Item 1. BUSINESS

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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. Our telephone number is 724-352-4455. Reference to “II-VI,” the “Company,” “we,” “us,” or “our” in this Annual Report on Form 10-K, unless the context requires otherwise, refers to II-VI Incorporated and its wholly-owned subsidiaries. The Company’s name is pronounced “Two Six Incorporated.” The name II-VI refers to Groups II and VI on the Periodic Table of Elements from which II-VI originally designed and produced infrared optics for high-power CO2 lasers used in materials processing. We address 7 major markets. The majority of our revenues are attributable to the sale of engineered materials and optoelectronic components, devices and subsystems for the industrial materials processing, optical communications and military markets. Reference to “fiscal” or “fiscal year” means our fiscal year ended June 30 for the year referenced.

The following acronyms are defined for reference: 3 dimensional (“3D”); 4th generation (“4G”) wireless; 5th generation (“5G”) wireless; bismuth telluride (“Bi2Te3”); cadmium telluride (“CdTe”); carbon monoxide (“CO”); carbon dioxide (“CO2”); chemical vapor deposited (“CVD”) materials including diamond; wavelength division multiplexing (“WDM”); dense wavelength division multiplexing (“DWDM”); extreme ultraviolet (“EUV”) lithography; gallium arsenide (“GaAs”); gallium nitride (“GaN”); gigabit Ethernet (“GbE”); gigabit per second (“Gb/s”); indium phosphide (“InP”); infrared (“IR”); light detection and ranging (“LiDAR”); near infrared (“NIR”); nanometers (“nm”); original equipment manufacturer (“OEM”); organic light-emitting diode (“OLED”); optical time domain reflectometer (“OTDR”); research, development and engineering (“RD&E”); radio frequency (“RF”); reconfigurable optical add/drop multiplexer (“ROADM”); silicon carbide (“SiC”); ultraviolet (“UV”); vertical cavity surface emitting laser (“VCSEL”); zinc selenide (“ZnSe”); and zinc sulfide (“ZnS”).

General Description of Business

We develop, manufacture and market engineered materials, optoelectronic components and devices for precision use in industrial materials processing, optical communications, military, consumer electronics, semiconductor equipment, life sciences and automotive applications and markets. We use advanced engineered materials growth technologies coupled with proprietary high-precision fabrication, micro-assembly, optical thin-film coating and electronic integration to manufacture complex optoelectronic devices and modules. Our products are deployed in a variety of applications, including (i) laser cutting, welding and marking operations; (ii) 3D sensing consumer applications; (iii) optical, data and wireless communication products; (iv) strategic military applications including intelligence, surveillance and reconnaissance; (v) semiconductor processing and tooling; and (vi) thermoelectric cooling and power generation solutions.

Through RD&E and acquisitions, II-VI has expanded its portfolio of materials. We believe that the materials that we grow and fabricate are differentiated by one or a combination of unique optical, electrical, thermal and mechanical properties. II-VI’s optics are shaped by precision surfacing techniques to meet the most stringent requirements for flat or curved geometries, functionalized with smooth or structured surfaces, or with patterned metallization. Proprietary processes developed at our global optical coating centers differentiate our products’ durability against high energy lasers and extreme operating environments. Optical coatings also provide the desired spectral characteristics ranging from the ultraviolet to the far-infrared. II-VI leverages these capabilities to deliver miniature- to large-scale precision optical assemblies, including in combination with thermal management components, integrated electronics, and/or software.

II-VI also offers a broad portfolio of compound semiconductor lasers that are used in a variety of applications in most of our end markets. These compound semiconductor lasers enable high-power lasers for materials processing, optical signal amplification in terrestrial and submarine communications networks, high bit rate server connectivity between and within datacenters, fast and accurate measurements in biomedical instruments, consumer electronics and optical communications network monitoring.

II-VI continues to work to perfect its operational capabilities, develop next generation products, and invest in new technology platforms. With a strategic focus on fast growing and sustainable markets, II-VI pursues its vision of enabling the world to be safer, healthier, closer and more efficient.

Information Regarding Market Segments and Foreign Operations

Financial data regarding our revenues, results of operations, industry segments and international sales for the three years ended June 30, 2018 are set forth in the Consolidated Statements of Earnings and in Note 12 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference. We also discuss certain Risk Factors set forth in Item 1A of this Annual Report on Form 10-K related to our foreign operations, which are incorporated herein by reference.

