports published by securities or industry analysts and others could adversely affect our share price and trading
volume.
•
Regulatory actions may adversely affect the trading price and liquidity of our Mandatory Convertible Preferred Stock.
•
Holders of Mandatory Convertible Preferred Stock have no voting rights, except under limited circumstances.
•
We depend on our subsidiaries for cash to fund our operations and expenses.
•
We and Coherent may have difficulty attracting, motivating and retaining executives and other employees.
•
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not
presently anticipated or that could have an adverse effect on us following the completion of the acquisition.
•
The acquisition is subject to conditions that may not be satisfied on a timely basis, or at all.
•
We have incurred, and will continue to incur, significant transaction-related costs in connection with the acquisition.
•
The closing of the acquisition may trigger change in control provisions in certain agreements to which Coherent
is a party.
6
PART I
Item 1.
BUSINESS
Definitions
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, U.S.A. Our telephone number is +1-724-352-4455.
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, aerospace and defense, and consumer electronics markets. Reference to “fiscal,” “fiscal year,” or
"FY" means our fiscal year ended June 30 for the year referenced.
The following defined terms are used in this Annual Report on Form 10-K: bismuth telluride (Bi2Te3); cadmium telluride (CdTe);
carbon dioxide (CO2); chemical vapor deposition (CVD) of materials including diamond; datacenter interconnect (DCI); 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);
integrated circuit (IC); intellectual property (IP); light detection and ranging (LiDAR); liquid crystal (LC); liquid crystal on
silicon (LCOS); millimeters (mm); nanometers (nm); near-infrared (NIR); optical channel monitor (OCM); 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); transimpedance amplifier (TIA);
ultraviolet (UV); vertical cavity surface-emitting laser (VCSEL); wavelength division multiplexing (WDM); wavelength
selective switching (WSS); zinc selenide (ZnSe); and zinc sulfide (ZnS).
Pending Coherent Acquisition
On March 25, 2021, II-VI, Coherent and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“Merger Sub”), entered
into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to
the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the surviving
corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”). Additional information regarding the terms of
the Merger is set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
this Annual Report on Form 10-K.
The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with
the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be
effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger
at special meetings held on June 24, 2021 by the respective companies.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions,
including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the
satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by the end of the first
calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger
being completed at a different time or not at all.
In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant
to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21,
2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc.,
PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National
Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA)
LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively,
the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt
financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the
Commitment Letter is subject to a number of customary conditions.
7
In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement,
dated as of March 30, 2021, (the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital
Private Equity, LP (the “Investor”). Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold,
and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company, no par value per
share (“II-VI Series B-1 Convertible Preferred Stock”), for $10,000 per share (the “Equity Per Share Price”), resulting in an
aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other things,
the Company and the Investor also agreed that the Company would issue, sell and deliver to the Investor:
•
105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company, no par value per share (“II-VI Series
B-2 Convertible Preferred Stock,” and together with the II-VI Series B-1 Convertible Preferred Stock, “New II-VI
Convertible Preferred Stock”), for a purchase price per share equal to the Equity Per Share Price, resulting in an
aggregate purchase price of $1.1 billion, immediately prior to Closing; and
•
immediately prior to Closing, if elected by the Company and agreed by the Investor, up to an additional 35,000 shares
of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity
Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million.
Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the
Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing,
increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.
The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating
Segment, and are presented in the Unallocated and Other in Note 15, Segment and Geographic Reporting.
General Description of Business
We develop, manufacture, and market engineered materials, optoelectronic components, and devices for use in optical
communications, industrial, 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.
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 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 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 growth in the short term and the long term. With our 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, 2021, are set forth in the Consolidated Statements of Earnings (Loss) and in Note 15. Segment and Geographic
8
Reporting to our Consolidated Financial Statements, which are 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.
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, 2021, our bookings were approximately
$3.3 billion, compared with bookings of approximately $2.7 billion for the fiscal year ended June 30, 2020.
We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30,
2021, our backlog was approximately $1,252 million, compared with approximately $957 million as of June 30, 2020.
Global Operations
II-VI is headquartered in Saxonburg, Pennsylvania, U.S.A., 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, Thailand, 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.
Human Capital
Our mission is “Enabling the world to be safer, healthier, closer, and more efficient.”
Our vision is “A world transformed through innovative materials vital to a better life today and the sustainability of future
generations.”
Our core values are: Integrity, Collaboration, Accountability, Respect, and Enthusiasm (I CARE).
Our people are essential to fulfilling our mission and working toward our vision. As a result, our human capital strategies are
core to the long-term success of the Company.
As of June 30, 2021, the Company employed approximately 23,000 employees worldwide.
Number of
employees
Percent of
total
Direct production
15,833
69%
Research, development, engineering, sales and marketing
4,276
19%
General administration
2,852
12%
Total:
22,961
100%
We believe that our efforts in managing our workforce have been effective, as evidenced by a strong culture and a good
relationship between the Company and our employees.
•
Our People. Our people are critical to our continued success. We provide a workplace that develops, supports, and
motivates our employees. In FY21, we again participated in the Gallup Employee Engagement Survey. We believe
Gallup’s employee engagement survey questions and resources are an effective way to gauge our progress to create a
stronger, more engaged workplace. Gallup provides comparative data from numerous studies over many years linked to
organizational performance, proven consistent survey methodology, and actionable guidance at both the local and
enterprise level. We had a 94% participation rate and an engagement mean of 4.16 out of 5.00. The responses to each of
the 12 questions within Gallup’s survey demonstrated improvement by us from our prior survey conducted in FY19.
Action plans are created across the globe to continue to improve our engagement level.
9
•
Employee Safety. It is our highest priority to keep our employees, customers, and suppliers safe, as the health and safety
of our workforce is fundamental to the success of our business. We provide our employees upfront and ongoing safety
training to ensure that safety policies and procedures are effectively communicated and implemented. We have
experienced employees on-site at each of our manufacturing locations who are tasked with environmental, health, and
personal safety education and compliance. The safety calculation recognized by the Occupational Safety and Health
Administration, the Total Recordable Incident Rate (“TRIR”), is closely monitored throughout the Company. As of
June 30, 2021, our TRIR was 0.23 as compared to 0.26 for FY20. Each year, we strive to improve our TRIR as a part of
our strong safety culture, as evidenced by a year-over-year reduction of 12%. We customize our policies to the local
requirements and circumstances of each plant.
•
COVID-19. Our top priority during the ongoing COVID-19 pandemic has been and continues to be protecting the
health and safety of our employees and their families, our customers, and our communities. Our on-site work
environments were changed to accommodate best-in-class protocols. The commitment to this effort is evidenced by the
extensive planning and numerous actions we swiftly took to respond to the pandemic, including the development and
implementation of a Pandemic Response Team and Pandemic Response Guide, a work-from-home program, health
check protocols, temperature screenings, and periodic COVID-19 testing where permitted and deemed appropriate for
all employees working on-site. Additionally, new process workflows were initiated to ensure reduced contact for
employees working on-site, contact tracing processes and protocols were established, quarantining and testing protocols
for exposure and positive tests were implemented, travel guidelines and protocols were created to ensure that employees
who must travel for work can do so safely, and phased return-to-work plans and approval processes were formed to
enable non-manufacturing employees to return to work when permitted by local government regulations and deemed
appropriate by II-VI leadership. We hired an infectious disease expert who specializes in COVID-19 to offer guidance
to our Pandemic Response Team, managers, and site leaders. We are continuing with our work-from-home
arrangements for non-manufacturing and operations employees through at least December 2021.
•
Talent Acquisition, Development, and Training. Hiring talented individuals and continuing to develop them are critical
to our operations, and we are focused on creating experiences and programs that foster growth and performance. We
have a robust succession-planning process that identifies internal candidates for development. We provide all employees
the chance to learn and develop critical skills, and we strive to attract, motivate, and retain high-quality talent. We
encourage all employees to broaden their knowledge. For example, we offer monthly Technology Spotlight Seminars
designed to highlight and communicate the many technical advances and competencies within II-VI, as well as foster
innovation within the Company and technical community. Tuition reimbursement and funding for growth and
development is built into the annual budget to ensure that II-VI has the skilled workforce we need. Our global
internship programs welcome a new talent pipeline. In FY21, II-VI pledged $1,000,000 to fund STEM educational and
research programs in 2021.
•
Total Rewards. Our “One II-VI” approach to total rewards provides a competitive total compensation package that:
attracts, motivates, and retains high-quality talent; matches total rewards of competitors with which we compete for
talent; increases transparency of rewards programs, company and segment metrics, and measurement of achievements
in relation to challenging objectives; balances fixed costs (benefits and base pay) and variable costs (bonus and equity),
with a substantial portion of total direct compensation tied to performance; pays for performance – base, bonus, and
equity reflect both company and individual performance; and aligns with the interests of our shareholders. Globally, all
non-sales employees participate in a variable incentive program measured on the operating earnings of their business
segment. Similarly, sales employees are incentivized on revenue and profit-after-tax attainment. Select employees are
eligible to receive equity-based awards, to align employee and shareholder interests. In addition to offering competitive
and fair compensation, we also offer a suite of benefits, including comprehensive health benefits to all of our employees
globally.
•
Diversity and Inclusion. II-VI supports fundamental human rights – values inherent to all human beings. We expect all
leaders and employees to treat each other with dignity, fairness, and respect. We are consciously expanding the diversity
of our workforce, creating growth and development opportunities for our employees, embracing different perspectives,
and fostering an inclusive work environment. In FY21, we greatly enhanced communication on diversity topics, and
globally, employees attended education on Diversity & Inclusion awareness.
Globally, approximately 50% of the workforce is female, with 11,428 females and 11,533 males as of June 30, 2021. In
the II-VI’s Senior Leadership Team (“SLT”), which consists of senior directors and above, there are 20 females and 179
males. The SLT meets quarterly to discuss strategy, business trends, company operations, financials, and people
programs. Our global footprint is diverse, with approximately 18,400 employees in the Asia-Pacific region, 1,000 in
Europe, and 3,600 in the Americas.
10
Manufacturing Processes
Our success in developing and manufacturing many of our products depends on our ability to manufacture and 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. Aside from datacenter transceivers, 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.
We continue to focus our efforts to convert locations to renewable energy. During the past two fiscal years we have converted 15
of our sites to renewable-electricity contracts. In addition, II-VI participates in Apple’s Supplier Clean Energy Program, and all
of our Apple production facilities are powered with 100% renewable energy.
Additionally, our Fremont, California, and Dallas, Texas, facilities are multiyear award recipients for continued compliance with
local wastewater treatment programs. Additional information can be found on the Community & Environment section of our
website at www.ii-vi.com. The website address is intended to be an inactive textual reference only. None of the information on,
or accessible through, II-VI's website is part of this Annual Report on Form 10-K or is incorporated by reference herein.
Sources of Supply
In our production processes, we use numerous optical, electrical, and mechanical parts that are sourced from third-party supplies.
These include integrated circuits, mechanical housings, and optical components, and we commonly refer to them as raw
materials.
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 are sometimes 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. Risks associated with reliance on
third parties for the timely and reliable delivery of raw materials is discussed in greater detail in Item 1A – Risk Factors of this
Annual Report.
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.
The Photonic Solutions Segment leverages II-VI’s compound semiconductor technology platforms and deep knowledge of end-
user applications for our key end markets to deliver differentiated components and subsystems.
The Compound Semiconductors Segment is a market leader in engineered materials and optoelectronic devices such as those
based on GaAs, InP, GaN, and SiC. We may from time to time reorganize parts of a given segment or corporate center to drive
the focus of certain priorities.
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.
11
Photonic Solutions
Business Unit
Our Products
ROADM
•
Products and solutions that enable high-bit-rate
interconnects for datacenters and communications
service providers, datacenter interconnects, ROADM
systems, and undersea fiber-optic transmission
Transceivers
•
Pluggable transceivers for Ethernet and Fiber
Channel applications in cloud and enterprise
datacenter applications
•
High-speed optoelectronics and modules for optical
communications in telecom networks, including for
datacenter interconnects and for metro, regional,
Advanced Optics
•
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
12
Compound Semiconductors
Business Unit
Our Products
Engineered Materials & Laser Optics
•
Laser optics and accessories for CO2 lasers used in
industrial, semiconductors, and life sciences
applications
•
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
Laser Devices & Systems
•
High-power semiconductor lasers and laser bars
enabling fiber and direct-diode lasers for industrial,
defense, consumer, and printing applications
•
Laser heads and modules, Q-switched laser modules,
high-power uncooled pump laser modules, laser
solutions for superhard 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 aerospace
and defense
New Ventures & Wide-Bandgap
Electronics
•
SiC and advanced semiconductor materials for high-
frequency and high-power electronic device
applications in defense, telecommunications,
automotive, and industrial markets
Optoelectronic & RF Devices
•
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
InP Devices
•
Semiconductor lasers and detectors for optical
interconnects and sensing applications
13
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, 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 next-generation 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 conferencing for work, school, and leisure; video downloads and
streaming; live TV; social networking; online gaming; file sharing; enterprise IP/internet traffic; cloud computing; and datacenter
virtualization that must be handled by both wireline and wireless networks. This traffic increase reflects the recent shift to the
work-from-home and study-from-home approach, which was driven by the COVID-19 pandemic but is expected to continue.
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, subcomponents, 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 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 80 km, typically, 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 a 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.
Our proven experience in both transmission and transport allows us to effectively address the emerging DCI market. Our
transceivers, submodules, pluggable amplifiers, and configurable line cards are able to meet the requirements of low power
consumption, compactness, ease of installation and operation, and cost savings, which are often mandatory features in the DCI
market.
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
14
to meet the growing demand. 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.
We are a market leader in the technology development and large-volume manufacturing 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 and 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 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 capability to manufacture the
state-of-the-art GaN-on-SiC HEMT devices that will enable these next-generation wireless networks.
Industrial Market
Our laser optics and solutions for the industrial market remain well-positioned, although we were impacted in FY21 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 drilling and cutting plastics, textiles, leather, wood, and other organic materials,
for which the CO2 laser’s 10-micron wavelength is ideally suited. The 5G market enabled strong growth for our low-power CO2
drilling machines. CO2 lasers are also at the core of EUV lithography systems, which 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
industrial applications, especially for metal cutting and welding along with precision machining such as marking and
microdrilling. II-VI supplies a broad range of materials, components, and subsystems 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’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. 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 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 nanomachined 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 that are packaged behind them. The domes provide hemispherical coverage for airborne,
naval, and ground-based systems.
15
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 EUV 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 analytical instrumentation that integrates light and/or thermal management
solutions. We segment this market into three application areas (biotechnology, medical laser, and scientific) and deliver targeted
and unique product portfolios for each segment. II-VI vertically integrates from the component-level to more complex
subassemblies and even full systems. Applications within the biotechnology segment 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.
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 laser 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 reach 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. Crystals and laser cavities, along with custom-designed lens assemblies, are 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.
For the scientific segment, II-VI's solutions are the building blocks of molecular spectroscopy and imaging-based platforms.
These tools typically target environmental applications such as water, air, food and 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 at all wavelengths, from UV to NIR and IR.
16
II-VI manufactures VCSELs, VCSEL arrays, and optical 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 have been used in consumer products such as computer mice and mobile phones for many years. Our VCSELs are also
widely deployed in datacenters and HDMI optical cables as well as in vehicle steering wheels. This expertise in VCSEL
technology has been leveraged for the growing 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 or hundreds of VCSELs per chip
in order to scale up the optical power required for, for example, face recognition. Therefore, 3D sensing applications created the
need to scale up manufacturing to 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 tablets, smart watches, and household robots.
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) for autonomous vehicles. LiDAR sensors enable ADAS to perform functions such as
emergency braking and adaptive cruise control. 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 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 a wide range of peak powers for direct illumination and imaging for short- and long-
range LiDAR solutions. 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 strategic marketing functions. Sales offices have been strategically aligned
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.
Consumer Electronics Market
17
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.
Customers
The representative groups of customers by segment are as follows:
Photonic Solutions
Business Unit:
Our Customers Are:
Representative Customers:
ROADM
Worldwide network system and
subsystem providers of
telecommunications, data
communications, and CATV
•
Ciena Corporation
•
Fujitsu Network Communications
•
NEC Corporation
•
Nokia Corporation
Transceivers
Cloud service providers, telecom
service providers, enterprises with
internal datacom networks, datacom
OEMs, telecom OEMs
•
Alibaba Group
•
Cisco Systems Inc.
•
Extreme Networks Inc.
•
H3C Technologies Co. Ltd.
•
Tencent
Advanced Optics
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
•
Coherent Inc
•
Corning Incorporated.
•
Han’s Laser Technology Industry
Group Co. Ltd.
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, 2021, we employed approximately 400
individuals in sales, marketing, and support.
18
Compound Semiconductors
Business Unit:
Our Customers Are:
Representative Customers:
Engineered Materials
& Laser Optics
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
•
Bystronic Laser AG
•
Coherent Inc.
•
TRUMPF GmbH + Co. KG
Manufacturers and developers of
integrated-circuit capital equipment
for the semiconductor capital
equipment industry
•
ASML Holding NV
•
Carl Zeiss AG
•
KLA Corporation
•
Nikon Corporation
Primary mineral processors, refiners,
and providers of specialized
materials used in laser optics,
photovoltaics, semiconductors,
thermoelectric coolers, metallurgy,
and industrial products
•
Aurubis AG
Manufacturers of equipment and
devices for aerospace, defense, and
commercial markets
•
Lockheed Martin Corporation
•
Raytheon Technologies Corporation
Laser Devices &
Systems
Manufacturers of industrial laser
components, optical
communications equipment, and
consumer technology applications;
automotive manufacturers
•
Ford Motor Company
•
Hisense Broadband Inc.
•
Laserline GmbH
•
Wuhan Raycus Fiber Laser
Technologies Co. Ltd.
OEM and subsystem integrators of
aiming, machine vision, biomedical
instruments, and fiber lasers; laser
cutting machines for superhard
materials
•
TRUMPF GmbH + Co. KG
New Ventures &
Wide-Bandgap
Electronics
Manufacturers and developers of
equipment and devices for high-
power RF electronics and high-
power, voltage-switching, and
power-conversion systems for
commercial and aerospace and
defense applications
•
Infineon Technologies AG
•
IQE PLC
•
Showa Denko KK
•
Sumitomo Electric Device Innovations
Inc.
Optoelectronic & RF
Devices
Manufacturers of consumer
electronics and transceivers
•
Apple Inc.
19
Competition
II-VI is a global leader in many of its product families. We compete, in part, on the basis of our reputation for offering highly
engineered products. We also compete by leveraging our intellectual property, ability to scale, product quality, on-time delivery,
and technical support. We believe 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:
Photonic Solutions
Areas of Competition:
Competitors:
Optical components, modules, and subsystems
for optical communications
•
Accelink Technologies Co.
Ltd.
•
InLC Technology
•
InnoLight Technology Ltd.
•
Intel Data Platforms Group
•
Lumentum Operations LLC
•
Molex LLC
•
O-Net Communications Ltd.
Optical and crystal components, thin-film
coatings, and subassemblies for lasers and
metrology instruments
• CASTECH Inc.
• Casix Inc.
• IDEX Corporation
• Optowide Technologies Co. Ltd.
• Research Electro-Optics Inc.
Compound Semiconductors
Areas of Competition:
Competitors:
Infrared laser optics
• American Photonics
•
Forerun (China)
•
Lambda Research
Corporation
• MKS Instruments Inc.
• Ophir Corporation
•
Research Electro-
Optics Inc.
•
Pleiger Maschinenfabrik GmbH &
Co. KG
•
Sigma Koki Co. Ltd.
•
Sumitomo Electric
Industries Ltd.
•
ULO Optics Ltd.
•
Wavelength Opto-
Electronic Pte. Ltd.
Automated equipment and laser materials
processing tools to deliver high-power 1-
micron laser systems
•
Empower
•
Mitsubishi Cable Industries
Ltd.
•
Optoskand AB
• Precitec GmbH & Co.
Biomedical instruments for flow cytometry,
DNA sequencing, and fluorescence microscopy
• Coherent Inc.
• Shimadzu Corporation
• Pavilion Integration Corporation
Semiconductor laser diodes for the industrial
and consumer markets
•
ams AG
•
Broadcom Inc.
•
Everbright LLC
•
Hamamatsu Photonics KK
•
Jenoptik AG
•
Lumentum Operations LLC
•
nLight Inc.
•
Optowell Co. Ltd.
•
OSRAM Licht AG
•
Panasonic Corporation
•
Wuhan Raycus Fiber Laser
Technologies Co. Ltd.
•
ROHM Co. Ltd.
•
Sony Corporation
•
TRUMPF GmbH + Co. KG
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
• Ferrotec Corporation
• Laird Thermal Systems
•
Komatsu Ltd.
Metal-matrix composites and reaction-bonded
ceramic products
• Berliner Glas GmbH
• CoorsTek Inc.
• Japan Fine Ceramics Co. Ltd.
•
Kyocera Corporation
•
Morgan Advanced Materials PLC
•
Schunk GmbH
Single-crystal SiC substrates
• Cree Inc.
• Dow Inc.
•
ROHM Co. Ltd.
• SICC Co. Ltd.
• TankeBlue Semiconductor Co.
Ltd.
Refining and materials recovery services for
high-purity rare metals
• 5N Plus Inc.
• RETORTE GmbH
• Vital Materials Co. Ltd.
20
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, reach 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
incorporating 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 that serve the applications mentioned above.
We continue to grow the number and size of our key accounts. 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:
Our Plan to Execute:
Identify New Products and Markets
Identify new technologies, products, and markets to meet evolving customer
requirements for high-performance engineered materials through our
dedicated RD&E programs, and thereby increase new product revenue and
maximize return on investment
Balanced Approach to Research and
Development
RD&E both internally and externally funded, targeting an overall
investment of 8%-12% of revenues
Leverage Vertical Integration
Combine RD&E and manufacturing expertise, operating with a bias toward
components and production machines; reduce cost and lead time to enhance
competitiveness, time to market, profitability, and quality; and enable our
customers to offer competitive products
Investment in Scalable Manufacturing
Strategically invest in, evaluate, and identify opportunities to consolidate
and automate manufacturing operations worldwide to increase production
capacity, capabilities, and cost-effectiveness
Enhance Our Performance and Reputation
as a Quality and Customer Service Leader
Continue to improve upon our established reputation as a consistent, high-
quality supplier of engineered materials and optoelectrical components that
are built into our customers’ products
Execute our global quality transformation process, eliminating costs of
nonconforming materials and processes
Identify and Complete Strategic
Acquisitions and Alliances
Identify acquisition opportunities that accelerate our access to emerging,
high-growth segments of the markets we serve and further leverage our
competencies and economies of scale
Research, Development, and Engineering
During the fiscal year ended June 30, 2021, 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, platforms, 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 the
close interaction between the development and manufacturing functions enhances the direction of our projects, reducing costs
and accelerating technology transfers. It also offers development opportunities to our employees.
21
During the fiscal year ended June 30, 2021, we focused our RD&E investments in the following areas:
Photonic Solutions
Area of Development:
Our RD&E Investments:
Photonics design
Continue to develop and improve crystal materials, precision optical
parts, and laser device components for photonics applications
Datacom transceivers
Continue cost reduction on 10G-100G products by leveraging our
engineering resources and manufacturing scale; continue to develop
high-end 200G/400G/800G products, including RF and packaging
designs; explore high-density, high-bandwidth co-packaged designs
through silicon photonics; continue to develop vertically integrated
designs, including with lasers and ICs
Coherent optics
Drive further integration to reduce size and power consumption;
optimize product cost with new design architectures and more efficient
manufacturing flow
Pump lasers
Continue to invest in our next-generation GaAs pump laser portfolio
and flexible manufacturing footprint to address evolving terrestrial and
undersea markets
Develop InP growth and processing capability together with associated
packaging technology
Optical amplifiers and
subsystems
Invest in and broaden the range of amplifiers and integrated
subsystems, including ROADMs
WSS
Develop LC and LCOS technologies and associated module designs for
WSS; invest in manufacturing equipment, including the WSS
automated assembly platform
Optical monitoring
Continue optical channel monitoring investment
Develop OTDRs to monitor the health of the fiber plant
Micro-optics manufacturing
Shift toward smaller, more compact optics and automated assembly
platforms and packages
Invest in manufacturing equipment for computerized processes
Compound Semiconductors
Area of Development:
Our RD&E Investments:
High-power laser diodes
Semiconductor lasers
Devices for optical
communications and sensing,
and high-volume
manufacturing
Increase fiber-coupled optical output power of multi-emitter modules
Develop high-power VCSELs, including multi-junction VCSELs for
3D sensing and consumer devices as well as next-generation, high-
speed VCSELs for datacom applications
Develop high-power and high-speed InP lasers, detectors, and
components for applications in optical communications
High-power beam delivery
Develop multi-kW beam delivery systems and cables for welding and
cutting
CVD diamond technology
Develop CVD diamond for EUV applications and as substrates for
high-performance RF devices
Broaden our portfolio beyond infrared window applications
SiC technology
Develop advanced SiC substrate growth technologies to support
emerging markets in GaN RF and SiC power electronics
Continuous improvement to maintain world-class, high-quality, large-
diameter substrates and epitaxial wafers
Thermoelectric materials and
devices
Continue to develop leading Bi2Te3 materials for thermoelectric
cooling/heating
22
Focus on thermoelectric power-generation capability in order to
introduce new products
Metal-matrix composites and
reaction-bonded ceramics
Support industrial customers in developing application-specific
material wear out and thermal-management solutions
Fiber laser technologies
Develop high-power fiber laser technologies for aerospace, defense,
and commercial applications
High-speed ICs
High-performance analog TIAs, laser drivers, and clock and data-
recovery retimer (CDR) ICs
Other R&D
Area of Development:
Our RD&E Investments:
Digital Signal Processors
(DSPs)
Develop high-speed DSPs for coherent optical communications
Optoelectronic chip hybrid
integration platform
Develop wafer-scale assembly technologies and processes for
integration of lasers, optics, and ICs
Silicon photonics devices
Develop silicon-based photonic ICs for coherent and direct-detection
transceivers and co-packaging solutions
Battery technology
Develop technology for lithium-ion batteries
Laser additive manufacturing
Develop alloys and multibeam delivery systems for laser additive
manufacturing
Internally funded research and development expenditures were $330 million, $339 million, and $139 million for the fiscal years
2021, 2020, and 2019, respectively.
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;
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 also have similar import and export control, and sanctions, laws and regulations. For additional discussion
regarding our import, export and sanctions compliance, see the discussion in Item 1A – Risk Factors of this Annual Report 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 helps 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 our U.S. employees to sign a confidentiality and noncompetition agreement upon
commencement of their employment with us. We have a total of approximately 2,205 patents globally.
23
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and positions as of June 30, 2021, are set forth below. Each
executive officer listed has been appointed by the board of directors to serve until removed or until a successor is appointed and
qualified.
Name
Age
Position
Vincent D. Mattera, Jr.
65 Chief Executive Officer; Director
Walter R. Bashaw II
56 President
Mary Jane Raymond
61 Chief Financial Officer and Treasurer
Giovanni Barbarossa
59 Chief Strategy Officer and President, Compound Semiconductors
Jo Anne Schwendinger
65 Chief Legal Officer and Compliance Officer and Secretary
Christopher Koeppen
50 Chief Technology Officer
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 and served as the Company's President
through June 2019, when the roles of President and Chief Executive Officer were separated. Dr. Mattera will become the
Company’s Board Chair immediately following the Company’s 2021 Annual Meeting of Shareholders. 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. 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. In 2019 Ms. Raymond was named to the Board of
Directors and Audit Committee of Veeco, Inc. 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
24
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. 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.
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 Ethical Business Conduct, 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.
25
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
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.
A widespread health crises could materially and adversely affect our business, financial condition, and results of
operations.
The outbreak of a widespread health crisis, whether global in scope or localized in an area in which we, our customers or our
suppliers do business, could have a material adverse effect on our operations and the operations of our suppliers and customers.
Potential impacts on our operations include:
•
significant reductions in demand for one or more of our products or a curtailment to one or more of our product lines
caused by, among other things, any 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 any applicable shutdown orders or stay-at-home polices;
•
disruptions to our third-party manufacturing and raw materials supply arrangements caused by constraints over our
suppliers’ workforce capacity, financial, or operational difficulties;
•
heightened risk and uncertainty regarding the loss or disruption of essential third-party service providers, including
transportation services, contract manufacturing, marketing, and distribution services;
•
requirements to comply with governmental and regulatory responses such as 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; and
•
increased operating expenses and potentially reduced efficiency of operations.
In the early stages of the outbreak of the global novel coronavirus (COVID-19) in 2020, we closely monitored 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. 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. While we
26
believe that we have been successful in identifying, managing, and mitigating the economic disruption impacts of the COVID-
19 pandemic on us, we cannot provide any assurance that we similarly will be able to mitigate the impacts of any future
widespread health crises, including as a result of any variants of COVID-19. Factors beyond our current knowledge or control,
including the duration and severity of any outbreak, as well as any resulting governmental and regulatory actions, could cause
any such crisis to have a material adverse effect on our business, operating results, and financial condition.
Global economic downturns may adversely affect our business, operating results, and financial condition.
Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate
the level of growth or contraction of the global economy as a whole. It is even more difficult to estimate growth or contraction
in various parts, sectors, and regions of the economy, including the industrial, aerospace and defense, optical communications,
telecommunications, semiconductor, consumer, and medical and life science markets in which we participate. All aspects of our
forecasts 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.
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, or 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.
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. 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
27
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 2019. We may continue to expand and diversify our operations with additional acquisitions, such as our pending acquisition
of Coherent, Inc. (“Coherent”). 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 complete 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:
•
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.
•
In connection with acquisitions, we may:
◦
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 prices of our outstanding securities 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 we expect that our acquisitions will result in cost savings, synergies, and other benefits, we may not realize
those benefits, or be able to retain those benefits even if realized.
The success of our acquisitions will depend in large part on our success in integrating the acquired operations, strategies,
technologies, and personnel. We may fail to realize some or all of the anticipated benefits of an acquisition if the integration
process takes longer than expected or is more costly than expected. If we fail to meet the challenges involved in successfully
integrating any acquired operations or to otherwise realize any of the anticipated benefits of an acquisition, including any
expected cost savings and synergies, our operations could be impaired. In addition, the overall integration of an acquired
business can be a time-consuming and expensive process that, without proper planning and effective and timely
implementation, could significantly disrupt our business.
Potential difficulties that we may encounter in the integration process include:
•
the integration of management teams, strategies, technologies and operations, products, and services;
28
•
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
•
the creation of uniform standards, controls, procedures, policies, and information systems;
•
the reduction of the costs associated with combined operations;
•
the integration of corporate cultures and maintenance of employee morale;
•
the retention of key employees; and
•
potential unknown liabilities associated with the acquired business.
The anticipated cost savings, synergies, and other benefits of any acquisition typically assume a successful integration of the
acquired business 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 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 ability to respond in
an effective and timely manner. Any inability to respond in an effective and timely manner to issues in our global operations
could have a material adverse effect on our business, results of operations, or financial condition.
We are subject to complex and rapidly changing import and export regulations 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.
•
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 in which we do cross-border business, or
29
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 (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 (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.
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 from time to time borrow under our existing credit facility or use proceeds from sales of our securities to fund portions of
our operations, including working capital investments and financing of 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 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 outstanding capital 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 (the “2022 Notes”) and the 0.50% Convertible Senior
Notes due 2036 issued by Finisar (the “2036 Notes”) have the right to require us to repurchase all or a portion of their
convertible notes for cash upon the occurrence of a fundamental change (as defined in the respective indentures governing such
notes) at a repurchase price equal to 100% of the principal amount of the convertible notes to be repurchased, plus accrued and
unpaid interest. Holders of the 2036 Notes also have the right to require Finisar to repurchase all or a portion of their 2036
Notes for cash on certain specified dates at a repurchase price equal to 100% of the principal amount of the 2036 Notes to be
repurchased, plus accrued and unpaid interest. The next such repurchase date for the 2036 Notes is December 15, 2021. In
addition, upon conversion of such convertible notes, we will be required to make cash payments in respect of such convertible
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 convertible notes or pay cash with respect to convertible notes being converted.
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In addition, our ability to repurchase or to pay cash upon conversion of our convertible notes may be limited by law, regulatory
authority, or agreements governing our future indebtedness. Our failure to repurchase convertible notes at a time when the
repurchase is required or to pay any cash upon conversion of the convertible notes as required would constitute a default under
the applicable indenture. A default under the applicable indenture or the fundamental change itself also could lead to a default
under agreements governing our existing credit facility or any of our other current or 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 convertible notes or to pay cash upon conversion of any such convertible notes.
Our current credit agreement restricts our operations, particularly our ability to respond to changes or to take certain
actions regarding our business.
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”)
contains 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 our 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.
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
Agreement 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.
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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 intellectual property
developed during a project that is assigned to the other party without us retaining rights to that intellectual property or is jointly
owned with the other party.
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 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.
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.
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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.
We also make products of which we are 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.
Data breach incidents and breakdowns 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
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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, 2021, we had approximately $1.4 billion of outstanding indebtedness on a consolidated basis. 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;
•
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;
•
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, pursuing sales of additional debt or equity
securities, or reducing or delaying capital expenditures, strategic acquisitions, investments, or 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.
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.
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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,
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,
Natural disasters or other global or regional catastrophic events could disrupt our operations, give rise to substantial
environmental hazards, and adversely affect our results.
35
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
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
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.
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
governmental trade action or economic sanctions may limit or preclude our ability to do business with certain customers.
36
Our business differs from that of Coherent. Accordingly, our results of operations and the market price of our securities after the
completion of our pending acquisition of Coherent may be affected by factors different from those currently affecting the
independent results of operations of each company. In addition, the issuance of shares of our common stock as part of the
merger consideration payable in connection with the acquisition could on its own have the effect of depressing the market
prices for our securities, including our common stock and our 6.00% Series A Mandatory Convertible Preferred Stock
(“Mandatory Convertible Preferred Stock”). Further, many Coherent stockholders may decide not to hold the shares of our
common stock that they receive as merger consideration. Other Coherent stockholders, such as funds with limitations on their
permitted holdings of stock in individual issuers, may be required to sell the shares of our common stock that they receive as
merger consideration. Any such sales of our common stock could have the effect of depressing the market prices for our
securities
There can be no assurance that we will be able to secure the funds necessary to pay the cash portion of the merger
consideration payable in our acquisition of Coherent, in a timely manner or at all.
We intend to finance part of the cash portion of the merger consideration payable in our acquisition of Coherent with the
proceeds of debt financing. To this end, we have entered into a debt commitment letter (the “Debt Commitment Letter”)
containing commitments for a senior secured term loan “A” facility in an aggregate principal amount of $850 million, a senior
secured term loan “B” facility in an aggregate principal amount of $2,800 million, a senior secured revolving credit facility in
an aggregate principal amount of $350 million and a senior unsecured bridge loan facility in an aggregate principal amount of
$1,125 million. We have not entered into any definitive agreement for this debt financing or other financing arrangements in
lieu thereof, and the obligation of the lender to provide the debt financing under the Debt Commitment Letter is subject to a
number of customary conditions. There is a risk that these conditions will not be satisfied and the debt financing may not be
available when required.
We also intend to finance part of the cash portion of the merger consideration with the proceeds of equity investments made by
BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (“BCPE”). To this end, on March 30, 2021, we
entered into an amended and restated investment agreement (the “Investment Agreement”) with BCPE. On March 31, 2021, we
issued and sold 75,000 shares of a new Series B-1 Convertible Preferred Stock, no par value (“Series B-1 Preferred Stock”), to
BCPE for an aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, we
and BCPE also have agreed that we will issue and sell to BCPE, immediately prior to the closing of our acquisition of
Coherent, an aggregate of 140,000 shares of a new Series B-2 Convertible Preferred Stock, no par value (“Series B-2 Preferred
Stock” and together with Series B-1 Preferred Stock, the “Series B Preferred Stock”), for an aggregate purchase price of $1.4
billion. However, the issuance and sale of the Series B-2 Preferred Stock to BCPE is subject to a number of customary
conditions, and there can be no assurance that this part of the equity financing will be completed.
In the event that the debt financing contemplated by the Debt Commitment Letter or the remaining investment contemplated by
the Investment Agreement is not consummated, there is a risk that alternate financing may not be available on acceptable terms,
in a timely manner or at all. Although our obligation to consummate our acquisition of Coherent is not conditioned upon the
consummation of either of the debt financing contemplated by the Debt Commitment Letter or the remaining investment
contemplated by the Investment Agreement, if we are unable to complete either of those financing transactions, the completion
of our acquisition of Coherent may be delayed or not completed, in which case we would be in breach of our obligations under
the merger agreement containing the terms of the acquisition.
The agreements that will govern indebtedness to be incurred or assumed in connection with our acquisition of Coherent
are expected to contain various covenants that will impose restrictions on that may affect our ability to operate our
businesses.
The agreements that will govern indebtedness to be incurred or assumed in connection with our acquisition of Coherent,
including pursuant to the related debt financing contemplated by the Debt Commitment Letter, are expected to contain various
affirmative and negative covenants that will, subject to certain significant exceptions, restrict our ability to, among other things,
have liens on our property, incur additional indebtedness, enter into sale and lease-back transactions, make loans, advances or
other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions with respect to
equity interests, and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person,
among other things. In addition, the definitive documentation governing certain of the facilities is expected to contain financial
maintenance covenants that will require us to maintain a certain leverage ratio and an interest coverage ratio at the end of each
fiscal quarter. Our ability to comply with these provisions may be affected by events beyond our control. Failure to comply with
these covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations
under the applicable definitive documentation or under other debt agreements.
Risks Relating to Our Pending Acquisition of Coherent
The market prices of our securities after completion of our pending acquisition of Coherent may be affected by factors
different from those currently affecting the markets for our securities or securities issued by Coherent.
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As of June 30, 2021, we had consolidated indebtedness of approximately $1.4 billion. Our pro forma consolidated indebtedness
as of June 30, 2021, after giving effect to our acquisition of Coherent and the anticipated incurrence and extinguishment of
indebtedness in connection therewith, would have been approximately $5.1 billion. We will have substantially increased
indebtedness following completion of the acquisition in comparison to what we have had on a recent historical basis, which
could have the effect, among other things, of causing or accentuating the consequences described above under “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.”
In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our
ratings reflect each rating organization’s opinion of our financial strength, operating performance, and ability to meet our debt
obligations. In connection with the anticipated debt financing contemplated by the Debt Commitment Letter, we expect that we
will seek ratings of our indebtedness from leading rating organizations. There can be no assurance that we will achieve or
maintain any particular rating in the future. In addition, there can be no assurance that the credit ratings of our existing debt will
not be subject to a downgrade below investment grade. If a ratings downgrade were to occur or if we fail to maintain an
investment grade rating, we could experience higher borrowing costs in the future and more restrictive debt covenants which
could reduce profitability and diminish operational flexibility.
Integrating Coherent may be more difficult, costly or time-consuming than expected, and we may fail to realize the
anticipated benefits of the acquisition, including our expected financial and operating performance following the
consummation of the acquisition.
The success of our acquisition of Coherent will depend, in part, on our ability to realize the anticipated benefits and cost
savings. To do so, we must successfully integrate Coherent in a manner that permits those benefits and cost savings to be
realized. Our ability to successfully manage this expanded business will depend, in part, upon our ability to implement an
effective integration of the two companies and manage a combined business with significantly larger size and scope with the
associated increased costs and complexity. If we are not able to successfully achieve these objectives, or are not able to achieve
these objectives on a timely basis, the anticipated benefits may not be realized fully or at all or may take longer to realize than
expected. In addition, the actual cost savings could be less than anticipated.
We and Coherent have operated and, until the completion of the acquisition, must continue to operate independently. It is
possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing
businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to
maintain relationships with clients, customers, suppliers and employees or to achieve the anticipated benefits and cost savings
of the transaction. Integration efforts between the two companies also may divert management attention and resources. These
integration matters could have an adverse effect on each company during this transition period and on us for an undetermined
period after completion of the acquisition. All projections regarding the combined company’s business are, by their nature,
estimates which are subject to risks and uncertainties. Business and financial measures of the combined company, including
revenue, free cash flow, synergies and dividend yield, are uncertain and subject to change based on changes in assumptions
underlying such measures or other changes in circumstances, many of which may be outside of our or Coherent’s control.
We and Coherent may have difficulty attracting, motivating and retaining executives and other employees in light of the
pending acquisition.
Uncertainty about the effect of the pending acquisition on our and Coherent’s respective employees may have an adverse effect
on us and Coherent. This uncertainty may impair our and Coherent’s ability to attract, retain and motivate personnel both before
and after completion of the acquisition. We and Coherent are dependent on the experience and industry knowledge of our
respective officers and other key employees to execute our business plans. The success of the acquisition will depend in part on
our ability to retain the talents and dedication of key employees currently employed by Coherent. Employee retention may be
particularly challenging during the pendency of the acquisition, as employees may feel uncertain about their future roles with us
after completion of the acquisition. In addition, we and Coherent may have to provide additional compensation in order to
retain employees.
If key employees terminate their employment with us or Coherent while the acquisition is pending, or with us after completion
of the acquisition, our business activities may be adversely affected and our management’s attention may be diverted from
successfully integrating Coherent to hiring suitable replacements, all of which may cause our business to suffer. In addition, we
and Coherent may not be able to locate or retain suitable replacements for any key employees who leave either company.
Accordingly, no assurance can be given that we will be able to attract or retain key employees following the completion of the
acquisition to the same extent that we or Coherent have been able to attract or retain employees in the past.
The significant additional indebtedness that we will incur in connection with our acquisition of Coherent could
adversely affect us, including by decreasing our business flexibility, increasing our interest expense and causing our
credit ratings to be downgraded.
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Before the acquisition may be completed, certain waiting periods must expire or terminate and applicable approvals must be
obtained under certain antitrust, competition and foreign investment laws and regulations. In deciding whether to grant
regulatory clearances and approvals, the relevant governmental entities may consider, among other things, the effect of the
transaction on competition within their relevant jurisdiction. The terms and conditions of the approvals that are granted may
impose requirements, limitations or costs or place restrictions on the conduct of our business. There can be no assurance that
regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or
restrictions will not have the effect of delaying completion of the acquisition or imposing additional material costs on or
materially limiting our revenues following the completion of the acquisition. In addition, we cannot provide assurance that any
such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the transaction.
Our pending acquisition of Coherent is subject to conditions, including certain conditions that may not be satisfied, and
may not be completed on a timely basis, or at all. Failure to complete the acquisition could have material and adverse
effects on us.
Our acquisition of Coherent is subject to a number of conditions, which make the completion and timing of the acquisition
uncertain. In addition, the governing merger agreement may be terminated in certain circumstances. If the transaction is not
completed on a timely basis or at all, our ongoing business may be adversely affected and, without realizing any of the benefits
of having completed the acquisition, we will be subject to a number of risks, including the following:
•
we will be required to pay certain costs relating to the transaction, whether or not the transaction is completed, such as
legal, accounting, financial advisor and printing fees;
•
under the merger agreement, we are subject to certain restrictions on the conduct of our business prior to completing
the transaction, which may adversely affect our ability to execute certain of our business strategies;
•
time and resources committed by our management team to matters relating to the transaction could otherwise have
been devoted to pursuing other beneficial opportunities;
•
the market price of our common stock could decline to the extent that the current market prices reflect a market
assumption that the transaction will be completed; and
•
depending on the circumstances in which the merger agreement is terminated, we may be required to pay a termination
fee of $500.0 million, which may make it more difficult for us to pursue alternatives to the acquisition of Coherent.
In addition, if the transaction is not completed, we may experience negative reactions from financial markets and from our
customers and employees. We could also be subject to litigation related to any failure to complete the transaction or to
enforcement proceedings commenced against us to perform our obligations under the governing merger agreement. If the
acquisition is not completed, we cannot assure that the risks described above will not materialize and will not adversely affect
our business or financial results or the market price of our securities.
We have incurred, and will continue to incur, significant transaction-related costs in connection with our pending
acquisition of Coherent.
We have incurred, and will continue to incur, substantial expenses in connection with the negotiation and completion of our
pending acquisition of Coherent, as well as the costs and expenses of filing, printing and mailing a joint proxy
statement/prospectus and various fees paid or to be paid to the SEC and other regulatory agencies in connection with the
transaction. These fees and costs have been, and will continue to be, significant. In addition, we will incur significant costs with
respect to the expected financing transactions relating to the cash portion of the merger consideration. If the transaction is not
completed, we may have to recognize these expenses without realizing the expected benefits of the transaction.