Bookings and Backlog

We define our bookings as customer orders received that are expected to be converted to revenues over the next 12 months. For long-term customer orders, to address the inherent uncertainty of orders that extend far into the future, the Company records only those orders which are expected to be converted into revenues within 12 months from the end of the reporting period. Bookings are adjusted if changes in customer demands or production schedules cause the expected time of a delivery to extend beyond 12 months. For the year ended June 30, 2018, our bookings were approximately $1.2 billion compared to bookings of approximately $1.1 billion for the year ended June 30, 2017.

We define our backlog as bookings that have not been converted to revenues by the end of the reporting period. As of June 30, 2018, our backlog was approximately $450 million, compared to approximately $400 million as of June 30, 2017.

Global Operations

II-VI is headquartered in Saxonburg, PA, with RD&E, manufacturing and sales facilities worldwide. Our U.S. production and research and development operations are located in Pennsylvania, California, New Jersey, Texas, Mississippi, Massachusetts, Connecticut, Delaware, New York, Florida and Illinois and our non-U.S. production operations are based in China, Singapore, Vietnam, the Philippines, Germany, Switzerland and the United Kingdom. We also utilize contract manufacturers and strategic suppliers. In addition to sales offices at most of our manufacturing sites, we have sales and marketing subsidiaries in Hong Kong, Japan, Germany, China, Switzerland, Belgium, the United Kingdom, Italy, South Korea, and Taiwan. Approximately 68% of our revenues for the fiscal year ended June 30, 2018, were generated from sales to customers outside of the United States.

Employees

The table below summarizes the number of our employees as of June 30, 2018 in the main functions. We have a long-standing practice of encouraging active employee participation in areas of operations and quality management. We believe our relations with our employees are good. We reward substantially all our employees with some form of variable compensation based on achievement of performance goals. There are approximately 265 employees located in the United States and the Philippines who are covered under collective bargaining agreements. The Company’s collective bargaining agreement in the Philippines expires in June 2019. The collective bargaining agreement covering certain U.S. based employees expires in January 2021. There are 730 employees of Photop in China who work under contract manufacturing arrangements for customers of the Company.

	Number of employees	Percent of total
Direct production	8,977	79%
Research, development & engineering	1,513	13%
Sales, marketing, administration, finance and supporting services	953	8%
Total:	11,443	100%

Manufacturing Processes

Our success in developing and manufacturing many of our products depends on our ability to manufacture and to tailor the optical and physical properties of technically-challenging materials and components. The ability to produce, process and refine these complex materials and to control their quality and in-process yields is an expertise of the Company that is critical to the performance of our customers’ instruments and systems. In the markets we serve, there are a limited number of high-quality suppliers of many of the components we manufacture and there are very few industry-standard products.

Our network of worldwide manufacturing sites allows us to manufacture our products in regions that provide cost-effective advantages. We employ numerous advanced manufacturing technologies and systems at our manufacturing facilities. These include metal organic chemical vapor deposition and molecular beam epitaxy reactors, automated Computer Numeric Control optical fabrication, high throughput thin-film coaters, nano-precision metrology and custom-engineered automated furnace controls for crystal growth processes. Manufacturing products for use across the electro-magnetic spectrum requires the capability to repeatedly produce products with high yields to atomic tolerances. II-VI continuously updates its comprehensive quality management systems that feature manufacturing quality best practices. II-VI is committed to delivering products within specification, on time and with high quality, with a goal of fully satisfying customers and continually improving.

Sources of Supply

Among the major feed stock and raw materials we use include zinc, selenium, ZnSe, ZnS, hydrogen selenide, hydrogen sulfide, tellurium, yttrium oxide, aluminum oxide, iridium, platinum, bismuth, silicon, thorium fluoride, antimony, carbon, graphite, GaAs, InP, copper, germanium, molybdenum, quartz, optical glass, diamond, and other materials.

The continued high-quality of and access to these materials is critical to the stability and predictability of our manufacturing yields. We test materials at the onset and throughout the production process. Additional research and capital investment may be needed to better define future material specifications. We have not experienced significant production delays due to shortages of materials. However, we do occasionally experience problems associated with vendor-supplied materials not meeting contract specifications for quality or purity. As discussed in greater detail in Item 1A – Risk Factors, of this Annual Report on Form 10-K, significant failure of our suppliers to deliver sufficient quantities of necessary high-quality materials to our specifications on a timely basis could have a materially adverse effect on our results of our operations.