We also expect to incur a number of non-recurring transaction-related costs associated with combining the operations of the two
companies and achieving desired synergies. Additional unanticipated costs may be incurred in the integration of our business
with Coherent’s business. There can be no assurance that the elimination of certain duplicative costs, as well as the realization
of other efficiencies related to the integration of the two businesses, will offset the incremental transaction-related costs over
time. Thus, any net benefit may not be achieved in the near term, the long term or at all.
The closing of our acquisition of Coherent may trigger change in control provisions in certain agreements to which
Coherent is a party.
Certain agreements to which Coherent is a party contain change in control provisions that may be triggered when we complete
our acquisition of Coherent. If we and Coherent are unable to negotiate waivers of those provisions, the counterparties may
exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages.
Even if we and Coherent are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to
renegotiate the agreements on terms less favorable to us.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not
presently anticipated or that could have an adverse effect on us following the completion of the acquisition.
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We and Coherent each are subject to business uncertainties and contractual restrictions while our acquisition of
Coherent is pending, which could adversely affect each of our and Coherent’s respective businesses and operations.
Under the terms of the merger agreement, we and Coherent are subject to certain restrictions on the conduct of our respective
businesses prior to completing the transaction, which may adversely affect each party’s ability to execute certain of its business
strategies. Such limitations could negatively affect each party’s businesses and operations prior to the completion of the
transaction. Furthermore, the process of planning to integrate the two companies can divert management attention and resources
and could ultimately have an adverse effect on us.
In connection with the transaction, parties with which we or Coherent do business may experience uncertainty associated with
the transaction, including with respect to current or future business relationships with us, Coherent or the combined business. It
is possible that some customers, suppliers and other persons with whom we or Coherent have a business relationship may delay
or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with us or
Coherent, as applicable, as a result of the transaction, which could negatively affect our or Coherent’s revenues, earnings and
cash flows, as well as the market price of shares of our common stock, regardless of whether the transaction is completed.
Holders of our capital stock will have a reduced ownership and voting interest in us after the completion of our
acquisition of Coherent and the expected remaining equity financing and therefore then will have less voting influence.
Each Coherent stockholder who receives shares of our common stock as merger consideration will become a shareholder of
ours. We estimate that, upon completion of the acquisition, former Coherent stockholders collectively will own approximately
15%, our shareholders as of immediately prior to the completion of the transaction (excluding as a result of the expected
remaining equity financing) will own approximately 71%, and BCPE will own approximately 14% of our outstanding shares of
common stock (in each case, on an as-converted and fully diluted basis and without regard to the fact that immediately prior to
the completion of the transaction, certain holders may own both our common stock and Coherent’s common stock). As a result,
our shareholders will have less voting influence on us and may have less influence on our management and policies than they
now have on us.
Shareholder litigation could prevent or delay the closing of our acquisition of Coherent or otherwise negatively impact
our business and operations.
We may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with our
pending acquisition of Coherent. Such litigation could have an adverse effect on our financial condition and results of
operations and could prevent or delay the consummation of the transaction.
The issuance and sale of shares of our Series B-1 Preferred Stock has reduced, and the issuance and sale of our Series B-
2 Preferred Stock will reduce, the relative voting power of holders of our other capital stock, will dilute the ownership of
such holders and may adversely affect the market price of our securities.
On March 31, 2021, we issued 75,000 shares of Series B-1 Preferred Stock to BCPE. Those shares of Series B-1 Preferred
Stock currently have voting rights and may vote as one class with our common stock, on an as-converted basis, subject to
limited exceptions. Upon completion of our acquisition of Coherent, we will issue and sell 140,000 shares of Series B-2
Preferred Stock to BCPE. Those shares of Series B-2 Preferred Stock will have voting rights, voting as one class with our
common stock and our Series B-1 Preferred Stock, on an as-converted basis, subject to limited exceptions. Therefore, the
issuance and sale of Series B-1 Preferred Stock resulted, and the issuance and sale of Series B-2 Preferred Stock will result, in
the immediate and substantial dilution to the ownership interests of the holders of our capital stock, including our common
stock and our Mandatory Convertible Preferred Stock.
Any sales in the public market of our common stock issuable upon conversion of Series B Preferred Stock could adversely
affect prevailing market prices of our other outstanding securities. Similarly, the perception that such sales might occur could
have a material adverse effect on such market prices.
Our Series B-1 Preferred Stock have, and the Series B-2 Preferred Stock to be issued upon completion of our pending
acquisition of Coherent will have rights, preferences and privileges that are not held by, and are preferential to, the
rights of holders of our other outstanding capital stock.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our Series B
Preferred Stock are entitled to receive certain payments (i) prior to any amounts paid to holders of our common stock and each
other class or series of our capital stock now existing or hereafter authorized, the terms of which do not expressly provide that
such class or series ranks either (x) senior to the Series B Preferred Stock as to dividend rights or distribution rights upon such a
liquidation event or (y) on parity with the Series B Preferred Stock as to dividend rights and distribution rights upon a such a
liquidation event and (ii) on parity with our Mandatory Convertible Preferred Stock and each other class or series of our capital
stock established in the future, the terms of which expressly provide that such class or series ranks on a parity basis with the
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Series B Preferred Stock as to dividend rights and distribution rights upon such a liquidation event. In addition, the holders of
Series B Preferred Stock also have certain redemption, conversion and consent rights.
These provisions may make it more costly for a potential acquirer to engage in a business combination transaction with us.
Provisions that have the effect of potentially discouraging, delaying or preventing such a transaction could limit the opportunity
for our shareholders to receive a premium for their shares of our capital stock and could also affect the price that some investors
are willing to pay for our capital stock. This could reduce the remaining amount of our assets, if any, available to distribute to
holders of our capital stock.
Our obligations to the holders of Series B Preferred Stock could limit our ability to obtain additional financing or increase our
borrowing costs, which could have an adverse effect on our financial condition. These preferential rights could also result in
divergent interests between the holders of shares of our Series B Preferred Stock and other holders of our capital stock.
The redemption rights of the holders of Series B Preferred Stock may result in the use of our cash in such a way that
could adversely affect our business, financial condition or results of operations and, therefore, the interests of holders of
our other capital stock.
At any time on or after the ten-year anniversary of the applicable issuance date of the shares of our Series B Preferred Stock and
subject to the procedures set forth in the terms of the Series B Preferred Stock, each holder of such shares will have the right to
require us to redeem all of such holder’s shares for cash at a price per share equal to the sum of the applicable stated value for
such shares plus accrued or declared and unpaid dividends on such shares that had not previously been added to such stated
value. This may have the effect of reducing funds available for working capital, capital expenditures, acquisitions and other
general corporate purposes, thereby negatively affecting the interests of holders of our other capital stock, including our
common stock and our Mandatory Convertible Preferred Stock.
Holders of our Series B Preferred Stock can exercise significant control over us, which could limit the ability of holders
of our other capital stock to influence the outcome of key transactions, including a change of control.
The Series B-1 Preferred Stock has, and the Series B-2 Preferred Stock will have, voting rights, allowing holders to vote as one
class with our common stock on an as-converted basis, subject to limited exceptions. As a result, the holders of Series B-1
Preferred Stock have, and the holders of Series B-2 Preferred Stock will have, the ability to significantly influence the outcome
of any matter submitted for the vote of the holders of our common stock. Holders of Series B Preferred Stock are entitled to act
separately in their own respective interests with respect to their ownership interests in us and have the ability to substantially
influence all matters that require approval by our shareholders, including the approval of significant corporate transactions.
Additionally, we may not undertake certain actions without the prior written approval of the holders of a majority of the issued
and outstanding shares of Series B Preferred Stock, voting separately from our common stock. Subject to certain exceptions, we
must not: (1) alter or change the rights, preferences or privileges of our Series B Preferred Stock or amend, modify or
supplement any provision of our organizational documents in a manner that adversely affects the rights, powers, preferences or
privileges of our Series B Preferred Stock; (2) authorize or issue any senior stock (as defined below) (or securities convertible
into senior stock), or amend or alter our articles of incorporation to increase the number of authorized or issued shares of our
Series B Preferred Stock; (3) decrease the number of authorized shares of our Series B Preferred Stock (other than as permitted
pursuant to a conversion, redemption or repurchase by us thereof); (4) issue any shares of our Series B Preferred Stock (other
than pursuant to the Investment Agreement); and (5) effect any voluntary deregistration or delisting with Nasdaq of our
common stock.
Furthermore, we may not, unless holders of Series B Preferred Stock otherwise consent in writing (or if such action is taken
with respect to a Permitted Issuance (as defined in the Investment Agreement)), so long as BCPE owns at least 5% of the
number of shares of Series B Preferred Stock that it held immediately following the completion of either the issuance and sale
of the Series B-1 Preferred Stock on March 31, 2021 (if the issuance and sale of the Series B-2 Preferred Stock has not
occurred) or the issuance and sale of the Series B-2 Preferred Stock upon completion of our pending acquisition of Coherent, (i)
authorize or issue any parity stock (as defined below) and (ii) pay any cash dividend on our common stock (other than ordinary
dividends (as defined below)). We also may not, unless BCPE otherwise consents in writing (or if such action is taken with
respect to a Permitted Issuance (as defined in the Investment Agreement)), so long as it owns at least 25% of the number of
shares of Series B Preferred Stock that it held immediately following the completion of either the issuance and sale of the Series
B-1 Preferred Stock on March 31, 2021 (if the issuance and sale of the Series B-2 Preferred Stock has not occurred) or the
issuance and sale of the Series B-2 Preferred Stock upon completion of our pending acquisition of Coherent, redeem,
repurchase or otherwise acquire (or make or declare any dividend or distribution in respect of) any junior stock (as defined
below) (subject to certain exceptions, including, among other things, ordinary dividends, non-cash dividends or other
distributions paid pro rata to all holders of our common stock and, if applicable, holders of Series B Preferred Stock,
repurchases of junior stock of up to $100 million on an aggregate annual basis and dividends on junior stock in kind or in the
form of other junior securities or securities convertible into or exchange for such junior securities). Moreover, under the terms
of the Investment Agreement, following the closing of the initial investment and for so long as BCPE beneficially owns shares
41
of Series B Preferred Stock (or shares of our common stock issued upon the conversion thereof) that represent, in the aggregate
and on an as-converted basis, at least 25% of the number of shares of Series B Preferred Stock that it held immediately
following the completion of either the issuance and sale of the Series B-1 Preferred Stock on March 31, 2021 (if the issuance
and sale of the Series B-2 Preferred Stock has not occurred) or the issuance and sale of the Series B-2 Preferred Stock upon
completion of our pending acquisition of Coherent, BCPE will have the right to nominate one designee and to designate one
observer to the our board of directors. Circumstances may occur in which the interests of BCPE could conflict with the interests
of holders of other outstanding capital stock, including our common stock and our Mandatory Convertible Preferred Stock.
The market prices of our securities may decline in the future as a result of our acquisition of Coherent.
The market prices of our securities, including our common stock and our Mandatory Convertible Preferred Stock, may decline
in the future as a result of our acquisition of Coherent for a number of reasons, including:
•
the unsuccessful integration of Coherent (including for the reasons set forth above); and
•
our failure to achieve the perceived benefits of the acquisition, including financial results, as rapidly as or to the extent
anticipated by financial or industry analysts.
Many of these factors are beyond our control. As a consequence, holders of our capital stock, including our common stock and
our Mandatory Convertible Preferred Stock, could lose the value of their investment in our capital stock.
We currently anticipate that our acquisition of Coherent will be accretive to earnings per share (on an adjusted earnings basis) in
the second year after the completion of the acquisition. This expectation is based on preliminary estimates which may
materially change. We also could encounter additional transaction-related costs or other factors such as the failure to realize all
of the benefits anticipated in the acquisition. All of these factors could cause dilution to our earnings per share or decrease or
delay the expected accretive effect of the acquisition and cause a decrease in the market prices of our securities, including our
common stock and our Mandatory Convertible Preferred Stock.
Our future results will suffer if we do not effectively manage our expanded operations following the completion of our
acquisition of Coherent.
Following the completion of our acquisition of Coherent, the size of our business will increase significantly beyond the current
size of either our or Coherent’s current businesses. Our future success depends, in part, upon our ability to manage this
expanded business, which may pose substantial challenges for management, including challenges related to the management
and monitoring of new operations and associated increased costs and complexity. There can be no assurance that we will be
successful or that we will realize the expected operating efficiencies, cost savings, revenue enhancements and other benefits
currently anticipated from the acquisition.
We and Coherent face competition, which is expected to intensify after the closing of our acquisition of Coherent and
which may reduce our market share and profits after consummation of the acquisition.
Competition in the industries in which we and Coherent operate is intense. Increased competition could hurt our and Coherent’s
businesses, hinder our respective market share expansions and lead to pricing pressures that may adversely impact our
respective margins and revenues. If we are unable to successfully compete following the completion of the acquisition, our
business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.
Following the consummation of the acquisition, our competitive position could be weakened by strategic alliances or
consolidation within our industries or the development of new technologies by competitors. Our ability to compete successfully
will depend on how well we markets our products and services and on our ability to anticipate and respond to various
competitive factors affecting our industries, including changes in customer preferences, and changes in the product offerings or
pricing strategies of our competitors.
After the consummation of the acquisition, competition could materially adversely affect us in several ways, including (i) the
loss of customers and market share, (ii) our need to lower prices or increase expenses to remain competitive and (iii) the loss of
business relationships within our existing markets.
We expect to incur substantial expenses related to our acquisition of Coherent and the related integration.
We expect to incur substantial expenses in connection with our acquisition of Coherent and the related integration. There are a
large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including
purchasing, accounting and finance, sales, payroll, pricing and benefits.
While we have assumed that a certain level of expenses will be incurred, there are many factors beyond our control that could
affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by
their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we
42
expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings. These
integration expenses likely will result in us taking significant charges against earnings following the completion of the
acquisition, and the amount and timing of such charges are uncertain at present.
Following the consummation of our acquisition of Coherent, we will be bound by all of the obligations and liabilities of
both companies.
Following the consummation of our acquisition of Coherent, we will become bound by all of the obligations and liabilities of
Coherent in addition to our obligations and liabilities existing prior to the consummation of the acquisition. We cannot predict
the financial condition of the combined company at the time of the completion of the acquisition or our ability to satisfy our
obligations and liabilities following the completion of the acquisition.
Our acquisition of Coherent may result in a loss of suppliers and strategic alliances and may result in the termination of
existing contracts.
Following the completion of our acquisition of Coherent, some of our suppliers or suppliers of Coherent may increase prices or
may terminate or scale back their business relationship with us, or even become competitors of ours. We and Coherent have
contracts with suppliers, vendors, and other business partners which may require us or Coherent to obtain consents from these
other parties in connection with the pending transaction, which may not be obtained at all or on favorable terms. If supplier
relationships or strategic alliances are adversely affected by our acquisition of Coherent, or if we, following the completion of
the transaction, lose the benefits of our or Coherent’s contracts, our business and financial performance could suffer.
Risks Relating to Our Capital Stock
The trading prices for our securities have been volatile in the past and may be volatile in the future.
The trading prices for our common stock on the Nasdaq Global Select Market Composite varied between a high of $100.44 per
share and a low of $36.04 per share in the fiscal year ended June 30, 2021. Likewise, the trading prices of our Mandatory
Convertible Preferred Stock varied between a high of $407.35 per share and a low of $174.38 per share in the fiscal year ended
June 30, 2021. The market prices of our securities could fluctuate significantly for many reasons, including the following:
•
future announcements concerning us or our competitors;
•
the overall performance of equity markets;
•
the trading volume of our securities;
•
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 any public health crisis 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;
•
the issuance of common stock or other securities (including shares of common stock issued upon conversion of any
shares of Mandatory Convertible Preferred Stock or Series B Preferred Stock or upon conversion of our outstanding
convertible notes);
•
incurrence of indebtedness;
•
quarterly variations in operating results;
•
our ability to accurately forecast future performance;
•
business acquisitions or divestitures, including developments relating to our pending acquisition of Coherent;
•
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, including 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
43
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.
We expect that the market price of our Mandatory Convertible Preferred Stock will be influenced by yield and interest rates in
the capital markets, the time remaining to the mandatory conversion date applicable to the Mandatory Convertible Preferred
Stock, 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 Bylaws (the “Bylaws”) 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 Bylaws contain provisions that could make us a less attractive target for a hostile takeover
and could make more difficult or discourage a merger proposal, a tender offer, or a proxy contest. Such provisions include:
•
a requirement that shareholder-nominated director nominees be nominated in advance of the meeting at which
directors are elected and that specific information be provided in connection with such nomination;
•
the ability of our board of directors to issue additional shares of common stock or preferred stock without shareholder
approval; and
•
certain provisions requiring supermajority approval (at least two-thirds of the votes cast by all shareholders entitled to
vote thereon, voting together as a single class).
In addition, the 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:
•
provide the other shareholders of the corporation with certain rights against the acquiring group or person;
•
prohibit the corporation from engaging in a broad range of business combinations with the acquiring group or person;
•
restrict the voting and other rights of the acquiring group or person; and
•
provide that certain profits realized by the acquiring group or person from the sale of our equity securities belong to
and are recoverable by us.
Regardless of the amount of a person’s holdings, if a shareholder or shareholder group (including affiliated persons) would be a
party to certain proposed transactions with us or would be treated differently from other shareholders of ours in certain
proposed transactions, the BCL requires approval by a majority of votes entitled to be cast by all shareholders other than the
interested shareholder or affiliate group, unless the transaction is approved by independent directors or other criteria are
satisfied. Furthermore, under the BCL, a “short-form” merger of II-VI cannot be implemented without the consent of our board
of directors.
In addition, as permitted by Pennsylvania law, an amendment to our Articles of Incorporation or other corporate action that is
approved by shareholders may provide mandatory special treatment for specified groups of nonconsenting shareholders of the
same class. For example, an amendment to our Articles of Incorporation or other corporate action may provide that shares of
common stock held by designated shareholders of record must be cashed out at a price determined by the 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 any of certain fundamental changes 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
44
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. Likewise, if any of
certain fundamental changes were to occur, we or the surviving entity would be required to make an offer to repurchase, at the
option and election of the holders thereof, for cash each share of Series B Preferred Stock then outstanding. These features of
the Mandatory Convertible Preferred Stock and Series B 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 on our common stock, 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 on our common
stock in the foreseeable future. We currently anticipate that we will retain future earnings to support operations and to finance
the development of our business. As a result, the success of an investment in our common stock will depend entirely upon
future appreciation in its value. There is no guarantee that our common stock will maintain its value or appreciate in value.
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.
Trading in preferred stock that we have issued 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 and, to the
extent that markets develop when applicable trading limitations no longer apply, our Series B 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
shareholders who view the Mandatory Convertible Preferred Stock or Series B Preferred Stock as 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
and Series B Preferred Stock; and any other preferred stock we may issue in the future. Our Mandatory Convertible
Preferred Stock and Series B Preferred Stock rank 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 and Series B 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 and Series B 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 and Series
B Preferred Stock then outstanding the applicable liquidation preferences.
45
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 and Series B Preferred Stock only after all of our consolidated liabilities have
been paid. In addition, the Mandatory Convertible Preferred Stock and Series B Preferred Stock rank 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 and Series B Preferred Stock then outstanding.
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.
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.
46
We depend on our subsidiaries for cash to fund our operations and expenses, including future dividend payments with
respect to our outstanding 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 and, to the
extent we elect to make such payments in cash, our Series B 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.
47
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
Information regarding our principal U.S. properties at June 30, 2021, is set forth below:
Location
Primary Use(s)
Primary Business Segment(s)
Approximate
Square Footage
Ownership
Sherman, TX
Manufacturing
Compound Semiconductors
700,000
Owned
Easton, PA*
Manufacturing and Research and
Development
Compound Semiconductors
281,000
Leased
Saxonburg, PA
Manufacturing and Research and
Development
Compound Semiconductors
235,000
Owned and
Leased
Warren, NJ
Manufacturing and Research and
Development
Compound Semiconductors
159,000
Leased
Newark, DE
Manufacturing and Research and
Development
Compound Semiconductors
135,000
Leased
Fremont, CA
Manufacturing and Research and
Development
Compound Semiconductors
128,000
Leased
Murrieta, CA
Manufacturing and Research and
Development
Compound Semiconductors
108,000
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, 2021, is set forth below:
Location
Primary Use(s)
Primary Business Segment(s)
Approximate
Square Footage
Ownership
China
Manufacturing, Research and
Development, and Distribution
Compound Semiconductors and
Photonic Solutions
3,138,000
Owned and
Leased
Malaysia
Manufacturing
Photonic Solutions
640,000
Owned
United Kingdom
Manufacturing, Research and
Development
Compound Semiconductors and
Photonic Solutions
319,000
Owned and
Leased
Philippines
Manufacturing
Compound Semiconductors
318,000
Leased
Vietnam
Manufacturing
Compound Semiconductors and
Photonic Solutions
211,000
Owned and
Leased
Switzerland
Manufacturing, Research and
Development, and Distribution
Compound Semiconductors
118,000
Leased
Germany
Manufacturing and Distribution
Compound Semiconductors and
Photonic Solutions
101,000
Owned and
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.
48
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the Nasdaq Global Select Market under the symbol “IIVI.” As of August 16, 2021,
there were approximately 806 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 Series A 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% 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.
Dividends on the Company’s Series B 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 5%, subject to
increase if II-VI defaults on payment obligation with respect to these shares, not to exceed 14% per annum. Until the fourth
anniversary of the issuance of the Series B Convertible Preferred Stock, dividends are payable solely in-kind. After the fourth
anniversary, dividends are payable, at the Company’s option, in cash, in-kind or as a combination of both.
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 $50 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. The Company did not
repurchase shares pursuant to this Program during the fiscal year ended June 30, 2021. During the fiscal year ended June 30,
2020, the Company purchased 50,000 shares of its common stock for $2 million under this program. As of June 30, 2021, the
Company has cumulatively purchased 1,416,587 shares of its common stock pursuant to the Program for approximately $22
million. The dollar value of shares as of June 30, 2021 that may yet be purchased under the Program is approximately $28
million.
49
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, 2016, through June 30, 2021. The Company’s current fiscal year peer group includes CMC Materials Inc.,
Coherent, Inc., Corning Incorporated, Franklin Electric Co., Inc., Lumentum Holdings Inc., MKS Instruments Inc., and Silicon
Laboratories, Inc.
50
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,
2021
2020
2019
2018
2017
($000 except per share data)
Statement of Earnings
Net revenues
$ 3,105,891 $ 2,380,071 $ 1,362,496 $ 1,158,794 $ 972,046
Net earnings (loss)
297,552
(67,029)
107,517
88,002
95,274
Basic earnings (loss) per share
2.50
(0.79)
1.69
1.41
1.52
Diluted earnings (loss) per share
2.37
(0.79)
1.63
1.35
1.48
Diluted weighted average shares outstanding
115,034
84,828
65,804
65,133
64,507
June 30,
2021
2020
2019
2018
2017
($000)
Balance Sheet
Working capital
$ 2,297,805 $ 1,116,076 $ 542,348 $ 525,370 $ 517,344
Total assets
6,512,650
5,234,714
1,953,773
1,761,661 1,477,297
Long-term debt
1,313,091
2,186,092
443,163
419,013
322,022
Total debt
1,375,141
2,255,342
466,997
439,013
342,022
Mezzanine equity
726,178
—
—
—
—
Retained earnings
1,136,777
876,552
943,581
836,064
748,062
Shareholders' equity
3,406,170
2,076,803
1,133,209
1,024,311
900,563
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations
("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.
51
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.
On July 7, 2020, the Company closed its underwritten public offering and sale of 2 million shares of Series A Mandatory
Convertible Preferred Stock, as well as its underwritten public offering and sale of approximately 11 million shares of its
common stock. See Note 11. Equity and Redeemable Preferred Stock, to our Consolidated Financial Statements contained in
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.
Pending Acquisition of Coherent, Inc.
On March 25, 2021, II-VI, Coherent, Inc. (“Coherent”) and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI
(“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger
Agreement, and subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent
will continue as the surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”).
Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the
Merger (the “Effective Time”), each share of common stock of Coherent (the “Coherent Common Stock”) issued and
outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the
right to receive the following consideration (collectively, the “Merger Consideration”): (A) $220.00 in cash, without interest
(the “Cash Consideration”), and (B) 0.91 of a validly issued, fully paid and nonassessable share of our common stock of II-VI.
Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than
Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into
time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement,
a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent
RSU multiplied by the sum of (A) 0.91, and (B) the quotient obtained by dividing the Cash Consideration by the volume
weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger
52
(the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI
Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of
Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of
achievement of such goals or metrics immediately prior to the Effective Time.
The converted Coherent RSUs generally will be subject to the same terms and conditions that applied to the awards
immediately prior to the Effective Time, provided that any Coherent RSUs subject to performance-based vesting conditions will
be subject solely to time- and service-based vesting. Each Coherent RSU that is outstanding as of the date of the Merger
Agreement and as of immediately prior to the Effective Time will be entitled to certain vesting acceleration benefits.
Each Coherent RSU granted to a non-employee member of Coherent’s Board of Directors (“Director RSUs”) (whether or not
vested) that is outstanding immediately prior to the Effective Time will automatically vest in full and be canceled and converted
into the right to receive the Merger Consideration as if such Director RSU had been settled in shares of Coherent Common
Stock immediately prior to the Effective Time.
The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with
the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be
effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger
at special meetings held on June 24, 2021 by the respective companies.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions,
including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the
satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by the end of the first
calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger
being completed at a different time or not at all.
In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant
to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21,
2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc.,
PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National
Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA)
LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively,
the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt
financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the
Commitment Letter is subject to a number of customary conditions.
In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement,
dated as of as of March 30, 2021, the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital
Private Equity, LP (the “Investor”). Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold,
and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company (“II-VI Series B-1
Convertible Preferred Stock”) for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of
$750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the
Investor also agreed that the company would issue, sell and deliver to the Investor:
•
105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company (“II-VI Series B-2 Convertible
Preferred Stock”) for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase
price of $1.1 billion, immediately prior to Closing; and
•
immediately prior to Closing, the company will receive up to an additional 35,000 shares of II-VI Series B-2
Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price,
resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million. This was agreed on June 8,
2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing
the investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.
The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating
Segment, and are presented in the Unallocated and Other within this Annual Report on Form 10-K.
53
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.
Series A Preferred Stock
As described in Note 11. Equity and Redeemable Preferred Stock, of the Notes to our Consolidated Financial Statements, on
July 7, 2020, the Company issued shares of Series A Mandatory Convertible Preferred Stock. Upon conversion, on the
mandatory conversion date, each outstanding share of Series A Mandatory Convertible Preferred Stock, unless previously
converted, will automatically convert into a number of shares of the Company’s common stock determined based on the market
value of the Company’s common stock on the mandatory conversion date, defined as July 1, 2023.
The accounting for the issuance of the Series A Mandatory Convertible Preferred Stock involved significant estimation in
approximating the future market value of the Company’s common stock on the mandatory conversion date, which was used to
determine whether the Series A Mandatory Convertible Preferred Stock should be classified within shareholders’ equity on the
consolidated balance sheet as well as the whether the Preferred Stock should be classified as a participating security.
Management estimated the future market value of its common stock on the mandatory conversion date, through development of
a Monte Carlo simulation model. A sensitivity analysis was also performed to confirm the reasonableness of the assumptions,
which included volatility and cost of equity. The Company bases its estimates and assumptions on historical experience and on
various other factors that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.
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 2021, 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 units. As of June 30, 2021,
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.
54
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 disease 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 continues to have a significant impact on global
markets due to resulting supply chain and production disruptions, workforce and travel 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.
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.
55
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 2021 Compared to Fiscal Year 2020
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,
2021 and 2020 ($ in millions except per share information):
Year Ended June 30, 2021 Year Ended June 30, 2020
% of
Revenues
% of
Revenues
Total revenues
$
3,106
100 % $
2,380
100 %
Cost of goods sold
1,890
61 %
1,561
66 %
Gross margin
1,216
39
820
34
Operating expenses:
Internal research and development
330
11
339
14
Selling, general and administrative
484
16
441
19
Interest and other, net
50
2
103
4
Earnings (Loss) before income tax
353
11
(64)
(3)
Income taxes
55
2
3
—
$
298
10 % $
(67)
(3) %
Diluted earnings (loss) per share
$
2.37
$
(0.79)
Consolidated
Revenues. Revenues for the year ended June 30, 2021 increased 30% to $3,106 million, compared to $2,380 million for the
prior fiscal year. Revenue for 2021 was a record with growth across all end markets compared to the same period last fiscal
year. Communications, our largest vertical, grew 30% compared to the same period last year. This growth was due to a full year
of Finisar revenue, strong demand across transceivers, including 200/400G products, as well as other optical communications
products. The strong demand for our 3D sensing products drove 118% growth in revenue for Consumer Electronics. Life
Sciences grew 65%, driven by demand for our filters, optics and thermo-electric coolers for COVID-19 related PCR testing and
sequencing instrumentation. Our Industrial business grew 11% compared to the same period last year, due to strong growth in
both "CO 2" and one micron laser components.
Gross margin. Gross margin for the year ended June 30, 2021 was $1,216 million, or 39%, of total revenues, compared to
$820 million, or 34% of total revenues, for the same period last fiscal year. Gross margin as a percentage of revenues increased
470 basis points compared to the prior fiscal year. Gross margin was negatively impacted in the prior year by the effects of
purchase accounting on inventory, an increased value of $87.7 million related to the fair value adjustment of the acquired
Finisar inventory.
Internal research and development. Company-funded internal research and development (“IR&D”) expenses for the fiscal
year ended June 30, 2021 were $330 million, or 11% of revenues, compared to $339 million, or 14%. of revenues, last fiscal
year. The IR&D expenses are primarily related to the Company continuing to invest in new products and processes across all its
businesses including investments in high speed datacom and telecom transceivers, high speed integrated circuits (ICs), 5G
technology, 3D sensing, indium phosphide semiconductor lasers, gallium arsenide semiconductor lasers, silicon carbide
semiconductor technology, and other emerging market trends.
56
Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2021
were $484 million, or 16% of revenues, compared to $441 million, or 19% of revenues, last fiscal year. The Company incurred
transaction and integration costs relating to the acquisitions of Finisar, Ascatron and Innovion, the pending acquisition of
Coherent, increased stock compensation due to the increased II-VI stock price, as well as the SG&A from the operations of
Ascatron and Innovion.
Interest and other, net. Interest and other, net for the year ended June 30, 2021 was expense of $50 million compared to
expense of $103 million last fiscal year, or a decrease of $53 million year over year. Interest and other, net primarily includes
$60 million for interest expense on borrowings, and $6 million of foreign currency losses. The decrease compared to prior
fiscal year is driven by lower levels of debt outstanding, due to the Term Loan B being repaid with funds from the July 2020
equity raise, as well as gains of $7 million and $11 million recognized in relation to the Innovion acquisition and the Preferred
Series B forward sale agreement, respectively. These gains were offset by $25 million of debt issuance costs recognized in
conjunction with the repayment of the Company's Term Loan B Facility in fiscal 2021.
There were foreign currency losses of $6 million for the year ended June 30, 2021 due to the volatility in the foreign exchange
market, compared to $8 million of losses for the year ended June 30,2020.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2021 was 16%, compared to an effective tax
rate of (5)% last fiscal year. The current fiscal year’s effective tax rate was lower than statutory rates because of favorable
research and development incentives in certain jurisdictions and stock option exercise benefits from the strong II-VI stock
price.
Segment Reporting
Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from
income from operations in that operating income excludes certain expenses included in interest and other (net), as reported.
Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance
over which management has direct control and is used by management in its evaluation of segment performance. See Note 15.
Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating
income to net earnings, which is incorporated herein by reference.
Photonic Solutions ($ in millions)
Year Ended
June 30,
%
Increase/(Decrease)
2021
2020
Revenues
$
2,038 $
1,537
33 %
Operating income
$
208 $
50
316 %
The above operating results for the year ended June 30, 2021 include the Company’s acquisition of Finisar in September 2019.
Revenues for the year ended June 30, 2021 for Photonic Solutions increased 33% to $2,038 million, compared to $1,537
million for last fiscal year. The largest driver of the increase is the inclusion of four full fiscal quarters of revenue from Finisar
compared to 6 days and three quarters of revenue in the prior year. Our transceiver business grew across all product lines
including the 200G and 400G modules.
Operating income for the year ended June 30, 2021 for Photonic Solutions increased 316% to $208 million, compared to an
operating income of $50 million last fiscal year. The drivers of the increased operating income were higher sales volume, and
improved operating performance and the absence of costs related to purchase accounting that were present in fiscal year 2020.
57
Year Ended
June 30,
%
Increase/(Decrease)
2021
2020
Revenues
$
1,068 $
821
30 %
Operating income
$
221 $
62
255 %
The above operating results for the year ended June 30, 2021 include the Company’s acquisition of Finisar in September 2019.
Revenues for the fiscal year ended June 30, 2021 for Compound Semiconductors increased 30% to $1,068 million, compared to
revenues of $821 million last fiscal year. The increase in revenues during the current fiscal year was primarily driven by over a
100% increase in VCSEL product shipments addressing the 3D sensing consumer market, and increased revenues to customers
in all of our other markets with significant growth in our Life Sciences business.
Operating income for the fiscal year ended June 30, 2021 for Compound Semiconductors increased 255% to $221 million,
compared to operating income of $62 million last fiscal year. The increase in operating income during the current fiscal year
was primarily driven by product mix and improved absorption of operating costs due to higher volumes and shipping 3D
sensing products. In addition, the expenses associated with the fair value inventory write-up and other related acquisition
expenses for Finisar did not repeat in the current year.
Fiscal Year 2020 Compared to Fiscal Year 2019
The Company aligned its organizational structure into the following two reporting segments for the purpose of making
operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The
Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report
on Form 10-K.
The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 2020 and
2019 ($ in millions except per share information):
Year Ended
June 30, 2020
Year Ended
June 30, 2019
% of
Revenues
% of
Revenues
Total revenues
$
2,380
100 % $
1,362
100 %
Cost of goods sold
1,561
66
841
62
Gross margin
820
34
521
38
Operating expenses:
Internal research and development
339
14
139
10
Selling, general and administrative
441
19
234
17
Interest and other, net
103
4
20
1
Earnings before income tax
(64)
(3)
129
9
Income taxes
3
—
21
2
Net earnings
$
(67)
(3) % $
108
8 %
Diluted earnings per share
$
(0.79)
$
1.63
Compound Semiconductors ($ in millions)
58
Consolidated
Revenues. Revenues for the year ended June 30, 2020 increased 75% to $2,380 million, compared to $1,362 million for fiscal
year 2019. The increase in revenues was primarily attributed to the acquisition of Finisar, which contributed $938 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 fiscal year 2020, 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 $820 million, or 34%, of total revenues, compared to $521
million, or 38% of total revenues, for the same period fiscal year 2019. Gross margin as a percentage of revenues decreased 380
basis points compared to fiscal year 2019 despite the 75% increase in revenues during this same fiscal year. Gross margin was
negatively impacted by additional cost of goods sold of $88 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.
Internal research and development. Company-funded IR&D expenses for the fiscal year ended June 30, 2020 were $339
million, or 14% of revenues, compared to $139 million, or 10% of revenues, fiscal year 2019. The increase in IR&D expenses
was 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. SG&A expenses for the year ended June 30, 2020 were $441 million, or 19% of
revenues, compared to $234 million, or 17% of revenues, fiscal year 2019. 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 million compared to
expense of $20 million fiscal year 2019. Interest and other, net primarily includes $89 million for interest expense on
borrowings, $14 million of foreign currency losses, and $3 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 million of debt extinguishment costs during fiscal year 2020 and recorded a $5 million
impairment charge for an unconsolidated investment as its carrying value was determined to be unrecoverable.
Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2020 was a (5)% benefit, compared to an
effective tax rate of 17% fiscal year 2019. Fiscal year 2020’s effective tax rate was negatively impacted by the U.S. enacted tax
legislation related to GILTI partially offset by research and development incentives in certain jurisdictions.
Photonic Solutions ($ in millions)
Year Ended
June 30,
%
Increase
2020
2019
Revenues
$
1,537 $
639
141 %
Operating income
$
50 $
82
(39) %
The above operating results for the year ended June 30, 2020 include the Company’s acquisitions of Finisar in September 2019.
Revenues for the year ended June 30, 2020 for Photonic Solutions increased 141% to $1,537 million, compared to $639 million
for fiscal year 2019. Included in revenue for fiscal year 2020 was $904 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 $50 million, compared to an
operating income of $82 million for fiscal year 2019. The decrease in operating income was primarily due to acquisition related
expenses related to amortization expense on acquired intangible assets and the expensing of acquired inventory fair value step-
up partially offset by incremental margin realized on increased revenues during the year.
59
Compound Semiconductors ($ in millions)
Year Ended
June 30,
%
Increase
2020
2019
Revenues
$
821 $
724
13 %
Operating income
$
62 $
82
(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 million, compared to
revenues of $724 million for fiscal year 2019. The increase in revenues during fiscal year 2020 was primarily driven by
increased VCSEL product shipments addressing the 3D Sensing consumer 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 million,
compared to operating income of $82 million for fiscal year 2019. The decrease in operating income during fiscal year 2020
was primarily driven by the acquisition of Finisar, which includes unabsorbed operating costs incurred at the segment's
Sherman, Texas wafer 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.
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,
2021
2020
2019
Net cash provided by operating activities
$
574 $
297 $
179
Net proceeds from equity issuance
1,611
—
—
Proceeds from exercises of stock options
32
14
9
Proceeds on new long-term borrowings
—
2,121
—
Proceeds from prior credit facility and other borrowings
—
10
150
Payments on Finisar Notes
—
(560)
—
Payments under prior term loan and credit facility
—
(177)
(135)
Debt issuance costs
—
(64)
(6)
Common stock repurchases
—
(2)
(2)
Payments under new long-term borrowings and credit facility
(926)
(138)
—
Additions to property, plant & equipment
(146)
(137)
(137)
Purchases of businesses, net of cash acquired
(34)
(1,037)
(83)
Payment of dividends
(20)
—
—
Payments in satisfaction of employees' minimum tax obligations
(20)
(29)
(7)
Other investing and financing
5
—
—
Effect of exchange rate changes on cash and cash equivalents and other items
22
(12)
(10)
60
Net cash provided by operating activities:
Net cash provided by operating activities was $574 million during the current fiscal year ended June 30, 2021 compared to
$297 million of cash provided by operating activities during the same period last fiscal year. The increase in cash flows
provided by operating activities during the year ended June 30, 2021 compared to the same period last fiscal year was primarily
driven by additional net earnings of $277 million in the year ended June 30, 2021 compared to the same period last fiscal year.
Net cash provided by operating activities was $297 million and $179 million for the fiscal years ended June 30, 2020 and 2019,
respectively. The increase in cash flows provided by operating activities during fiscal year ended June 30, 2020 compared to
fiscal year ended June 30, 2019 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 used in investing activities:
Net cash used in investing activities was $173 million for the fiscal year ended June 30, 2021, compared to net cash used of
$1,179 million for the same period last fiscal year. Net cash used in investing activities during the current period primarily
included $34 million for net cash paid for the acquisitions of Ascatron AB and INNOViON Corporation and $146 million of
capital expenditures to continue to increase capacity to meet the growing demand for the Company’s product portfolio.
Net cash used in investing activities was $1,179 million and $224 million for the fiscal years ended June 30, 2020 and 2019,
respectively. Net cash used in investing activities during the fiscal year ended June 30, 2020 primarily included $1,037 million
for net cash paid for the acquisition of Finisar, and $137 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 provided by financing activities:
Net cash provided by financing activities was $676 million for the fiscal year ended June 30, 2021, compared to net cash
provided by financing activities of $1,174 million for the same period last fiscal year. Net cash provided by financing activities
was primarily impacted by $1,611 million of net proceeds from the Company's underwritten public offering in July 2020 as
well as the issuance of the Series B Preferred Stock in March 2021, offset by cash used to repay borrowings of $926 million.
Net cash provided by financing activities was $1,174 million for the year ended June 30, 2020 compared to net cash provided
by financing activities of $5 million for the year ended June 30, 2019. Net cash provided by financing activities during the
fiscal year ended June 30, 2020 included net borrowings on long-term debt of $1,256 million primarily to fund the acquisition
of Finisar, and $14 million of cash received from exercises of stock options. Net cash provided by financing activities was
offset by $64 million of debt issuance costs associated with the increased borrowings, $29 million of cash payments in
satisfaction of employees’ minimum tax obligations from the vesting of equity awards and a $2 million payment to repurchase
common stock through the Company's share repurchase program.
Senior Credit Facilities
The Company currently has Senior Credit Facilities 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 governing the Senior Credit Facilities (the "Credit Agreement") provides for senior secured financing of
$2.4 billion in the aggregate, consisting of
(i)
Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan
facility (the “Term A Facility”),
(ii)
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”), which was
repaid in full during the quarter ended September 30, 2020, and
61
(iii)
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 million and a swing loan sub-facility
initially not to exceed $20 million.
The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. In
conjunction with the repayment, the Company paid $1 million in associated interest and expensed $25 million of debt issuance
costs related to the Term B Facility.
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 September 24, 2019 (the "Finisar 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 (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 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.
Amounts outstanding under the Senior Credit Facilities 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 to 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 Finisar Closing Date,
commencing with the first full fiscal quarter after the Finisar Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through
and including the eighth fiscal quarter after the Finisar Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As
of June 30, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.
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
62
common stock, is changed to a right to convert Finisar Notes into cash and shares of the Company’s common stock, subject to
the terms of the Finisar Indenture.
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, which was $58 million as of June 30, 2021. 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 II-VI 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 $532 million as of
June 30, 2021 and $346 million as of June 30, 2020 (based on the Company’s closing stock price on the last trading day of the
fiscal periods then ended).
Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only under
the following circumstances:
(i) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2017 (and only during such
fiscal quarter), if the last reported sale price of the II-VI Common Stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the
immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable
trading day;
(ii) during the five business day period immediately after any five consecutive trading day period (the “measurement
period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement
period was less than 98% of the product of the last reported sale price of the II-VI Common Stock and the conversion
rate on each such trading day; or
(iii) upon the occurrence of certain specified corporate events.
On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may
convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver,
as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the
Company’s election.
Because the last reported sale price of II-VI Common Stock for at least 20 trading days during the period of 30 consecutive
trading days ending on the last trading day of the calendar quarter ended June 30, 2021 was equal to or greater than 130% of the
applicable conversion price on each applicable trading day, the II-VI Notes are convertible at the option of the holders thereof
during the fiscal quarter ending September 30, 2021.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination
of cash and shares of II-VI Common Stock, at the Company’s election.
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. II-VI Notes were convertible during the quarters ended March 31, and June 30, 2021; conversions were immaterial.
63
The following table sets forth total interest expense recognized related to the II-VI Notes for the years ended June 30, 2021,
2020 and 2019 ($000):
Year Ended
June 30, 2021
Year Ended
June 30, 2020
Year Ended
June 30, 2019
0.25% contractual coupon
$
874 $
876 $
874
Amortization of debt discount and debt issuance costs including initial
purchaser discount
13,748
13,172
12,550
Interest expense
$
14,622 $
14,048 $
13,424
The effective interest rate on the liability component for the periods presented was 5%. The unamortized discount amounted to
$15 million as of June 30, 2021, and is being amortized over the remaining life of the notes
Aggregate Availability
The Company had aggregate availability of $449 million under its Revolving Credit Facility as of June 30, 2021.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1% and 3% for the years ended June 30, 2021 and 2020,
respectively.
Share Repurchase Programs
In August 2017, in conjunction with the Company’s offering and sale of the II-VI Notes, the Company was authorized 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 $50 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. The Company did not
repurchase shares pursuant to this Program during the fiscal year ended June 30, 2021. During the fiscal year ended June 30,
2020, the Company purchased 50,000 shares of its common stock for $2 million under this program. As of June 30, 2021, the
Company has cumulatively purchased 1,416,587 shares of its common stock pursuant to the Program for approximately $22
million. The dollar value of shares as of June 30, 2021 that may yet be purchased under the Program is approximately $28
million.
Our cash position, borrowing capacity and debt obligations are as follows (in millions):
June 30, 2021
June 30, 2020
Cash and cash equivalents
$
1,592 $
493
Available borrowing capacity
449
375
Total debt obligations
1,375
2,255
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 2022.
64
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, 2021, the Company held approximately $406 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.