Business Units

The Company’s organizational structure is divided into three reporting segments for the purpose of making operational decisions and assessing financial performance: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products. These segments, and the units within the segments, are reflected in the organization chart below:

II-VI Laser Solutions designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI Infrared brand name that are used primarily in high-power CO2 lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG, direct diode laser modules, sub-systems and systems sold under the II-VI SUWTECH and II-VI DIRECTPHOTONICS brand names and super-hard materials processing laser systems sold under the II-VI LASERTECH brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers under the II-VI EPIWORKS brand name for applications in optical components, wireless devices, and high-speed communication systems and manufactures 6-inch gallium arsenide wafers allowing for the production of high-performance lasers optoelectronics and integrated circuits in high volume sold under the II-VI Laser Enterprise, II-VI EpiWorks, II-VI Compound Semiconductor Ltd. and II-VI OptoElectronic Devices Division brand names.

II-VI Photonics manufactures crystal materials, optics, microchip lasers and optoelectronic modules for use in optical communication networks and other diverse consumer, life sciences and commercial applications. In addition, the segment also manufactures pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers for both terrestrial and submarine applications within the optical communications market.

II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for military, medical and commercial laser imaging applications. In addition, the segment designs, manufactures and markets unique silicon carbide engineered materials for thermoelectric devices and subsystems for silicon carbide applications servicing the semiconductor equipment, military, communications, automotive and life science markets.

II-VI’s segments are organized by business unit at the group or division level. Each of these business units develops and markets products as described below.

Segment:	Group/Division:	Our Products:
II-VI Laser Solutions	II-VI Infrared	• Laser optics and accessories for CO2 lasers used in materials processing semiconductor and life sciences • High power fiber and direct diode laser optics • Infrared thermal imaging optics and assemblies • II-VI compound crystalline material production including ZnSe, ZnS, ZnS multispectral and CVD diamond
II-VI HIGHYAG	• Laser processing heads and beam delivery systems for laser materials processing with fiber lasers, disk lasers, and diode lasers
II-VI Laser Enterprise	• High-power semiconductor lasers and laser bars enabling fiber and direct diode lasers for materials processing, medical, defense, consumer and printing applications • VCSELs for optical interconnects and sensing
II-VI OEG	• VCSELs for 3D sensing in consumer electronics and automotive • RF devices for communications
II-VI Compound Semiconductor	• RF electronic devices for military applications
II-VI EpiWorks	• III-V epitaxial wafers to enable higher performance photonic and RF components for consumer, communications, network and mobile applications, including wireless handsets, tablets and the Internet of things
II-VI SUWTECH	• Diode pumped solid state lasers, green lasers and Q-switched lasers • Laser diode modules for multiple markets and applications, including aiming, leveling, range finding, machine vision, bio-medical instrumentation, Raman spectroscopy, and fluorescence spectroscopy • Fiber coupled high power diode lasers in the 8xx and 9xx nm wavelength ranges for fiber laser and solid state laser pumping, as well as for medical and other applications
II-VI LASERTECH	• Laser cutting and drilling machines for processing a wide variety of super hard materials such as CVD diamond, polycrystalline diamond, polycrystalline cubic boron nitride, and ceramics among others as well as for high efficiency laser cutting of non-conductive materials
II-VI DIRECTPHOTONICS	• High brightness, high power direct diode laser engines for cutting, welding, and thermal processing applications, including optimized solutions for aluminum and aluminum-copper processing applications

Segment:	Group/Division:	Our Products:
II-VI Photonics	II-VI Optical Communications	• Products and solutions that enable high bit rate interconnects for datacenters and communication service providers, datacenter inter-connects, ROADM systems and submarine transmission
II-VI Photop	• Fiber optics and precision optics used in projection and displays, crystal materials and components for optical communications, high power UV, visible and NIR optics for industrial lasers, filters and assemblies for life sciences, as well as for sensors, instrumentation and semiconductor equipment
II-VI Performance Products	II-VI Optical Systems	• Precision optical assemblies, objectives, infrared optics, thin film coatings and optical materials • Optical solutions to critical and complex designs, engineering and production challenges in defense, aerospace and commercial industries
II-VI M Cubed	• Advanced ceramic and metal matrix composite products for semiconductor equipment, flat panel display equipment, industrial and optical equipment, as well as for defense applications
II-VI Marlow	• Thermoelectric components, sub-assemblies and systems for heating, cooling, temperature tuning, thermal cycling and power generation in aerospace, defense, medical, industrial, automotive, consumer, telecommunications and power generation markets
II-VI Advanced Materials	• SiC and advanced semiconductor materials for high frequency and high power electronic device applications in defense, telecommunications, automotive and industrial markets
II-VI Performance Metals	• 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

Our Markets

Our market-focused businesses are organized by technology and products. Our businesses are composed of the following primary markets: Communications, Materials Processing, Military, Semiconductor Equipment, Life Sciences, Consumer Electronics and Automotive.