65
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
Payments Due By Period
Less Than 1
1-3
3-5
More Than 5
Contractual Obligations
Total
Year
Years
Years
Years
($000)
Long-term debt obligations
$
1,417,270 $
62,050 $
469,069 $
871,263 $
14,888
Interest payments (1)
53,255
16,577
30,415
6,263
—
Operating lease obligations, including imputed
interest
193,027
34,076
58,397
41,964
58,590
Finance lease obligations, including imputed
interest
29,780
2,486
5,178
5,468
16,648
Purchase and sponsorship obligations (2)
386,980
351,525
32,685
1,231
1,539
Total
$
2,080,312 $
466,714 $
595,744 $
926,189 $
91,665
(1)
Interest payments represent both variable and fixed rate interest obligations based on the interest rates in
effect at June 30, 2021 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.
(2)
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.
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 17 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, 2021 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.
66
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 Chinese Renminbi, Swiss Franc,
Malaysian Ringgit and the Japanese Yen. No significant changes have occurred in the techniques and instruments used.
Interest Rate Risk
As of June 30, 2021, 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. However in March of 2020,
the Federal Reserve lowered the interest rates, putting our hedge in a negative position. With the hedge in place, a change in the
interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $12
million for the year ended June 30, 2021.
67
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, 2021. 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 Ascatron, which was acquired in August 2020, and Innovion, which was acquired in October 2020. The recent
acquisitions excluded from management’s assessment of internal controls over financial reporting represented approximately
$141.4 million and $117.4 million of total assets and net assets, respectively, as of June 30, 2021 and approximately
$22.4 million and $2.5 million of total revenues and net loss, respectively, for the fiscal year then ended. Based on the
evaluation, management concluded that as of June 30, 2021, 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, 2021. Its report is included herein.
68
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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended
June 30, 2021, 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, 2021, 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 20, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Accounting for Series A Mandatory Convertible Preferred Stock
Description of the
Matter
As described in Note 11 to the consolidated financial statements, on July 7, 2020, the Company
issued shares of Series A Mandatory Convertible Preferred Stock. Upon conversion, on the
mandatory conversion date, each outstanding share of Series A Mandatory Convertible Preferred
Stock, unless previously converted, will automatically convert into a number of shares of the
Company’s common stock determined based on the market value of the Company’s common stock
on the mandatory conversion date.
Auditing the Company’s accounting for the Series A Mandatory Convertible Preferred Stock was
complex due to the significant estimation uncertainty involved in estimating the future market value
of the Company’s common stock on the mandatory conversion date, which was used to determine
whether the Series A Mandatory Convertible Preferred Stock should be classified within
shareholders’ equity on the consolidated balance sheet as well as the related impact to the
Company’s earnings per share. The Company used a Monte Carlo simulation model to estimate the
future market value of its common stock on the mandatory conversion date, which considers inputs
such as volatility and cost of equity, which are forward-looking and could be affected by future
economic and market conditions.
69
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of
controls relating to management’s accounting for the Series A Mandatory Convertible Preferred
Stock. For example, we tested controls that address the risks of material misstatement relating to the
estimation of the future market value of the Company’s common stock on the mandatory conversion
date, including management’s review of the estimation methodology and significant inputs.
To test the Company’s accounting for the Series A Mandatory Convertible Preferred Stock, our audit
procedures included, among others, reading the relevant agreements and the Company’s accounting
analysis and evaluating the Company’s conclusions as compared to the relevant accounting
guidance. To test the estimated future market value of the Company’s common stock, our audit
procedures included, among others, assessing the appropriateness of the estimation methodology
used and evaluating the significant inputs. We compared the forecasted volatility of the Company’s
common stock price to its historical volatility and compared the cost of equity to prior valuations
performed by the Company. We also performed sensitivity analyses to evaluate the changes in the
estimated future market value of the Company’s common stock that would result from changes in the
significant inputs. We involved our valuation specialist to assist in evaluating the methodology used,
to test certain significant inputs and to perform comparative calculations.
Accounting for Series B Convertible Preferred Stock
Description of the
Matter
As described in Notes 3, 11 and 16 to the consolidated financial statements, the Company entered
into an investment agreement, dated March 25, 2021, and amended and restated as of March 30,
2021, pursuant to which: (1) on March 31, 2021, the Company issued shares of Series B-1
Convertible Preferred Stock; and (2) the Company agreed to issue, immediately prior to the closing
of the Company’s acquisition of Coherent, Inc., additional shares of Series B-2 Convertible Preferred
Stock. The Series B-1 and B-2 Convertible Preferred Stock are contingently redeemable at the option
of the holder on or after the tenth anniversary of the issuance or upon a certain change in control.
The Company has concluded that (1) the obligation to issue the shares of Series B-1 Convertible
Preferred Stock was required to be measured at fair value as an asset or liability with changes in fair
value recognized in earnings; and (2) the obligation to issue the shares of Series B-2 Convertible
Preferred Stock is an embedded feature that does not require bifurcation for separate accounting.
Auditing the Company’s accounting for the obligations to issue shares of Series B-1 and B-2
Convertible Preferred Stock was complex due to the significant judgments made by management in
determining whether each obligation should be classified and measured as an asset or liability on the
consolidated balance sheet or comprises an embedded feature requiring bifurcation and separate
accounting.
How We Addressed
the Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of
controls relating to management’s accounting for the Series B Convertible Preferred Stock, including
management’s review of the relevant agreements and evaluation of the accounting guidance.
To test the Company’s accounting for the obligations to issue shares of Series B-1 and B-2
Convertible Preferred Stock, our audit procedures included, among others, reading the relevant
agreements and the Company’s accounting analysis, assessing the pertinent provisions of the Series
B-1 and B-2 Convertible Preferred Stock, and evaluating the Company’s conclusions as compared to
the relevant accounting guidance.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Pittsburgh, Pennsylvania
August 20, 2021
70
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, 2021, 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, 2021, 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 Ascatron AB (“Ascatron”) and INNOViON Corporation (“Innovion”), which are included in the June 30, 2021
consolidated financial statements of the Company and constituted $141.4 million and $117.4 million of total and net assets,
respectively, as of June 30, 2021 and $22.4 million and $2.5 million of revenues and net loss, respectively, for the fiscal year
then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the
internal control over financial reporting of Ascatron and Innovion.
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, 2021 and 2020, 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, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our
report dated August 20, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
71
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
August 20, 2021
72
II-VI Incorporated and Subsidiaries
Consolidated Balance Sheets
($000)
June 30,
2021
2020
Assets
Current Assets
Cash and cash equivalents
$
1,591,892 $
493,046
Accounts receivable - less allowance for doubtful accounts of $924 at June 30, 2021 and $1,698 at
June 30, 2020
658,962
598,124
Inventories
695,828
619,810
Prepaid and refundable income taxes
13,095
12,279
Prepaid and other current assets
67,617
65,710
Total Current Assets
3,027,394
1,788,969
Property, plant & equipment, net
1,242,906
1,214,772
Goodwill
1,296,727
1,239,009
Other intangible assets, net
718,460
758,368
Deferred income taxes
33,498
22,938
Other assets
193,665
210,658
Total Assets
$
6,512,650 $
5,234,714
Liabilities. Mezzanine Equity and Shareholders' Equity
Current Liabilities
Current portion of long-term debt
$
62,050 $
69,250
Accounts payable
294,486
268,773
Accrued compensation and benefits
181,491
157,557
Operating lease current liabilities
25,358
24,634
Accrued income taxes payable
20,295
33,341
Other accrued liabilities
145,909
119,338
Total Current Liabilities
729,589
672,893
Long-term debt
1,313,091
2,186,092
Deferred income taxes
73,962
45,551
Operating lease liabilities
125,541
94,701
Other liabilities
138,119
158,674
Total Liabilities
2,380,302
3,157,911
Mezzanine Equity
Series B redeemable convertible preferred stock, no par value, 5% cumulative; authorized - 215,000
shares; issued - 75,000 shares at June 30, 2021, redemption value - $759,583
726,178
—
Shareholders' Equity
Series A preferred stock, no par value, 6% cumulative; authorized - 5,000,000 shares; issued - 2,300,000
shares at June 30, 2021
445,319
—
Common stock, no par value; authorized - 300,000,000 shares; issued - 119,126,585 shares at June 30, 2021;
issued - 105,916,068 shares at June 30, 2020
2,028,273
1,486,947
Accumulated other comprehensive income (loss)
14,267
(87,383)
Retained earnings
1,136,777
876,552
3,624,636
2,276,116
Treasury stock, at cost - 13,640,555 shares at June 30, 2021 and 13,356,447 shares at June 30, 2020
(218,466)
(199,313)
Total Shareholders' Equity
3,406,170
2,076,803
Total Liabilities, Mezzanine Equity and Shareholders' Equity
$
6,512,650 $
5,234,714
See Notes to Consolidated Financial Statements.
73
II-VI Incorporated and Subsidiaries
Consolidated Statements of Earnings (Loss)
Year Ended June 30,
2021
2020
2019
($000, except per share data)
Revenues
$
3,105,891 $
2,380,071 $
1,362,496
Costs, Expenses and Other Expense (Income)
Cost of goods sold
1,889,678
1,560,521
841,147
Internal research and development
330,105
339,073
139,163
Selling, general and administrative
483,989
440,998
233,518
Interest expense
59,899
89,409
22,417
Other expense (income), net
(10,370)
13,998
(2,562)
Total Costs, Expenses and Other Expense (Income)
2,753,301
2,443,999
1,233,683
Earnings (Loss) Before Income Taxes
352,590
(63,928)
128,813
Income Tax Expense
55,038
3,101
21,296
Net Earnings (Loss)
$
297,552 $
(67,029) $
107,517
Less: Dividends on Preferred Stock
$
37,231 $
— $
—
Net Earnings (Loss) available to the Common Shareholder
$
260,321 $
(67,029) $
107,517
Basic Earnings (Loss) Per Share
$
2.50 $
(0.79) $
1.69
Diluted Earnings (Loss) Per Share
$
2.37 $
(0.79) $
1.63
See Notes to Consolidated Financial Statements.
74
II-VI Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Year Ended June 30,
2021
2020
2019
($000)
Net earnings (loss)
$
297,552 $
(67,029) $
107,517
Other comprehensive income (loss):
Foreign currency translation adjustments
86,991
(15,969)
(14,319)
Change in fair value of interest rate swap, net of taxes of $3,372 and $0 for
the years ended June 30, 2021 and 2020, respectively
12,312
(44,085)
—
Pension adjustment, net of taxes of $576, ($851) and ($1,642) for the years
ended June 30, 2021, 2020, and 2019, respectively
2,347
(3,108)
(6,122)
Other comprehensive income (loss)
101,650
(63,162)
(20,441)
Comprehensive income (loss)
$
399,202 $
(130,191) $
87,076
See Notes to Consolidated Financial Statements.
75
II-VI Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Accumulated
Other
Common Stock
Preferred Stock
Comprehensive
Retained
Treasury Stock
Mezzanine Equity
Shares
Amount
Shares
Amount
Income (Loss)
Earnings
Shares
Amount
Total
Preferred
Shares
Amount
(000, including share
amounts)
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
—
—
—
—
(158)
(7,224)
23,438
—
—
Net earnings
—
—
—
—
—
107,517
—
—
107,517
—
—
Purchases of treasury
stock
—
—
—
—
—
—
(50)
(1,616)
(1,616)
—
—
Foreign currency
translation adjustments
—
—
—
—
(14,319)
—
—
—
(14,319)
—
—
Pension adjustment, net
of taxes of ($1,642)
—
—
—
—
(6,122)
—
—
—
(6,122)
—
—
Balance - June 30,
76,315 $ 382,423
—
— $
(24,221) $ 943,581
(12,604) $ (168,574)
$ 1,133,209
— $
—
Share-based and
deferred compensation
2,888
116,817
—
—
—
—
(702)
(29,114)
87,703
—
—
Purchases of treasury
stock
—
—
—
—
—
—
(50)
(1,625)
(1,625)
—
—
Shares issued related to
Finisar acquisition
26,713
987,707
—
—
—
—
—
—
987,707
—
—
Net loss
—
—
—
—
—
(67,029)
—
—
(67,029)
—
—
Foreign currency
translation adjustments
—
—
—
—
(15,969)
—
—
—
(15,969)
—
—
Change in fair value of
interest rate swap
—
—
—
—
(44,085)
—
—
—
(44,085)
—
—
Balance - Balance -
Pension adjustment, net
of taxes of ($851)
— $
—
—
—
(3,108)
—
—
—
(3,108)
—
—
Balance - June 30,
105,916 $ 1,486,947
—
— $
(87,383) $ 876,552
(13,356) $ (199,313)
$ 2,076,803
— $
—
Share-based and
deferred compensation
activities
2,512
102,737
—
—
—
—
(284)
(19,153)
83,584
—
—
Shares issued in
underwritten public
offering
10,698
438,589
2,300
445,319
—
—
—
—
883,908
—
—
Net earnings
—
—
—
—
—
297,552
—
—
297,552
—
—
Series B shares issued
in March 2021
—
—
—
—
—
—
—
—
—
75
716,087
Accretion to
redemption value of
Series B shares issued
in March 2021
—
—
—
—
—
(508)
—
—
(508)
—
508
Foreign currency
translation adjustments
—
—
—
—
86,991
—
—
—
86,991
—
—
Change in fair value of
interest rate swap, net
of taxes of $3,372
—
—
—
—
12,312
—
—
—
12,312
—
—
Pension adjustment, net
of taxes of $576
—
—
—
—
2,347
—
—
—
2,347
—
—
Dividends
—
—
—
—
—
(36,819)
—
—
(36,819)
—
9,583
Balance - June 30,
2021
119,127
2,028,273
2,300
445,319
14,267
1,136,777
(13,640)
(218,466)
3,406,170
75
726,178
See Notes to Consolidated Financial Statements.
76
II-VI Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
2021
2020
2019
($000)
Cash Flows from Operating Activities
Net earnings (loss)
$
297,552
$
(67,029) $
107,517
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation
187,803
156,690
75,745
Amortization
82,266
64,192
16,620
Share-based compensation expense
70,953
68,480
21,946
Amortization of discount on convertible debt and debt issuance costs
20,732
22,150
12,550
Debt extinguishment expense
24,747
3,960
—
Losses (gains) on disposals of property, plant and equipment
2,537
(1,461)
—
Losses on foreign currency remeasurements and transactions
5,545
14,442
3,155
Earnings from equity investments
(14,246)
(2,775)
(3,214)
Deferred income taxes
(371)
(42,454)
(10,462)
Impairment of investment
—
4,980
—
Increase (decrease) in cash from changes in (net of effects of acquisitions):
Accounts receivable
(51,697)
(91,981)
(50,764)
Inventories
(44,645)
112,572
(36,392)
Accounts payable
2,266
45,026
15,999
Income taxes
(18,086)
40,061
366
Accrued compensation and benefits
23,934
—
—
Other operating net assets (liabilities)
(14,937)
(29,561)
25,409
Net cash provided by operating activities
574,353
297,292
178,475
Cash Flows from Investing Activities
Additions to property, plant & equipment
(146,337)
(136,877)
(137,122)
Purchases of businesses, net of cash acquired
(34,394)
(1,036,609)
(83,067)
Other investing activities
7,774
(5,804)
(3,787)
Net cash used in investing activities
(172,957)
(1,179,290)
(223,976)
Cash Flows from Financing Activities
Proceeds from issuance of common shares
460,000
—
—
Proceeds from issuance of Series A preferred shares
460,000
—
—
Proceeds from issuance of Series B preferred shares
750,000
—
—
Proceeds from borrowings of Term A Facility
—
1,241,000
—
Proceeds from borrowings of Term B Facility
—
720,000
—
Proceeds from borrowings of Revolving Credit Facility
—
160,000
—
Proceeds from borrowings under prior Credit Facility
—
10,000
150,000
Payment of Finisar Notes
—
(560,112)
—
Payments on borrowings under prior Term Loan, Credit Facility, and other loans
—
(176,618)
(135,000)
Payments on borrowings under Term A Facility
(137,050)
(46,538)
—
Payments on borrowings under Term B Facility
(714,600)
(5,400)
—
Payments on borrowings under Revolving Credit Facility
(74,000)
(86,000)
—
Debt issuance costs
—
(63,510)
(5,589)
Equity issuance costs
(58,596)
—
—
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan
32,360
13,467
8,698
Common stock repurchases
—
(1,625)
(1,616)
Payments in satisfaction of employees' minimum tax obligations
(19,701)
(28,700)
(7,092)
Payment of dividends
(20,319)
—
—
Other financing activities
(2,367)
(2,339)
(4,524)
Net cash provided by financing activities
675,727
1,173,625
4,877
Effect of exchange rate changes on cash and cash equivalents
21,723
(3,453)
(1,542)
Net increase (decrease) in cash and cash equivalents
1,098,846
288,174
(42,166)
Cash and Cash Equivalents at Beginning of Period
493,046
204,872
247,038
Cash and Cash Equivalents at End of Period
$
1,591,892
$
493,046 $
204,872
Non cash transactions:
Additions to property, plant & equipment included in accounts payable
$
32,028
$
21,801 $
10,986
See Notes to Consolidated Financial Statements.
77
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. The Company is 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 II-VI operates. At the onset of the COVID-19 outbreak, the Company began focusing intensely on mitigating the
adverse impacts of COVID-19 on foreign and domestic operations starting by protecting its 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.
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.
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
78
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 Accounting Standards Codification 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 Note 13 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 August 20, 2020, the Company acquired all of the outstanding shares of Ascatron AB ("Ascatron"), located in Sweden and
on October 1, 2020, the Company acquired the remaining 6.1% interest in INNOViON Corporation ("Innovion"). Refer to
Note 4 Acquisitions for further information regarding the Innovion and Ascatron acquisitions.
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 2021 and 2020, 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.
79
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 or 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.
Series A Mandatory Convertible Preferred Stock. The II-VI Series A Mandatory Convertible Preferred Stock is initially
measured at fair value, less underwriting discounts and commissions and offering expenses paid by the Company. The Preferred
Stock’s dividends are cumulative, at 6% per annum.
Series B Convertible Preferred Stock. The II-VI Series B-1 Convertible Preferred Stock is initially measured at fair value less
issuance costs, accreted to its redemption value over a ten-year period (using the effective interest method) with such accretion
accounted for as deemed dividends and reductions to Net Earnings Available to the Common Shareholder.
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, 2021 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 to the
80
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.
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, services, 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 or services, 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.
The Company believes that disaggregating revenue by end market provides the most relevant information regarding the nature,
amount, timing, and uncertainty of revenues and cash flows. See Note 5. Revenue from Contracts with Customers.
Research and Development. Research and development expenses include salaries, contractor and consultant fees, supplies and
materials, as well as costs related to other overhead such as depreciation, facilities, utilities and other departmental expenses.
The costs we incur with respect to internally developed technology, including allocations of our wafer fabrication and other
manufacturing facilities and resources utilized to support R&D programs, are included in research and development expenses 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,
net of forfeitures. The estimated annualized forfeitures are based on the Company’s historical experience of 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.
Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (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 income (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.
81
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.
Note 2.
Recently Issued Financial Accounting Standards
Financial Instruments - Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13,
Financial Instruments - Credit Losses (Topic 326), which modifies the measurement of expected credit losses on certain types
of financial instruments, including trade receivables. The Company adopted this standard on July 1, 2020. The adoption did not
have a material impact on the Company's consolidated financial statements.
Pronouncements Currently Under Evaluation
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). The update simplifies the
accounting for convertible instruments by eliminating two accounting models (i.e., the cash conversion model and beneficial
conversion feature model) and reducing the number of embedded conversion features that could be recognized separately from
the host contract. ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings
per share guidance. ASC 2020-06 is effective for annual reporting periods beginning after December 15, 2021, including
interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December
15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. We plan
to adopt this ASU as of July 1, 2021. We estimate the impact of adopting ASU 2020-06 will result in an increase in net debt of
$15 million, a decrease in the deferred tax liability of $3 million, a decrease in common stock of $56 million, and an increase in
retained earnings of $45 million. The adoption will result in a decrease of interest expense of approximately $12 million in
fiscal year 2022.
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. Pending Coherent Acquisition
On March 25, 2021, II-VI, Coherent, Inc., and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“Merger Sub”),
entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and
subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the
surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”).
Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the
Merger (the “Effective Time”), each share of common stock of Coherent, par value $0.01 per share (the “Coherent Common
Stock”), issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically
converted into the right to receive the following consideration (collectively, the “Merger Consideration”):
(A) $220.00 in cash, without interest (the “Cash Consideration”), and
(B) 0.91 of a validly issued, fully paid and nonassessable share of common stock of II-VI, no par value per share (“II-
VI Common Stock”)
Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than
Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into
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time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement,
a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent
RSU multiplied by the sum of (A) 0.91, and (B) the quotient obtained by dividing the Cash Consideration by the volume
weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger
(the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI
Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of
Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of
achievement of such goals or metrics immediately prior to the Effective Time.
The converted Coherent RSUs generally will be subject to the same terms and conditions that applied to the awards
immediately prior to the Effective Time, provided that any Coherent RSUs subject to performance-based vesting conditions will
be subject solely to time- and service-based vesting. Each Coherent RSU that is outstanding as of the date of the Merger
Agreement and as of immediately prior to the Effective Time will be entitled to the following vesting acceleration benefits:
(A) for any holder of Coherent RSUs who is a participant under Coherent’s Change of Control and Leadership Change
Severance Plan (the “CIC Plan”), the acceleration benefits under the CIC Plan upon such participant’s involuntary
termination of employment in accordance with the terms and conditions set forth therein; and
(B) for any holder who is not a participant in the CIC Plan, the following vesting acceleration benefits upon his or her
termination of employment by Coherent, II-VI, or their respective subsidiaries without “cause” within the period
beginning immediately following the date of the Closing and ending on the date that is 12 months following the date
of the Closing (or, if earlier, December 31, 2022) (a “Qualifying Termination”), (1) if such holder’s Qualifying
Termination occurs during calendar year 2021, the sum of: (x) 100% of the total number of converted Coherent RSUs
that otherwise would have vested during calendar year 2021 under the applicable vesting schedule in effect on the
Closing had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last
applicable vesting date for such award in calendar year 2021 (and reduced by the total number of converted Coherent
RSUs that vested in calendar year 2021 prior to such Qualifying Termination) plus (y) 50% of the total number of
converted Coherent RSUs that otherwise would have vested during calendar year 2022 under the applicable vesting
schedule in effect on the Closing had such holder remained employed with Coherent, II-VI, or their respective
subsidiaries through the last applicable vesting date for such award in calendar year 2022, or (2) if such holder’s
Qualifying Termination occurs during calendar year 2022, 50% of the total number of converted Coherent RSUs that
otherwise would have vested during calendar year 2022 under the applicable vesting schedule in effect on the Closing
had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last applicable
vesting date for such award in calendar year 2022 (and reduced by the total number of converted Coherent RSUs that
vested in calendar year 2022 prior to such Qualifying Termination).
Each Coherent RSU granted to a non-employee member of Coherent’s Board of Directors (“Director RSUs”) (whether or not
vested) that is outstanding immediately prior to the Effective Time will automatically vest in full and be canceled and converted
into the right to receive the Merger Consideration as if such Director RSU had been settled in shares of Coherent Common
Stock immediately prior to the Effective Time.
The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with
the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be
effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger
at special meetings held on June 24, 2021 by the respective companies.
The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions,
including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the
satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by year-end 2021 or at
the beginning of the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies
could result in the Merger being completed at a different time or not at all.
In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant
to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21,
2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc.,
PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National
Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA)
LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively,
the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt
83
financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the
Commitment Letter is subject to a number of customary conditions.
In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement,
dated as of March 30, 2021, (the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital
Private Equity, LP (the “Investor”). Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold,
and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company, no par value per
share (“II-VI Series B-1 Convertible Preferred Stock”), for $10,000 per share (the “Equity Per Share Price”), resulting in an
aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other
things, the Company and the Investor also agreed that the Company would issue, sell and deliver to the Investor:
•
105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company, no par value per share (“II-VI Series
B-2 Convertible Preferred Stock,” and together with the II-VI Series B-1 Convertible Preferred Stock, “New II-VI
Convertible Preferred Stock”), for a purchase price per share equal to the Equity Per Share Price, resulting in an
aggregate purchase price of $1.1 billion, immediately prior to Closing; and
•
immediately prior to Closing, if elected by the Company and agreed by the Investor, up to an additional 35,000 shares
of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the
Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million.
Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the
Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing,
increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.
The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating
Segment, and are presented in the Unallocated and Other in Note 15, Segment and Geographic Reporting.
Note 4.
Acquisitions
Acquisition of Ascatron AB
On August 20, 2020, the Company acquired all of the outstanding shares of Ascatron, located in Sweden. The acquisition will
add essential elements to the Company's vertically integrated silicon carbide technology platform. Purchase price consideration
totaled $37 million.
The Company utilized the widely accepted income-based approach (relief-from-royalty method) to perform the preliminary
purchase price allocation.
The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date
of acquisitions ($000):
Previously Reported
September 30, 2020
Measurement Period
Adjustments (a)
As Adjusted
Assets
Developed technology
$
20,000 $
(3,622) $
16,378
Goodwill
18,922
3,018
21,940
Other assets
2,511
683
3,194
Total assets acquired
$
41,433 $
79 $
41,512
Liabilities
Non-interest bearing liabilities
$
(203) $
(1,101) $
(1,304)
Deferred tax liability
(4,526)
1,022
(3,504)
Total liabilities assumed
(4,729)
(79)
(4,808)
Net assets acquired
$
36,704 $
— $
36,704
84
(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 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.
The goodwill is recorded in the Compound Semiconductors segment and is attributed to the workforce acquired as part of the
transaction. The goodwill is non-deductible for income tax purposes. Transaction expenses related to the acquisition totaled
$2 million for the year ended June 30, 2021 and are included in Selling, General and Administrative expenses in the
Consolidated Statements of Earnings (Loss). Technology is being amortized with a useful life of approximately 17 years.
The revenues and net loss from Ascatron included in the Company's Consolidated Statement of Earnings (Loss) for the year
ended June 30, 2021 were $1 million and $3 million, respectively.
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.
Purchase of Equity Investment in INNOViON Corporation
On October 1, 2020, II-VI acquired the remaining 6.1% interest in Innovion for $4 million. Innovion is a provider of ion
implantation services supporting unique capabilities in semiconductor materials processing. This acquisition will add essential
elements to the Company's vertically integrated silicon carbide technology platform.
Through the period ended December 31, 2020, the Company held a 93.9% investment in Innovion which was accounted for as
an equity method investment. The Company accounted for the acquisition of the remaining equity of Innovion as a step
acquisition, which required remeasurement of the Company's previous ownership interest to fair value prior to completing
purchase accounting. Using step acquisition accounting the Company increased the value of its previously held equity
investment to its fair value of $67 million, which resulted in a gain of approximately $7 million, recorded in other expense
(income), net in the Consolidated Statements of Earnings (Loss) in the second quarter of fiscal year 2021.
The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the
preliminary purchase price allocation and determine the fair value of the previously held equity method investment. Income-
based valuation approaches included the use of the multi-period excess earnings and relief-from-royalty methods for certain
acquired intangible assets.
The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date
of acquisition ($000):
85
Previously Reported
December 31, 2020
Measurement Period
Adjustments (a)
As Adjusted
Assets
Developed technology
$
15,000 $
(240) $
14,760
Customer lists
10,000
(1,003)
8,997
Goodwill
29,478
3,216
32,694
Property, plant, & equipment
16,556
(1,832)
14,724
ROU Asset
10,644
1,893
12,537
Other assets
12,450
(643)
11,807
Total assets acquired
$
94,128 $
1,391 $
95,519
Liabilities
Non-interest bearing liabilities
$
(14,050) $
(1,788) $
(15,838)
Interest bearing liabilities
(3,430)
—
(3,430)
Deferred tax liabilities
(5,743)
397
(5,346)
Total liabilities assumed
$
(23,223) $
(1,391) $
(24,614)
Net assets acquired
$
70,905 $
— $
70,905
(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 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.
The goodwill is recorded in the Compound Semiconductor segment and is attributed to the workforce acquired as part of the
transaction. The goodwill is non-deductible for income tax purposes. Technology is being amortized with a useful life of
approximately 16 years. Customer lists are being amortized with a useful life of approximately 14 years. Transaction expenses
for the year ended June 30, 2021 were insignificant.
The revenues from Innovion included in the Company's Consolidated Statement of Earnings for the year ended June 30, 2021
was $21 million. The net income for the same period was $1 million.
Note 5.
Revenue from Contracts with Customers
The following table summarizes disaggregated revenue by market for the years ended June 30, 2021, 2020 and 2019 ($000):
Year Ended June 30, 2021
Photonic
Solutions
Compound
Semiconductors
Total
Industrial
$
50,181 $
275,698 $
325,879
Communications
1,917,697
134,969
2,052,666
Aerospace & Defense
—
201,845
201,845
Consumer
9,138
277,319
286,457
Other
61,268
177,776
239,044
Total Revenues
$
2,038,284 $
1,067,607 $
3,105,891
86
Year Ended June 30, 2020
Photonic
Solutions
Compound
Semiconductors
Unallocated &
Other
Total
Industrial $
52,806 $
240,475 $
— $
293,281
Communications
1,437,377
125,527
21,557
1,584,461
Aerospace & Defense
—
175,097
—
175,097
Consumer
4,620
126,227
494
131,341
Other
41,987
153,904
—
195,891
Total Revenues $
1,536,790 $
821,230 $
22,051 $
2,380,071
Year Ended June 30, 2019
Photonic
Solutions
Compound
Semiconductors
Total
Industrial $
58,621 $
283,422 $
342,043
Communications
526,420
92,812
619,232
Aerospace & Defense
—
152,702
152,702
Consumer
2,300
46,826
49,126
Other
51,548
147,845
199,393
Total Revenues $
638,889 $
723,607 $
1,362,496
"Other" revenue included in the tables above include revenue from the life science/medical, semiconductor and automotive end
markets.
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 contracts. Contract liabilities are recognized as
revenue when performance obligations have been performed. During the year ended June 30, 2021, the Company recognized
revenue of $4 million related to customer payments that were included in the consolidated balance sheet as of June 30, 2020. As
of June 30, 2021 and June 30, 2020, the Company had $40 million and $39 million, respectively, of contract liabilities recorded
in the consolidated balance sheet.
Note 6.
Inventories
The components of inventories were as follows:
June 30,
2021
2020
($000)
Raw materials
$
211,890 $
190,237
Work in progress
336,391
298,577
Finished goods
147,547
130,996
Total Inventories
$
695,828 $
619,810
Note 7.
Property, Plant & Equipment
Property, plant & equipment consists of the following:
87
June 30,
2021
2020
($000)
Land and land improvements
$
20,454 $
18,396
Buildings and improvements
419,157
345,736
Machinery and equipment
1,483,183
1,352,835
Construction in progress
136,544
111,394
Finance lease right-of-use asset
25,000
25,000
2,084,338
1,853,361
Less accumulated depreciation
(841,432)
(638,589)
Property, plant, and equipment, net
$
1,242,906 $
1,214,772
Included in the table above is a building acquired under a finance lease. As of June 30, 2021 and June 30, 2020, the
accumulated depreciation of the finance lease ROU asset was $7 million and $6 million, respectively.
Note 8.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses.
Identifiable intangible assets acquired in business combinations are recorded based upon fair value at the date of acquisition.
Changes in the carrying amount of goodwill were as follows ($000):
Year Ended June 30, 2021
Year Ended June 30, 2020
Photonic
Solutions
Compound
Semiconductors
Total
Photonic
Solutions
Compound
Semiconductors
Total
Balance-beginning of period
$
1,052,494 $
186,515 $ 1,239,009 $
134,057 $
185,721 $ 319,778
Goodwill acquired
—
54,634
54,634
919,192
—
919,192
Finisar measurement period
adjustments
(4,901)
—
(4,901)
—
—
—
Foreign currency translation
5,435
2,550
7,985
(755)
794
39
Balance-end of period
$
1,053,028 $
243,699 $ 1,296,727 $
1,052,494
186,515
1,239,009
The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30,
2021 and 2020 were as follows ($000):
June 30, 2021
June 30, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Net
Book
Value
Gross
Carrying
Amount
Accumulated
Amortization
Net
Book
Value
Technology
$
476,200 $
(106,802) $
369,398 $
444,315 $
(68,048) $
376,267
Trade Names
22,660
(6,233)
16,427
22,369
(3,669)
18,700
Customer Lists
469,154
(136,519)
332,635
456,223
(92,822)
363,401
Other
1,576
(1,576)
—
1,570
(1,570)
—
Total
$
969,590 $
(251,130) $
718,460 $
924,477 $
(166,109) $
758,368
Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2021, 2020 and 2019 was $82
million, $64 million, and $17 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 147 months. The customer lists are being amortized over
60 to 240 months with a weighted-average remaining life of approximately 135 months.
In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these
trade names of $14 million as of June 30, 2021 is not amortized but tested annually for impairment. The Company completed
88
its impairment test of these trade names with indefinite lives in the fourth quarter of fiscal years 2021 and 2020. 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,
2022
$
83,463
2023
82,558
2024
80,684
2025
79,196
2026
73,466
89
Note 9.
Debt
The components of debt for the periods indicated were as follows ($000):
June 30, 2021
June 30, 2020
Term A Facility, interest at LIBOR, as defined, plus 1.38%
$
1,057,412 $
1,194,463
Revolving Credit Facility, interest at LIBOR, as defined, plus 1.38%
—
74,000
Debt issuance costs, Term A Facility and Revolving Credit Facility
(25,191)
(32,174)
Term B Facility, interest at LIBOR, as defined, plus 3.50%
—
714,600
Debt issuance costs, Term B Facility
—
(24,747)
0.50% convertible senior notes, assumed in the Finisar acquisition
14,888
14,888
0.25% convertible senior notes
344,969
345,000
0.25% convertible senior notes unamortized discount attributable to cash conversion
option and debt issuance costs including initial purchaser discount
(16,937)
(30,688)
Total debt
1,375,141
2,255,342
Current portion of long-term debt
(62,050)
(69,250)
Long-term debt, less current portion
$
1,313,091 $
2,186,092
The scheduled maturities of principal amounts of debt obligations for the next five years and thereafter is as follows ($000):
Year Ending
June 30,
2022
$
62,050
2023
407,019
2024
62,050
2025
871,263
2026
—
Thereafter
14,888
Total
$
1,417,270
Senior Credit Facilities
The Company currently has Senior Credit Facilities 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 governing the Senior Credit Facilities (the "Credit Agreement") provides for senior secured financing of
$2.4 billion in the aggregate, consisting of
(i)
Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan
facility (the “Term A Facility”),
(ii)
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”), which was
repaid in full during the quarter ended September 30, 2020, and
(iii)
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”).
90
The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility
initially not to exceed $20 million.
The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. In
conjunction with the repayment, the Company paid $1 million in associated interest and expensed $25 million of debt issuance
costs related to the Term B Facility.
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 September 24, 2019 (the "Finisar 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 (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 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.
Amounts outstanding under the Senior Credit Facilities 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 to 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 Finisar Closing Date,
commencing with the first full fiscal quarter after the Finisar Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through
and including the eighth fiscal quarter after the Finisar Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As
of June 30, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.
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 shares of the Company’s common stock, subject to
the terms of the Finisar Indenture.
0.25% Convertible Senior Notes
91
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, which was $58 million as of June 30, 2021. 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 II-VI 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 $532 million as of
June 30, 2021 and $346 million as of June 30, 2020 (based on the Company’s closing stock price on the last trading day of the
fiscal periods then ended).
Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only under
the following circumstances:
(i) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2017 (and only during such
fiscal quarter), if the last reported sale price of the II-VI Common Stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the
immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable
trading day;
(ii) during the five business day period immediately after any five consecutive trading day period (the “measurement
period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement
period was less than 98% of the product of the last reported sale price of the II-VI Common Stock and the conversion
rate on each such trading day; or
(iii) upon the occurrence of certain specified corporate events.
On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may
convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver,
as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the
Company’s election.
Because the last reported sale price of II-VI Common Stock for at least 20 trading days during the period of 30 consecutive
trading days ending on the last trading day of the calendar quarter ended June 30, 2021 was equal to or greater than 130% of the
applicable conversion price on each applicable trading day, the II-VI Notes are convertible at the option of the holders thereof
during the fiscal quarter ending September 30, 2021.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination
of cash and shares of II-VI Common Stock, at the Company’s election.
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. II-VI Notes were convertible during the quarters ended March 31, and June 30, 2021; conversions were immaterial.
The following table sets forth total interest expense recognized related to the II-VI Notes for the years ended June 30, 2021,
2020 and 2019 ($000):
Year Ended
June 30, 2021
Year Ended
June 30, 2020
Year Ended
June 30, 2019
0.25% contractual coupon
$
874 $
876 $
874
Amortization of debt discount and debt issuance costs including initial
purchaser discount
13,748
13,172
12,550
Interest expense
$
14,622 $
14,048 $
13,424
92
The effective interest rate on the liability component for the periods presented was 5%. The unamortized discount amounted to
$15 million as of June 30, 2021, and is being amortized over the remaining life of the notes.
Aggregate Availability
The Company had aggregate availability of $449 million under its Revolving Credit Facility as of June 30, 2021.
Weighted Average Interest Rate
The weighted average interest rate of total borrowings was 1% and 3% for the years ended June 30, 2021 and 2020,
respectively.
Note 10.
Income Taxes
The components of earnings (loss) before income taxes were as follows:
Year Ended June 30,
2021
2020
2019
($000)
U.S. income (loss)
$
21,692 $
(302,027) $
(34,241)
Non-U.S. income
330,898
238,099
163,054
Earnings (loss) before income taxes
$
352,590 $
(63,928) $
128,813
The components of income tax expense were as follows:
Year Ended June 30,
2021
2020
2019
($000)
Current:
Federal
$
415 $
7 $
1,755
State
1,632
496
472
Foreign
53,362
45,052
29,531
Total Current
$
55,409 $
45,555 $
31,758
Deferred:
Federal
$
13,744 $
(43,955) $
(3,764)
State
(431)
1,007
(2,010)
Foreign
(13,684)
494
(4,688)
Total Deferred
$
(371) $
(42,454) $
(10,462)
Total Income Tax Expense
$
55,038 $
3,101 $
21,296
Principal items comprising deferred income taxes were as follows:
93
June 30,
2021
2020
($000)
Deferred income tax assets
Inventory capitalization
$
20,753 $
19,372
Interest rate swap
6,347
9,847
Non-deductible accruals
7,437
9,325
Accrued employee benefits
14,025
11,095
Net-operating loss and credit carryforwards
163,717
182,625
Share-based compensation expense
8,400
8,110
Other
8,956
9,736
Right of use asset
33,341
31,573
Valuation allowances
(53,765)
(54,559)
Total deferred income tax assets
$
209,211 $
227,124
Deferred income tax liabilities
Tax over book accumulated depreciation
$
(32,692) $
(25,926)
Intangible assets
(153,582)
(160,577)
Tax on unremitted earnings
(21,569)
(21,785)
Convertible debt
(3,321)
(6,006)
Lease liability
(32,053)
(29,768)
Other
(6,458)
(5,676)
Total deferred income tax liabilities
$
(249,675) $
(249,738)
Net deferred income taxes
$
(40,464) $
(22,614)
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,
2021
%
2020
%
2019
%
($000)
Taxes at statutory rate
$ 74,044
21 $ (13,425)
21 $ 27,051
21
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit
1,246
—
1,194
(2)
(1,212)
(1)
Taxes on non U.S. earnings
(26,557)
(7)
(915)
1
(5,857)
(5)
Valuation allowance
(3,720)
(1)
(9,365)
15
(6,703)
(5)
Research and manufacturing incentive deductions and
credits
(22,968)
(6)
(15,836)
25 (11,756)
(9)
Stock compensation
(2,500)
(1)
4,334
(7)
(1,914)
(1)
Repatriation tax
—
—
—
—
14,108
11
GILTI and FDII
27,369
8
36,067
(56)
6,437
5
Other
8,124
2
1,047
(2)
1,142
1
$ 55,038
16 $ 3,101
(5) $ 21,296
17
94
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. 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.
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 $22 million.
During the fiscal years ended June 30, 2021, 2020, and 2019, net cash paid by the Company for income taxes was $60 million,
$40 million, and $26 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 3.22%, (8.91)% and 0.25% for the fiscal years ended June 30, 2021, 2020 and
2019, respectively, and the impact of the tax holidays on diluted earnings per share is $0.10, $0.07, and $0.00 for the fiscal
years ended June 30, 2021, 2020, and 2019, respectively. The holiday related to II-VI Malaysia Advanced Manufacturing
Center Sdn. Bhd will end during the fiscal year ended June 30, 2026, the holiday related to certain II-VI Laser Enterprise
Philippines, Inc.'s business lines will end during the fiscal year ended June 30, 2022, and the holiday related to II-VI Vietnam
Co., Ltd will end during the fiscal year ended June 30, 2024.
The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2021:
Type
Amount
Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits
$
79,211
June 2022-June 2041
Foreign tax credits
20,493
June 2022-June 2031
State tax credits
15,434
June 2022-June 2036
State tax credits (indefinite)
39,125
Indefinite
Operating loss carryforwards:
Loss carryforwards - federal
$
47,755
June 2022-June 2036
Loss carryforwards - state
136,454
June 2022-June 2041
Loss carryforwards - state (indefinite)
13,076
Indefinite
Loss carryforwards - foreign
17,375
June 2021-June 2040
Loss carryforwards - foreign (indefinite)
48,884
Indefinite
The Company has recorded a valuation allowance against the majority of the foreign and state 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, 2021, 2020 and 2019 were as follows:
95
2021
2020
2019
($000)
Beginning balance
$
42,803 $
11,520 $
9,892
Increases in current year tax positions
3,940
1,506
191
Increases in prior year tax positions
—
—
376
Acquired business
5,341
31,791
6,036
Settlements
(7,514)
—
—
Expiration of statute of limitations
(6,545)
(2,014)
(4,975)
Ending balance
$
38,025 $
42,803 $
11,520
The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2021, 2020
and 2019, there was $0.3 million, $0.6 million and $(0.1) million of interest and penalties within income tax expense,
respectively. The Company had $3 million, $4 million and $1 million of interest and penalties accrued at June 30, 2021, 2020
and 2019, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the
amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax
position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the
technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax
rate, was approximately $26 million, $24 million and $6 million at June 30, 2021, 2020 and 2019, respectively. The Company
expects a decrease of $2 million of unrecognized tax benefits during the next 12 months due to the expiration of statutes of
limitation.
Fiscal years 2018 to 2021 remain open to examination by the Internal Revenue Service, fiscal years 2016 to 2021 remain open
to examination by certain state jurisdictions, and fiscal years 2010 to 2021 remain open to examination by certain foreign taxing
jurisdictions. The Company is currently under examination in New York for the years ended June 30, 2018 though June 30,
2019 and under examination for certain subsidiary companies in India for the year ended March 31, 2016; Philippines for the
year ended June 30, 2019; and Germany for the years ended June 30, 2012 through June 30, 2018. The Company believes its
income tax reserves for these tax matters are adequate.
Note 11. Equity and Redeemable Preferred Stock
Mandatory Convertible Preferred Stock
On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 2,000,000 shares of 6.00% Series A
Mandatory Convertible Preferred, no par value per share (“Mandatory Convertible Preferred Stock”), resulting in gross
proceeds to II-VI from the offering of $400 million, before deducting the underwriting discounts and commissions and offering
expenses payable by the Company (the “Preferred Stock Offering”). In addition, the underwriters had a 30-day option to
purchase up to an additional 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 the option in full, raising an additional approximately $60 million in gross
proceeds. On July 7, 2020, the Company closed the Preferred Stock Offering, including the issuance and sale of 2 million
shares of Mandatory Convertible Preferred Stock.
Upon conversion on the mandatory conversion date, July 1, 2023, as determined in accordance with the terms of the Mandatory
Convertible Preferred Stock, each outstanding share of the Mandatory Convertible Preferred Stock, unless previously
converted, will automatically convert into a number of shares of II-VI Common Stock equal to not more than 4.6512 shares of
II-VI Common Stock and not less than 3.8760 shares of II-VI Common Stock (the “Minimum Conversion Rate”), depending on
the applicable market value of the II-VI Common Stock, determined in accordance with the terms of the Mandatory Convertible
Preferred Stock and subject to certain anti-dilution adjustments.
Other than in the event of one of certain fundamental changes, a holder of Mandatory Convertible Preferred Stock may, at any
time prior to July 1, 2023, elect to convert such holder’s shares of Mandatory Convertible Preferred Stock, in whole or in part
(but in no event less than one share of Mandatory Convertible Preferred Stock), at the Minimum Conversion Rate per share of
Mandatory Convertible Preferred Stock, subject to certain anti-dilution adjustments.