Communications Market

II-VI’s optical communications products and technologies enable the next generation of high-speed optical transmission systems, networks, and datacenter solutions necessary to meet the accelerating global bandwidth demand. At the core of both terrestrial and undersea optical networks, our market-leading 980 nm pump lasers boost the power of the optical signal in the fiber optic cable at intervals along the way to enable a larger number of high speed signals to be transmitted over longer distances. Our latest generation of 980 nm pump lasers along with miniature tunable filters and hybrid passives are part of our ultra-compact family of components critical to a new generation of small size, long reach DWDM transmission modules operating at 100, 200 and 400 Gb/s.

Customers continue to rely on us for our industry-leading optical amplification and embedded monitoring solutions for their next generation ROADM systems to compensate for the inherent signal loss and to monitor the signal integrity. Our proprietary OTDR modules allow systems to automatically detect and pinpoint issues along the transmission path in real time. The accelerating adoption of applications such as cloud computing are driving the rapid growth of datacenter buildouts. Our high-speed 25 Gb/s VCSELs enable intra-datacenter transceivers to transmit and receive signals. Our miniature WDM thin film filter assemblies are used to increase the bandwidth within 100 GbE transceivers by combining wavelengths at the transmitter end and separating them out at the receiver end.

In mobile wireless applications, II-VI supplies base SiC substrates to customers who manufacture RF power amplifier devices that are embedded in remote radio heads in 4G wireless bases stations to boost the power of RF signal before it reaches the antenna. These devices are also widely expected to be embedded in next generation active antennas for 5G wireless, where multiple devices per antenna will be required to enable higher bandwidth. SiC has a high number of intrinsic physical and electronic advantages, such as high thermal conductivity, that enable them to operate at high-power levels and still dissipate the excess heat generated.

Materials Processing Market

Our industrial laser optics and solutions for the materials processing market remain in strong demand. There continues to be a steady global demand to support existing installations and new deployments of CO2 and fiber laser systems. Our vertically integrated and market leading ZnSe optics and components, due to their inherent low loss at around 10 micron wavelength, have enabled high-power CO2 laser systems for many decades and remain critical to the steady stream of new deployments as well as to continued operation, serving as replacement optics, of the installed base of CO2 lasers. II-VI continues to introduce products that address new and growing applications for low-power CO2 lasers, such as cutting textiles, leather, wood and other organic materials, for which the CO2 laser’s 10 micron wavelength is ideally suited. CO2 lasers are also at the core of EUV lithography systems, which are now emerging on the market to enable a new generation of smaller and more powerful personal integrated circuits for the internet of things computing devices.

Over the past several years, fiber laser-based systems operating at one micron wavelength in pulsed or continuous mode have taken a central role in nearly all materials processing segments, and especially for precision machining such as marking and micro drilling. From the laser chips that generate the input optical power to the beam delivery systems that direct the output optical power to the target, II-VI supplies a broad set of laser optics and fused fiber products that enable many functions within these systems. The same set of II-VI products is also at the core of existing and emerging direct diode laser systems. II-VI is also driving innovation with a direct-diode laser engine small enough to be mounted on a robotic arm so that the end user can apply square beams directly to the work piece at wavelengths optimized for aluminum processing.

Another emerging and fast growing application is the processing of displays for consumer electronics, including those based on the OLED technology that are scribed with CO lasers and sealed with UV lasers. II-VI’s broad portfolio of coated optics and crystal materials serve all of these growing laser markets.

Military Market

Our focus in the military market is enabling lasers for targeting, night vision, navigation, as well as intelligence, surveillance and reconnaissance systems. Multiple fighter jets are equipped with our large area sapphire windows that surround advanced electro-optical targeting and imaging systems. Infrared domes are used on missiles with infrared guidance systems ranging from small, human-portable designs to larger designs mounted on helicopters, fixed-wing aircraft and ground vehicles. High-precision domes are an integral component of a missile’s targeting system, providing efficient tactical capability, while serving as a protective cover to its internal components.