96
If one of certain fundamental changes occurs on or prior to July 1, 2023, holders of the Mandatory Convertible Preferred Stock
will have the right to convert their shares of Mandatory Convertible Preferred Stock, in whole or in part (but in no event less
than one share of the Mandatory Convertible Preferred Stock), into shares of II-VI Common Stock at the conversion rate
determined in accordance with the terms of the Mandatory Convertible Preferred Stock during the period beginning on, and
including, the effective date of such change and ending on, and including, the date that is 20 calendar days after the effective
date of such fundamental change (or, if later, the date that is 20 calendar days after holders receive notice of such fundamental
change, but in no event later than July 1, 2023). Holders who convert their shares of the Mandatory Convertible Preferred Stock
during that period will also receive a dividend make-whole amount and, to the extent there is any, the accumulated dividend
amount, in each case as calculated in accordance with the terms of the Mandatory Convertible Preferred Stock.
Upon issuance of the Mandatory Convertible Preferred Stock, the Company used a Monte Carlo simulation model to estimate
the future market value of the II-VI Common Stock on the mandatory conversion date, based on the following inputs:
Expected Volatility
50% - 55%
Cost of Equity
14% - 17%
Dividend Yield
none
Expected volatility is based on the historical volatility of II-VI Common Stock, taking into consideration the mean-reverting
tendency of volatility and the expected term of the Mandatory Convertible Preferred Stock, as well as traded option contracts
for II-VI Common Stock. The cost of equity was calculated over a three-year term, assuming a risk-free interest rate of 0.2%
derived from the average U.S. Treasury Note rate during the period. The dividend yield of zero is based on the fact that the
Company has never paid cash dividends on II-VI Common Stock and has no current intention to pay cash dividends on II-VI
Common Stock in the future.
The Company declared $27 million of preferred stock dividends during fiscal year 2021 associated with the Mandatory
Convertible Preferred Stock. Dividends from the quarter ended June 30, 2021 were $7 million and were presented as other
accrued liabilities on the Consolidated Balance Sheet.
The following table presents dividends per share and dividends recognized for the year ended June 30, 2021:
Year Ended June 30, 2021
Dividends per share
11.80
Series A Mandatory Convertible Preferred Stock dividends ($000)
27,140
Redeemable Convertible Preferred Stock
The Company issued 75,000 shares of II-VI Series B-1 Convertible Preferred Stock in the year ended June 30, 2021. Refer to
Note 3. Pending Coherent Acquisition for additional information.
In connection with the execution of the Investment Agreement, on March 30, 2021, the Company filed a Statement with
Respect to Shares (the “Statement”) with the Pennsylvania Department of State Corporation Bureau to establish the
designation, rights and preferences of the II-VI Series B-1 Convertible Preferred Stock. The Statement became effective on
March 30, 2021.
The shares of II-VI Series B-1 Convertible Preferred Stock accrue dividends at 5.00% per annum, subject to increase if II-VI
defaults on payment obligations with respect to the New II-VI Convertible Preferred Stock, not to exceed 14% per annum. Until
the fourth anniversary of March 31, 2021 (the “Initial Issue Date”), dividends are payable solely in-kind. After the fourth
anniversary of the Initial Issue Date, dividends are payable on the applicable series, at the Company’s option, in cash, in-kind,
or as a combination of both.
The shares of II-VI Series B-1 Convertible Preferred Stock are convertible into shares of II-VI Common Stock as follows:
97
•
at any time after their issuance, at the election of the holder, each share of II-VI Series B-1 Convertible Preferred Stock
may be converted into shares of II-VI Common Stock at a conversion price of $85.00 per share (“Conversion Price”),
except that the shares of II-VI Series B-1 Convertible Preferred Stock will be so convertible only after the earliest to
occur of (i) the issuance of shares of II-VI Series B-2 Convertible Preferred Stock upon the Closing, (ii) the
termination of the Merger Agreement or (iii) the delivery by II-VI to the Investor of an offer to repurchase the II-VI
Series B-1 Convertible Preferred Stock upon the occurrence of a Fundamental Change (as defined in the Statement);
and
•
at any time following the third anniversary of Initial Issue Date, at the election of II-VI, each share of II-VI Series B-1
Convertible Preferred Stock may be converted into shares of II-VI Common Stock at the then-applicable Conversion
Price if the volume-weighted average price of II-VI Common Stock exceeds 150% of the then- applicable Conversion
Price for 20 trading days out of any 30 consecutive trading days.
The II-VI Series B-1 Convertible Preferred Stock have voting rights, voting as one class with the II-VI Common Stock, on an
as-converted basis, subject to limited exceptions.
On or at any time after the tenth anniversary of the Initial Issue Date:
•
each holder has the right to require the Company to redeem all of their II-VI Series B-1 Convertible Preferred Stock,
for cash, at a redemption price per share equal to the sum of the Stated Value for such shares (as defined in the
Statement) plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not
previously been added to the Stated Value (such price the “Redemption Price,” and such right the “Put Right”), and
•
the Company has the right to redeem, in whole or in part, on a pro rata basis from all holders based on the aggregate
number of shares of II-VI Series B-1 Convertible Preferred Stock outstanding, for cash, at the Redemption Price.
In connection with any Fundamental Change, and subject to the procedures set forth in the Statement, the Company must, or
will cause the survivor of a Fundamental Change (such survivor of a Fundamental Change, the “Acquirer”) to, make an offer to
repurchase, at the option and election of the holder thereof, each share of II-VI Series B-1 Convertible Preferred Stock then-
outstanding (the “Fundamental Change Repurchase Offer”) at a purchase price per share in cash equal to (i) the Stated Value for
such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been
added to the Stated Value as of the date of repurchase plus (ii) if prior to the fifth anniversary of the Initial Issue Date, the
aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase
through the fifth anniversary of the Initial Issue Date.
The II-VI Series B-1 Convertible Preferred Stock is redeemable for cash outside of the control of the Company upon the
exercise of the Put Rights, and upon a Fundamental Change, and is therefore classified as mezzanine equity.
The Company recognized $10 million of preferred stock dividends during the fiscal year ended 2021, which were presented as
a reduction to retained earnings on the Consolidated Balance Sheet as of June 30, 2021. The Company incurred $27 million of
transaction costs associated with the II-VI Series B-1 Convertible Preferred Stock, of which, $23 million were capitalized, and
$4 million were expensed in the Selling, General, and Administrative expenses in the Consolidated Statements of Earnings
(Loss) for the fiscal year ended June 30, 2021.
The following table presents dividends per share and dividends recognized for the year ended June 30, 2021:
Year Ended June 30, 2021
Dividends per share
$
134.55
Dividends ($000)
9,583
Deemed dividends ($000)
508
The obligation to issue the shares of II-VI Series B-2 Convertible Preferred Stock is an embedded feature within the II-VI
Series B-1 Convertible Preferred Stock that does not require bifurcation for separate accounting.
Common Stock Offering
98
On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 9,302,235 shares of II-VI Common Stock at
a public offering price of $43.00 per share, resulting in 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”). In addition, the underwriters had a 30-day option to purchase up to an additional 1,395,335 shares of II-VI Common
Stock at the applicable public offering price, less underwriting discounts and commissions. On July 2, 2020, the underwriters
exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company
closed the Common Stock Offering, including the issuance and sale of approximately 11 million shares II-VI Common Stock.
Note 12.
Earnings Per Share
Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common shareholders by the
weighted-average number of shares of common stock outstanding during the period.
The diluted earnings (loss) per common share is computed by dividing the diluted earnings (loss) available to common
shareholders by the weighted-average number of shares of common stock and potentially dilutive shares of common stock
outstanding during the period. The dilutive effect of equity awards is calculated based on the average stock price for each fiscal
period, using the treasury method. For the fiscal years ended 2021, 2020 and 2019, diluted shares outstanding include the
dilutive effect of the potential shares of the Company's common stock issuable from stock options, performance and restricted
shares. For fiscal year ended 2021, the diluted shares outstanding also include the dilutive effect of the potential shares of the
Company's Common Stock issuable upon conversion of outstanding convertible debt
The following is a reconciliation of the numerators and denominators of the basis and diluted earnings (loss) per share
computations for the periods presented ($000):
Year Ended June 30,
2021
2020
2019
($000 except per share)
Numerator
Net earnings (loss)
$ 297,552 $ (67,029) $ 107,517
Deduct Series A preferred stock dividends
(27,140)
—
—
Deduct Series B redeemable preferred stock dividends
(9,583)
—
—
Deduct Series B redeemable preferred stock deemed dividends
(508)
—
—
Basic earnings (loss) available to common shareholders
$ 260,321 $ (67,029) $ 107,517
Effect of dilutive securities:
Add back interest on II-VI Notes Due 2022
$
12,264 $
— $
—
Diluted earnings (loss) available to common shareholders
$ 272,585 $ (67,029) $ 107,517
Denominator
Weighted average shares
104,151
84,828
63,584
Effect of dilutive securities
Stock options, performance and restricted shares
3,552
—
2,220
II-VI Notes due 2022
7,331
—
—
Diluted weighted average common shares
115,034
84,828
65,804
Basic earnings (loss) per common share
$
2.50 $
(0.79) $
1.69
Diluted earnings (loss) per common share
$
2.37 $
(0.79) $
1.63
The following table presents potential shares of common stock excluded from the calculation of diluted net earnings (loss) per
share, as their effect would have been antidilutive (in thousands of shares):
99
Year Ended June 30,
2021
2020
2019
Series A Mandatory Convertible Preferred Stock
8,915
—
—
Series B Redeemable Preferred Stock
2,230
—
—
II-VI Notes due 2022
—
7,331
7,331
Stock options, performance and restricted shares
118
2,345
115
0.50% Finisar Convertible Notes
—
289
—
Total anti-dilutive shares
11,263
9,965
7,446
Note 13.
Leases
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.
The following table presents lease costs, which include short-term leases, lease term, and discount rates ($000):
100
Year Ended
June 30, 2021
Year Ended
June 30, 2020
Finance Lease Cost
Amortization of right-of-use assets
$
1,667 $
1,667
Interest on lease liabilities
1,268
1,328
Total finance lease cost
2,935
2,995
Operating lease cost
37,361
32,466
Sublease income
1,471
368
Total lease cost
$
38,825 $
35,093
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases
1,268
1,328
Operating cash flows from operating leases
35,641
30,816
Financing cash flows from finance leases
1,152
1,026
Assets Obtained in Exchange for Lease Liabilities
Right-of-use assets obtained in acquisitions
13,391
29,247
Right-of-use assets obtained in exchange for new operating lease liabilities
52,839
29,458
Total assets obtained in exchange for new operating lease liabilities
66,230
58,705
Weighted-Average Remaining Lease Term (in Years)
Finance leases
10.5
11.5
Operating leases
7.0
7.2
Weighted-Average Discount Rate
Finance leases
5.6 %
5.6 %
Operating leases
6.1 %
7.3 %
The following table presents future minimum lease payments, which include short-term leases ($000):
Future Years
Operating Leases
Finance Leases
Total
Year 1
$
34,076 $
2,486 $
36,562
Year 2
31,121
2,554
33,675
Year 3
27,276
2,624
29,900
Year 4
23,332
2,697
26,029
Year 5
18,632
2,771
21,403
Thereafter
58,590
16,648
75,238
Total minimum lease payments
$
193,027 $
29,780 $
222,807
Less: amounts representing interest
42,128
7,484
49,612
Present value of total lease liabilities
$
150,899 $
22,296 $
173,195
101
Note 14.
Share-Based Compensation
The Company’s Board of Directors amended the II-VI Incorporated 2018 Omnibus Incentive Plan, which was approved by the
shareholders at the Annual Meeting in November 2018. The Amended Omnibus Plan (the “Plan”) was approved at the annual
meeting in November 2020. 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 9,550,000 shares of common stock, not including any remaining shares forfeited under the predecessor plans
that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability of the
grantee.
As of June 30, 2021, there were approximately 8 million shares available to be issued under the Plan, including forfeited shares
from predecessor plans.
The Company records share-based compensation expense for these awards, which requires the recognition of the grant-date fair
value of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the
requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-
based stock appreciation rights, cash-based restricted share units and cash-based performance share units as liability awards, in
accordance with U.S. GAAP.
Share-based compensation expense for the fiscal years ended June 30, 2021, 2020 and 2019 is as follows $000:
Year Ended June 30,
2021
2020
2019
Stock Options and Cash-Based Stock
Appreciation Rights
$
10,626 $
11,893 $
6,801
Restricted Share Awards, Restricted Share
Units, and Cash-Based Restricted Share Units
47,060
49,957
9,242
Performance Share Units and Cash
Based Performance Share Units
16,640
11,977
8,920
$
74,326 $
73,827 $
24,963
Stock Options and Cash-Based Stock Appreciation Rights:
The Company utilized the Black-Scholes valuation model for estimating the fair value of stock options and cash-based stock
appreciation rights. During the fiscal year ended June 30, 2021, no stock options were issued. During fiscal years ended June
30, 2020 and 2019, the weighted-average fair value of options granted under the Plan was $14.79 and $20.66, respectively, per
option using the following assumptions:
Year Ended June 30,
2020
2019
Risk-free interest rate
1.50 %
2.80 %
Expected volatility
39 %
37 %
Expected life of options
6.91 years
6.96 years
Dividend yield
None
None
The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in
effect at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted
average rate for all options granted during the fiscal year. Expected volatility is based on the historical volatility of the
Company’s common stock over the period commensurate with the expected life of the options. The expected life calculation is
based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero
is based on the fact that the Company has never paid cash dividends and has no current intention to pay cash dividends in the
future.
Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2021 was as follows:
102
Stock Options
Cash-Based Stock Appreciation Rights
Number of
Shares
Weighted Average
Exercise Price
Number of
Rights
Weighted Average
Exercise Price
Outstanding - July 1, 2020
3,721,801 $
26.99
230,374 $
32.13
Exercised
(1,047,216) $
21.04
(76,880) $
28.75
Forfeited and Expired
(31,951) $
33.86
(8,160) $
34.14
Outstanding - June 30, 2021
2,642,634 $
29.26
145,334 $
33.80
Exercisable - June 30, 2021
1,805,735 $
25.31
63,209 $
27.36
As of June 30, 2021, 2020 and 2019, the aggregate intrinsic value of stock options and cash-based stock appreciation rights
outstanding and exercisable was $88 million, $80 million and $56 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, 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, 2021. 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, 2021, 2020, and 2019 was $49 million, $20 million, and $15 million, respectively. As of
June 30, 2021, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation
rights was $9 million. This cost is expected to be recognized over a weighted-average period of approximately two years.
Outstanding and exercisable stock options at June 30, 2021 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
Weighted
Average
Range of
Shares or
Contractual Term
Exercise
Shares or
Contractual Term
Exercise
Exercise Prices
Rights
(Years)
Price
Rights
(Years)
Price
$13.34 - $18.07
574,264
3.55 $
16.18
574,264
3.55 $
16.18
$18.07 - $24.35
685,719
4.01 $
20.83
674,952
3.94 $
20.70
$24.35 - $35.39
542,224
6.79 $
33.21
291,734
6.18 $
34.20
$35.39 - $36.90
573,384
8.21 $
36.47
126,567
8.16 $
36.43
$36.90 - $49.90
412,377
7.08 $
47.85
201,427
6.96 $
47.60
2,787,968
5.78 $
29.49 1,868,944
4.78 $
25.38
Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Units:
Restricted share awards, restricted share units, and cash-based restricted share units 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 and restricted share units) or the stock price at the period end date (for cash-based restricted share units),
and is being recognized over the vesting period. Generally, the restricted share awards, restricted share units, and cash-based
restricted share units have a three-year tranche vesting provision.
Restricted share award, restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30,
2021, was as follows:
103
Restricted Share
Awards
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
Number
of
Units
Weighted Average
Grant Date Fair Value
Nonvested -
June 30, 2020
50,527 $
35.92 2,242,412 $
39.46
82,003 $
38.31
Granted
— $
— 1,277,460 $
45.74
5,194 $
44.30
Vested
(49,525) $
35.47
(996,955) $
37.91
(38,943) $
38.57
Forfeited
(1,002) $
18.42
(196,745) $
38.36
(2,381) $
38.91
Nonvested -
June 30, 2021
— $
— 2,326,172 $
43.67
45,873 $
38.75
As of June 30, 2021, total unrecognized compensation cost related to non-vested, restricted share unit and cash-based restricted
share units was $68 million. This cost is expected to be recognized over a weighted-average period of approximately two years.
The restricted share award 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 units 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 awards, restricted share units, and cash-based restricted share units granted during the years ended June 30,
2021, 2020 and 2019, was $59 million, $11 million and $10 million, respectively. The total fair value of restricted share awards,
restricted share units and cash-based restricted share units vested was $69 million, $75 million and $20 million during fiscal
years 2021, 2020 and 2019, respectively.
Performance Share Units and Cash-Based Performance Share Units:
The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees
performance share units and cash-based performance share units under the Plan. As of June 30, 2021, the Company had
outstanding grants covering performance periods ranging from 12 to 36 months. These grants 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 grants are payable only if the Company achieves specified levels of financial
performance during the performance periods.
For our relative Total Shareholder Return (“TSR”) performance-based units, which are based on market performance of our
stock as compared to the S&P Composite 1500 – Electronic Equipment, Instruments & Components Index, the compensation
cost is recognized over the performance period on a straight-line basis, because the grants 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
units using the Monte-Carlo simulation model.
The performance 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 performance
share unit compensation expense was calculated based on the number of units expected to be earned, multiplied by the stock
price at the period-end date, and is being recognized over the vesting period. Performance share unit and cash-based
performance share unit activity relating to the Plan during the year ended June 30, 2021, was as follows:
104
Performance Share Units
Cash-Based Performance Share Units
Number of
Units
Weighted Average
Grant Date Fair Value
Number of
Units
Weighted Average
Grant Date Fair Value
Nonvested - June 30, 2020
409,246 $
40.96
35,188 $
38.54
Granted
209,639 $
52.04
— $
—
Vested
(187,410) $
30.03
(14,928) $
35.25
Forfeited
(5,344) $
37.66
— $
—
Performance Adjustments
92,178 $
17.52
7,464 $
35.25
Nonvested - June 30, 2021
518,309 $
45.28
27,724 $
39.43
As of June 30, 2021, total unrecognized compensation cost related to non-vested performance share units and cash-based
performance share units was $12 million. This cost is expected to be recognized over a weighted-average period of
approximately 1.65 years. The total fair value of the performance share units and cash-based performance share units granted
during the fiscal years ended June 30, 2021, 2020 and 2019 was $14 million, $15 million and $10 million, respectively. The
total fair value of performance share units and cash-based performance share units vested during the fiscal years ended June 30,
2021, 2020 and 2019 was $9 million, $6 million and $11 million, respectively. The performance adjustments relate to grants
that exceeded the performance targets when vested during FY21, including the final number of shares issued, which were 200%
of the target units based on actual results during the three-year performance period.
Note 15.
Segment and Geographic Reporting
The Company reports its business segments using the “management approach” model for segment reporting. This means that
the Company determines its reportable business segments based on the way the chief operating decision maker organizes
business segments within the Company for making operating decisions and assessing performance.
The Company reports its financial results in 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 address all of
II-VI's seven end markets, namely: communications, industrial, aerospace & defense, consumer electronics, semiconductor
capital equipment, life sciences and automotive. This segment designs, manufactures and markets the following products: (i)
optical and electro-optical components and materials used primarily in CO2 lasers, fiber-lasers and direct diode lasers for
materials processing applications; (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; (iv) engineered materials for thermoelectric, ceramics and silicon carbide for a wide range of
applications; and (v) compound semiconductor epitaxial wafers for applications in optical and wireless communication.
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 (i) transceivers for data centers and telecom optical
networks; (ii) pump lasers, optical amplifiers, wavelength selective switches and advanced components for telecom networks;
(iii) crystal materials, optics, lasers and optoelectronic modules for a wide range of applications, including in optical
communications, life sciences, and consumer electronics markets.
In September 2019, the Company completed its acquisition of Finisar. 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 Coherent
105
acquisition in the fiscal year ended June 30, 2021. In the fiscal year ended June 30, 2020, it included transaction costs related to
the Finisar acquisition.
The following tables summarize selected financial information of the Company’s operations by segment:
Photonic
Solutions
Compound
Semiconductors
Unallocated
& Other
Total
($000)
2021
Revenues
$
2,038,284 $
1,067,607 $
— $
3,105,891
Inter-segment revenues
35,358
244,407
(279,765)
—
Operating income (loss)
207,652
221,239
(26,772)
402,119
Interest expense
—
—
—
(59,899)
Other income, net
—
—
—
10,370
Income taxes
—
—
—
(55,038)
Net earnings
—
—
—
297,552
Depreciation and amortization
161,208
108,861
—
270,069
Expenditures for property, plant & equipment
87,304
59,033
—
146,337
Segment assets
4,231,289
2,281,361
—
6,512,650
Goodwill
1,053,028
243,699
—
1,296,727
Photonic
Solutions
Compound
Semiconductors
Unallocated
& Other
Total
($000)
2020
Revenues
$
1,536,790 $
821,230 $
22,051 $
2,380,071
Inter-segment revenues
31,515
164,884
(196,399)
—
Operating income (loss)
49,930
62,279
(72,730)
39,479
Interest expense
—
—
—
(89,409)
Other income, net
—
—
—
(13,998)
Income taxes
—
—
—
(3,101)
Net loss
—
—
—
(67,029)
Depreciation and amortization
112,203
104,936
3,743
220,882
Expenditures for property, plant & equipment
45,795
88,318
2,764
136,877
Segment assets
3,502,467
1,732,247
—
5,234,714
Goodwill
1,052,494
186,515
—
1,239,009
106
Photonic
Solutions
Compound
Semiconductors
Unallocated
& Other
Total
($000)
2019
Revenues
$
638,889 $
723,607 $
— $
1,362,496
Inter-segment revenues
12,568
94,405
(106,973)
—
Operating income
81,898
82,414
(15,643)
148,668
Interest expense
—
—
—
(22,417)
Other income, net
—
—
—
2,562
Income taxes
—
—
—
(21,296)
Net earnings
—
—
—
107,517
Depreciation and amortization
26,273
66,092
—
92,365
Expenditures for property, plant & equipment
44,851
83,899
—
128,750
Segment Assets
681,610
1,272,163
— $
1,953,773
Goodwill
134,057
185,721
— $
319,778
Geographic information for revenues from the legal country of origin, and long-lived assets by country, which include property,
plant and equipment, net of related depreciation, and certain other long-term assets, were as follows:
Revenues
Year Ended June 30,
2021
2020
2019
($000)
United States
$
2,017,152 $
1,432,195 $
405,404
Non-United States
Hong Kong
356,356
299,359
319,601
China
343,483
292,139
290,287
Japan
132,015
146,325
109,670
Germany
153,548
124,934
155,000
Vietnam
38,799
22,152
22,322
Switzerland
24,462
35,895
32,770
Korea
12,406
8,537
11,674
Taiwan
11,385
3,743
2,005
Singapore
5,103
5,791
6,868
Philippines
4,974
4,479
4,179
United Kingdom
4,560
4,226
2,712
Other
1,648
296
4
Total Non-United States
$
1,088,739 $
947,876 $
957,092
$
3,105,891 $
2,380,071 $
1,362,496
107
Long-Lived Assets
June 30,
2021
2020
($000)
United States
$
737,151 $
754,815
Non-United States
China
402,987
369,544
United Kingdom
60,090
55,028
Malaysia
53,187
46,162
Switzerland
37,121
37,129
Sweden
27,374
24,270
Germany
16,703
18,631
Australia
13,627
12,321
Vietnam
10,246
11,140
Philippines
7,890
7,607
Taiwan
6,532
—
Korea
4,595
3,438
Hong Kong
2,104
2,870
Other
1,916
1,965
Total Non-United States
$
644,372 $
590,105
$
1,381,523 $
1,344,920
Note 16.
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 $29 million is recognized in the
Consolidated Balance Sheet within other accrued liabilities (current) and other liabilities (non-current). Changes in fair value
are recorded within accumulated 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,
108
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, 2021; 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, 2021 ($000):
Fair Value
Carrying Value
II-VI Notes
$
549,580 $
328,032
Finisar Notes
$
14,889 $
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.
By entering into the Investment Agreement as described in Note 3 on March 25, 2021, the Company entered into a commitment
to issue shares of II-VI Series B-1 Convertible Preferred Stock on the Initial Closing Date for a fixed price (such commitment
the "Forward Sale Commitment"). The Forward Sale Commitment comprises a financial instrument, other than an outstanding
share, that, at inception, has both of the following characteristics: (i) embodies an obligation to repurchase the Company's
equity shares and (ii) requires or may require the Company to settle the obligation by transferring assets. Under ASC 480,
Distinguishing Liabilities from Equity, it is required to be initially measured and subsequently remeasured, at fair value as an
asset or liability with changes in fair value recognized in earnings. An option pricing model was utilized to calculate the fair
value of the Forward Sale Commitment. The Company recognized $11 million of realized gains within Other Expense
(Income), Net in the Consolidated Statements of Earnings (Loss) for the year ended June 30, 2021, related to the Forward Sale
Commitment due to changes in its fair value from March 25, 2021 to its settlement on March 31, 2021.
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
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 17.
Employee Benefit Plans
Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are
made at the discretion of the Company’s board of directors and were $2 million, $6 million, and $5 million for the years ended
June 30, 2021, 2020 and 2019, 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, 2021, there have been 361,834 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
109
employee age and other factors. Employer contributions to the Swiss Plan for years ended June 30, 2021 and 2020 were $4
million and $3 million, respectively. Net periodic pension cost is not material for any year presented.
The underfunded pension liability was $25 million and $27 million as of June 30, 2021 and 2020, respectively. The pension
adjustment amount recognized in accumulated other comprehensive income was $2 million decrease and $3 million increase
for the fiscal years ended June 30, 2021 and 2020, respectively. The accumulated benefit obligation was $90 million as of
June 30, 2021, compared to $85 million as of June 30, 2020.
Estimated future benefit payments under the Swiss Plan are estimated to be as follows:
Year Ending June 30,
($000)
2022
$
5,500
2023
4,700
2024
4,900
2025
6,100
2026
7,500
Next five years
35,800
Note 18.
Other Accrued Liabilities
The components of other accrued liabilities were as follows:
June 30,
2021
2020
($000)
Contract liabilities
$
13,926 $
17,328
Warranty reserves
21,868
27,620
Other accrued liabilities
110,115
74,390
$
145,909 $
119,338
Note 19.
Commitments and Contingencies
The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of
the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase
commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary
nature of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early
termination. The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred
under these commitments based upon historical experience and current expectations. The Company also has contingent
obligations relating to earnout arrangements on its acquisitions of $1 million. Total future purchase commitments held by II-VI
as of June 30, 2021, were $352 million in fiscal 2022, and $35 million thereafter.
Note 20.
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. The Company did not
repurchase any shares pursuant to this Program during the fiscal year ended June 30, 2021. During the fiscal
year ended June 30, 2020 the Company purchased 50,000 shares of its common stock for $2 million
under this program. As of June 30, 2021, the Company has cumulatively purchased 1,416,587 shares of II-VI common stock
pursuant to the Program for approximately $22 million.
Note 21.
Accumulated Other Comprehensive Income (Loss)
110
The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30,
2021, 2020, and 2019 were as follows ($000):
Foreign
Currency
Translation
Adjustment
Interest
Rate
Swap
Defined
Benefit
Pension Plan
Total
Accumulated
Other
Comprehensive
Income (Loss)
AOCI - June 30, 2018
$
(1,308) $
— $
(2,472) $
(3,780)
Other comprehensive income (loss) before reclassifications
(14,319)
—
(6,307)
(20,626)
Amounts reclassified from AOCI
—
—
185
185
Net current-period other comprehensive income
(14,319)
—
(6,122)
(20,441)
AOCI - June 30, 2019
$
(15,627) $
— $
(8,594) $
(24,221)
Other comprehensive income (loss) before reclassifications
(15,969)
(46,067)
(3,528)
(65,564)
Amounts reclassified from AOCI
—
1,982
420
2,402
Net current-period other comprehensive income
(15,969)
(44,085)
(3,108)
(63,162)
AOCI - June 30, 2020
$
(31,596) $
(44,085) $
(11,702) $
(87,383)
Other comprehensive income (loss) before reclassifications
86,991
(2,687)
1,709
86,013
Amounts reclassified from AOCI
—
14,999
638
15,637
Net current-period other comprehensive income
86,991
12,312
2,347
101,650
AOCI - June 30, 2021
$
55,395 $
(31,773) $
(9,355) $
14,267
111
Quarterly Financial Data (unaudited)
Fiscal Year 2021
Quarter Ended
June 30,
2021
March 31,
2021
December 31,
2020
September 30,
2020
($000, except per share)
2021
Net revenues
$
808,006 $
783,232 $
786,569 $
728,084
Cost of goods sold
500,379
483,676
464,103
441,520
Internal research and development
83,768
83,231
84,858
78,248
Selling, general and administrative
126,666
131,244
118,893
107,186
Interest expense
14,066
13,034
15,585
17,214
Other expense (income) - net
(10,124)
(21,432)
(3,153)
24,339
Earnings (loss) before income taxes
93,251
93,479
106,283
59,577
Income taxes
10,957
12,387
18,383
13,311
Net Earnings (Loss)
$
82,294 $
81,092 $
87,900 $
46,266
Basic earnings (loss) per share
$
0.62 $
0.71 $
0.78 $
0.39
Diluted earnings (loss) per share
$
0.59 $
0.66 $
0.73 $
0.38
Fiscal Year 2020
Quarter Ended
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
($000, except per share)
2020
Net revenues
$
746,290 $
627,041 $
666,331 $
340,409
Cost of goods sold
444,153
381,108
517,991
217,269
Internal research and development
100,489
94,764
107,700
36,120
Selling, general and administrative
134,152
82,133
119,218
105,495
Interest expense
25,521
28,530
28,390
6,968
Other expense (income) - net
1,264
7,168
487
5,079
Earnings before income taxes
40,711
33,338
(107,455)
(30,522)
Income taxes
(10,550)
27,417
(9,242)
(4,524)
Net Earnings
$
51,261 $
5,921 $
(98,213) $
(25,998)
Basic earnings per share
$
0.56 $
0.07 $
(1.08) $
(0.39)
Diluted earnings per share
$
0.53 $
0.06 $
(1.08) $
(0.39)
112
SCHEDULE II
II-VI INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2021, 2020, AND 2019
(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, 2021:
Allowance for doubtful accounts
$
1,698 $
301 $
—
$
(1,075) (3) $
924
Warranty reserves
$
27,620 $
2,134 $
—
$
(7,886)
$
21,868
Deferred tax asset valuation allowance $
54,559 $
(2,545) $
1,751 (2) $
—
$
53,765
YEAR ENDED JUNE 30, 2020:
Allowance for doubtful accounts
$
1,292 $
956 $
—
$
(550) (3) $
1,698
Warranty reserves
$
4,478 $
11,507 $
37,453 (1) $
(25,818)
$
27,620
Deferred tax asset valuation allowance $
20,190 $
(2,186) $
36,555 (1) $
—
$
54,559
YEAR ENDED JUNE 30, 2019:
Allowance for doubtful accounts
$
837 $
548 $
—
$
(93) (3) $
1,292
Warranty reserves
$
4,679 $
4,185 $
—
$
(4,386)
$
4,478
Deferred tax asset valuation allowance $
21,797 $
(1,607) $
—
$
—
$
20,190
(1) Related to amounts assumed from the Finisar Acquisition.
(2) Primarily related to currency translation adjustments.
(3) Primarily relates to write-offs of accounts receivable.
113
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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, 2021, 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.
114
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, to the extent applicable, 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 2021 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 website 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 2021,” “Executive Compensation,” “Compensation Committee Report” and
“Compensation and Risk” in the Company’s Proxy Statement.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the information set forth under the captions “Equity
Compensation Plan Information” and “Security Owners of Certain Beneficial Owners and Management” in the Company’s
Proxy Statement.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the information set forth under the caption
“Director Independence and Corporate Governance Policies” in the Company’s Proxy Statement.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information set forth under the caption
“Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement.
115
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, 2021 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.
116
Exhibit No.
Description
Location
2.01
Agreement and Plan of Merger, dated as of November 8,
2018, by and among II-VI Incorporated, Mutation Merger Sub
Inc. and Finisar Corporation.
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.
2.02
Agreement and Plan of Merger, dated as of March 25, 2021,
by and among II-VI Incorporated, Watson Merger Sub Inc.
and Coherent, Inc.
Incorporated herein by reference to
Exhibit 2.1 to II-VI's Current Report on
Form 8-K (File No. 001-39375) filed on
March 25, 2021.
3.01
Amended and Restated Articles of Incorporation of II-VI
Incorporated.
Incorporated herein by reference to
Exhibit 3.1 to II-VI’s Current Report on
Form 8-K (File No. 000-16195) filed on
November 8, 2011.
3.02
Amended and Restated By-Laws of II-VI Incorporated, as
amended and restated effective February 26, 2021.
Incorporated herein by reference to
Exhibit 3.1 to II-VI’s Current Report on
Form 8-K (File No. 001-39375) filed on
March 1, 2021.
3.03
Statement with Respect to Shares, filed with the Pennsylvania
Department of State Corporations Bureau and effective July 6,
2020.
Incorporated herein by reference to
Exhibit 3.03 to II-VI's Annual Report on
Form 10-K (File No. 001-39375) for the
fiscal year ended June 30, 2020.
3.04
Statement with Respect to Shares, filed with the Pennsylvania
Department of State Corporations Bureau and effective March
30, 2021.
Incorporated herein by reference to
Exhibit 3.1 to II-VI's Current Report on
Form 8-K (File No. 001-39375) filed on
March 31, 2021.
4.01
Indenture, dated as of August 29, 2017, by and between II-IV
Incorporated and U.S. Bank, National Association, as Trustee
Incorporated herein by reference to
Exhibit 4.1 to II-VI’s Current Report on
Form 8-K (File No. 000-16195) filed on
November 14, 2017.
4.02
Form of 0.25% Convertible Senior Notes due 2022.
Included in Exhibit 4.01.
4.03
Description of II-VI's Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934.
Incorporated herein by reference to
Exhibit 4.03 of II-VI's Annual Report on
Form 10-K (File No, 001-39375) for the
fiscal year ended June 30, 2020.
4.04
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.
4.05
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.
4.06
Form of 0.50% Convertible Senior Notes due 2036
Included in Exhibit 4.04.
4.07
Form of 6.00% Series A Mandatory Convertible Preferred
Stock Certificate.
Included in Exhibit 3.03.
10.01
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
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.
10.02
Amended and Restated Employment Agreement, effective
January 26, 2020, by and between II-VI Incorporated and
Vincent D. Mattera, Jr. *
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.
117
10.03
Form of Indemnification Agreement between II-VI
Incorporated and its directors and officers
Incorporated herein by reference to
Exhibit 10.15 to II-VI’s Annual Report on
Form 10-K (File No. 000-16195) for the
fiscal year ended June 30, 2018.
10.04
II-VI Incorporated Amended and Restated Employees’ Profit-
Sharing Plan and Trust Agreement, as amended (P)
Incorporated herein by reference to
Exhibit 10.05 to II-VI’s Registration
Statement on Form S-1 (File No. 33-
16389).
10.05
Description of Bonus Incentive Plan*
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.
10.06
Description of Discretionary Incentive Plan (now known as
the Goal/ Results Incentive Program)*
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.
10.07
Amended and Restated II-VI Incorporated Deferred
Compensation Plan (applicable to periods prior to January 1,
2015)*
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.
10.08
Amended and Restated II-VI Incorporated Deferred
Compensation Plan (applicable to periods after January 1,
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.
10.09
Trust Under the II-VI Incorporated Deferred Compensation
Plan*
Incorporated herein by reference is
Exhibit 10.13 to II-VI’s Annual Report on
Form 10-K (File No. 000-16195) for the
fiscal year ended June 30, 1996.
10.10
II-VI Incorporated 2009 Omnibus Incentive Plan*
Incorporated herein by reference to
Exhibit A to II-VI’s Definitive Proxy
Statement on Schedule 14A (File No. 000-
16195) filed on September 25, 2009.
10.11
Form of Nonqualified Stock Option Agreement under the II-
VI Incorporated 2009 Omnibus Incentive Plan*
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.
10.12
II-VI Incorporated 2012 Omnibus Incentive Plan*
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.
10.13
Form of Nonqualified Stock Option under the II-VI
Incorporated 2012 Omnibus Incentive Plan*
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.
10.14
II-VI Incorporated Amended and Restated 2012 Omnibus
Incentive Plan*
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.
10.15
Form of Nonqualified Stock Option Agreement under the II-
VI Incorporated Amended and Restated 2012 Omnibus
Incentive Plan*
Incorporated herein by reference to
Exhibit 10.30 to II-VI’s Annual Report on
Form 10-K (File No. 000-16195) for the
fiscal year ended June 30, 2013.
118
10.16
II-VI Incorporated Second Amended and Restated 2012
Omnibus Incentive Plan*
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.
10.17
Form of Nonqualified Stock Option Agreement under the II-
VI Incorporated Second Amended and Restated Omnibus
Incentive Plan*
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.
10.18
Form of Restricted Share Award Agreement (3 year) under the
II-VI Incorporated Second Amended and Restated 2012
Omnibus Incentive Plan*
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.
10.19
Form of Restricted Share Unit Award Agreement under the II-
VI Incorporated Second Amended and Restated 2012
Omnibus Incentive Plan*
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.
10.20
Form of Performance Share Award Agreement under the II-VI
Incorporated Second Amended and Restated 2012 Omnibus
Incentive Plan*
Incorporated herein by reference to Exhibit
10.20 to II-VI's Annual Report on Form
10-K (File No. 001-39375) for the fiscal
year ended June 30, 2020.
10.21
II-VI Incorporated 2018 Employee Stock Purchase 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
November 13, 2018.
10.22
II-VI Incorporated Amended and Restated 2018 Omnibus
Incentive Plan*
Incorporated herein by reference to
Exhibit 99.1 to II-VI’s Registration
Statement on Form S-8 (File No. 333-
249995) filed on November 10, 2020.
10.23
Form of Nonqualified Stock Option Agreement under the II-
VI Incorporated 2018 Omnibus Incentive Plan*
Incorporated herein by reference to
Exhibit 10.01 to II-VI’s Quarterly Report
on Form 10-Q (File No. 000-16195) for
the quarter ended December 31, 2018.
10.24
Form of Restricted Share Unit Settled In Shares Award
Agreement under the II-VI Incorporated 2018 Omnibus
Incentive Plan*
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.
10.25
Form of Restricted Share Unit Settled In Cash Award
Agreement under the II-VI Incorporated 2018 Omnibus
Incentive Plan*
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.
10.26
Form of Restricted Share Unit Settled In Shares Award
Agreement under the II-VI Incorporated 2018 Omnibus
Incentive Plan*
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.
10.27
Form of Stock Appreciation Rights Agreement under the II-VI
Incorporated 2018 Omnibus Incentive Plan*
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.
10.28
Form of Performance Share Award Agreement under the II-VI
Incorporated 2018 Omnibus Incentive Plan*
Incorporated herein by reference to Exhibit
10.28 to II-VI's Annual Report on Form
10-K (File No. 001-39375) for the fiscal
year ended June 30, 2020.
119
10.29
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.
10.30
Form of Participation Agreement for the II-VI Incorporated
Executive Severance Plan*
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.
10.31
Amended and Restated Investment Agreement, dated as of
March 30, 2021 by and between II-VI Incorporated and BCPE
Watson (DE) SPV, LP
Incorporated herein by reference to
Exhibit 10.1 to II-VI's Current Report on
Form 8-K (File No. 001-39375) filed on
March 31, 2021.
10.31
Form of Performance Share Unit Award Agreement (Cash
Flow; Share-Settled)
Filed herewith.
10.32
Form of Performance Share Unit Award Agreement (Relative
TSR; Share-Settled
Filed herewith.
21.01
List of Subsidiaries of II-VI Incorporated
Filed herewith.
23.01
Consent of Ernst & Young LLP
Filed herewith.
31.01
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.
31.02
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.
32.01
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.
32.02
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.
120
(101.PRE)
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
Filed herewith.
104
Cover Page Interactive Data File (formatted as Inline XBRL
and contained in Exhibit 101).
Filed herewith.
∗
Denotes management contract or compensatory plan, contract or arrangement.
(P)
Denotes filed via paper copy.
The Registrant will furnish to the Commission upon request copies of any instruments not filed herewith which authorize the
issuance of long-term obligations of the Registrant not in excess of 10% of the Registrant’s total assets on a consolidated basis.
Item 16.
FORM 10-K SUMMARY
None.
121
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.
II-VI INCORPORATED
Date: August 20, 2021
By:
/s/ Vincent D. Mattera Jr.
Vincent D. Mattera Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
122
Principal Executive Officer:
Date: August 20, 2021
By:
/s/ Vincent D. Mattera Jr.
Vincent D. Mattera Jr.
Chief Executive Officer and Director
Principal Financial and Accounting Officer:
Date: August 20, 2021
By:
/s/ Mary Jane Raymond
Mary Jane Raymond
Chief Financial Officer and Treasurer
Date: August 20, 2021
By:
/s/ Francis J. Kramer
Francis J. Kramer
Chairman of the Board
Date: August 20, 2021
By:
/s/ Joseph J. Corasanti
Joseph J. Corasanti
Director
Date: August 20, 2021
By:
/s/ RADM Marc Y. E. Pelaez (retired)
RADM Marc Y. E. Pelaez (retired)
Director
Date: August 20, 2021
By:
/s/ Howard H. Xia
Howard H. Xia
Director
Date: August 20, 2021
By:
/s/ Shaker Sadasivam
Shaker Sadasivam
Director
Date: August 20, 2021
By:
/s/ Enrico Digirolamo
Enrico Digirolamo
Director
Date: August 20, 2021
By:
/s/ Michael L. Dreyer
Michael L. Dreyer
Director
Date: August 20, 2021
By:
/s/ Patricia Hatter
Patricia Hatter
Director
Date: August 20, 2021
By:
/s/ David L. Motley
David L. Motley
Director
Date: August 20, 2021
By:
/s/ Stephen Pagliuca
Stephen Pagliuca
Director
CORPORATE INFORMATION
Board of Directors
Francis J. Kramer, Chair
Retired President and CEO
II-VI Incorporated
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
Board Chair SRC, Inc.
Retired President, CEO and Director
CONMED Corporation
Michael L. Dreyer
Director
• F5 Networks
• Deep Labs
Enrico Digirolamo
Senior Advisor to Technology Companies
& Manufacturing Firms
Retired CFO and SVP Covisint, SVP
Allstate, VP General Motors
Patricia Hatter
Chief Customer Officer Palo Alto Networks
Dr. Shaker Sadasivam
Co-Founder and CEO Auragent
Bioscience, LLC
Director FTC Solar
Dr. Howard H. Xia
Retired General Manager Vodafone
China Limited
David Motley
General Partner, Black Tech Nation Ventures
Director
• Deep Lake Capital
• FNB
• Koppers
• Stanford Research Institute
Steve Pagliuca
Co-Chair Bain Capital
Director
• Axis Bank, Ltd.
• Gartner, Inc.
• Virgin Voyages
Managing General Partner and Co-Owner
Boston Celtics
Executive Officers
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,
Corporate Secretary
Dr. Christopher S. Koeppen
Chief Technology Officer
Annual Meeting
Thursday, November 18, 2021
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.”
Transfer Agent
American Stock Transfer & Trust
Company
6201 15th Ave.
Brooklyn, NY 11219
1.800.937.5449
Independent Registered
Public Accountants
Ernst & Young LLP
2100 One PPG Place
Pittsburgh, PA 15222
Securities Counsel
K&L Gates LLP
K&L Gates Center
210 Sixth Avenue
Pittsburgh, PA 15222
II-VI Incorporated is an Equal Opportunity Employer. As such, it is the Company’s policy to promote equal
employment opportunities and to prohibit discrimination on the basis of race, color, religion, sex, age,
national origin, disability, status as a veteran or other legally protected class in all aspects of employment,
including recruiting, hiring, training and promoting personnel. In fulfilling this commitment, the Company
shall comply with the letter and spirit of all applicable laws, regulations, and Executive Orders governing
equal opportunity in employment.
375 Saxonburg Boulevard, Saxonburg, PA 16056
724.352.4455
WWW.II-VI.COM
375 Saxonburg Boulevard, Saxonburg, PA 16056
724.352.4455
WWW.II-VI.COM