Rotary and fixed-wing aircraft also use missile warning systems to protect against shoulder fired human-portable missiles. Our competencies in material growth for UV crystals and our optical assembly capabilities provide significant support to these missile warning systems. A key attribute of several of these systems is the ability to filter electro-magnetic interference using micro-fine conductive mesh patterns. This technology is also applied to non-optical applications for absorbing and transmitting energy from the surfaces of aircraft and missiles.

Many military systems employ laser designation and range-finding capabilities supported by our semiconductor lasers bars and solid state laser host crystals and laser optics, all manufactured in-house, as well as our competency in short wave infrared and visible optics. Our thermoelectric coolers are used to increase thermal imaging sensitivity, or to maintain a constant window temperature in various visible and infrared applications.

We provide a range of battlefield-ready technologies for soldier equipment and specifically designed variants for law enforcement. Our precision patterned reticles are embedded in rifle scopes. Our reaction bonded boron carbide materials are shaped into torso plates and employed as in-aircraft cabin and protective body armor. Our thermo-electric coolers are used to regulate the soldier’s body heat. They are also used to convert heat produced by battlefield fuel burners into electrical power, for example to extend battery life on the battlefield.

We maintain engineering and manufacturing facilities in the United States with strictly controlled access that are dedicated to our U.S. government supported contracts.

Semiconductor Capital Equipment Market

Semiconductor equipment requires advanced materials to meet the need for tighter tolerances, enhanced thermal stability, faster wafer transfer speeds and reduced stage settling times. Our metal matrix composites and reaction bonded ceramics enable these applications thanks to their optimum combination of light weight, strength, hardness and coefficient of thermal expansion. Our reaction bonded SiC materials are used to manufacture wafer chucks, light weight scanning stages and high temperature, corrosion resistant wafer support systems. Our cooled SiC mirrors and precision patterned reticles are used in the illumination systems of lithography tools.

In the emerging market of EUV lithography systems, CO2 lasers are used to generate extreme ultraviolet light. These CO2 lasers and beam delivery systems leverage our broad portfolio of CO2 laser optics, CdTe Modulators, high power damage resistant polycrystalline CVD diamond windows to route the powerful laser beam to a tin droplet from which EUV light will emanate. Due to their very high mechanical and thermal performance characteristics, our reaction bonded SiC are used in structural support systems that are integral to EUV lithography optics to meet critical requirements for optical system stability.

Life Sciences Market

The majority of our business in the life sciences end market is in analytical tools. Many analytical tools found in modern biotech laboratories are based on some form of interaction with light. This applies to flow cytometry, cell sorting, confocal microscopy, DNA genome sequencing, Raman spectroscopy, fluorescence spectroscopy and particle sizing to name a few. Our multi-colored laser engines along with our broad portfolio of application-specific optics, filters and gratings are embedded in these analytical tools. We also supply objective lenses, precision patterned reticles and assemblies for microscopes.

Genome sequencing involves temperature cycling DNA in flow cells with a high degree of temperature uniformity and precision. We believe that our thermal engines are the state of the art in chiller technology, and they achieve what we believe to be industry-leading temperature control and uniformity across large areas. Our green lasers are used to excite the fluorescence of DNA to reveal its structure. Our flow cells are micro-machined with a high degree of precision to insure the smooth flow of sample fluids undergoing analysis. Our thermal engines are also used in a multitude of other biomedical applications, for example to measure substance concentration in complex mixtures, to protect blood supplies and to perform heating- and cooling-based physical therapy.

Clinical procedures are increasingly performed with tools that embed our lasers and optics. For example, our semiconductor laser bars are used in hair and wrinkle removal procedures and our custom designed lens assemblies are used for laser eye surgery. We continue to leverage our core lasers, optics and temperature control expertise into new applications to grow our business in life sciences.

Consumer Electronics Market

II-VI manufactures low cost VCSELs, VCSEL arrays and low angle shift filters for the consumer electronics market. Our VCSEL products leverage our world-class 6-inch GaAs platform, combining our epitaxial wafer growth and wafer fabrication capabilities.

Our VCSELs, unlike many on the market, have already been designed into consumer products such as the computer mouse as well as for menu navigation in smart phones and in car steering wheels. Our VCSELs are also widely deployed in datacenters and in the emerging market for HDMI optical cables. This expertise in VCSEL technology is being leveraged for the emerging 3D sensing market. With our acquisitions of 6-inch epitaxy and wafer capabilities, we have invested significantly to round out our capacity expansion.

Automotive Market

Power conversion electronics for high-efficiency electric vehicles need a combination of high-power density, high-efficiency and high-temperature operation that are only afforded by advanced material systems based on SiC substrates. Our SiC substrates are available in large diameters and have what we believe to be best-in-class quality and low defect levels.

Our thermoelectric modules are used to cool batteries to extend their operating life. They are also more efficient than resistive heaters when used in heated car seats and extend an electric vehicle’s range of travel in cold environments.

To operate safely, self-driving cars will rely on control systems that are informed by a comprehensive number of sensors. One such sensor is based on LiDAR, which employs semiconductor lasers to properly identify and measure the distance to obstacles ahead. Our GaAs-based semiconductor laser platform, which already enables a broad portfolio of products in communications and materials processing, is now being scaled further for consumer electronics, and will be leveraged to deliver a highly reliable and cost-effective laser product for this emerging market.

Marketing and Sales

We market our products through direct sales forces and through representatives and distributors around the world. Our market strategy is focused on understanding our customers’ requirements and building market awareness and acceptance of our products. New products are continually being produced and introduced to our new and established customers in all markets.

The Company is centralizing its worldwide marketing and sales functions across the Company’s business units. Sales offices have been strategically established to best serve and distribute products to our worldwide customer base. There are significant cooperation, coordination and synergies among our business units, which capitalize on the most efficient and appropriate marketing channels to address diverse applications within our markets.

Our sales forces develop effective communications with our OEM and end-user customers worldwide. Products are actively marketed through targeted mailings, telemarketing, select advertising, attendance at trade shows and customer partnerships. Our sales force includes a highly-trained team of applications engineers to assist customers in designing, testing and qualifying our parts as key components of our customers’ systems. As of June 30, 2018, we employed approximately 263 individuals in sales, marketing and support.

We do business with a number of customers in the defense industry, who in turn generally contract with a governmental entity, typically a U.S. governmental agency. Most governmental programs are subject to funding approval and can be modified or terminated without warning by a legislative or administrative body.

Customers

The representative groups of customers by segments are as follows:

Segment:	Group/Division:	Our Customers Are:	Representative Customers:
II-VI Laser Solutions	II-VI Infrared	OEM and system integrators of industrial, medical and military laser systems. Laser end-users who require replacement optics for their existing laser systems.	• TRUMPF GmbH + Co. KG • Bystronic Laser AG • Coherent, Inc.
II-VI HIGHYAG	Automotive manufacturers, laser manufacturers and system integrators.	• Ford Motor Company • Laserline GmbH
II-VI Laser Systems	OEM and subsystem integrators of aiming, machine vision, bio-medical instruments, and fiber lasers. Laser cutting machines for super-hard materials.	• BGI Complete Genomics, Shenzhen Co., Ltd. • SPI Lasers Limited
II-VI OEG	Manufacturers of industrial laser components, optical communication equipment and consumer technology applications.	• Laserline GmbH • Wuhan Raycus Fiber Laser Technologies Co., Ltd
II-VI Photonics	II-VI Optical Communications & II-VI Photop	Worldwide network system and sub-system providers of telecommunications, data communications and CATV.	• Cisco Systems, Inc. • Fujitsu Network Communications • Corning Incorporated • Coherent, Inc. • Acacia Communications, Inc. • Han’s Laser Technology Industry Group Co. Ltd.
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.
II-VI Performance Products	II-VI Optical Systems	Manufacturers of equipment and devices for aerospace, defense and commercial markets.	• Lockheed Martin Corporation
II-VI M Cubed	Manufacturers and developers of integrated circuit capital equipment for the semiconductor industry.	• ASML Holding NV • Carl Zeiss AG • Nikon Corporation • KLA-Tencor Corporation
Manufacturers and developers of products and components for various defense and industrial markets.	• Corning Incorporated
II-VI Marlow	Manufacturers and developers of equipment and devices for defense, space, telecommunications, medical, industrial, automotive, personal comfort and commercial markets.	• Lumentum Operations LLC
II-VI Advanced Materials	Manufacturers and developers of equipment and devices for high-power RF electronics and high-power and voltage switching and power conversion systems for both commercial and military applications.	• Sumitomo Electric Device Innovations, Inc. • Showa Denko K. K. • STMicroelectronics • IQE PLC • Infineon Technologies AG
II-VI Performance Metals	Primary mineral processors, refineries and providers of specialized materials that are used in laser optics, photovoltaics, semiconductors, thermoelectric coolers, metallurgy and industrial products.	• Aurubis AG

Competition

We believe we are a global leader in many of our product families. We compete partly on the basis of our reputation for offering highly engineered products, product and technology roadmaps, intellectual property, ability to scale, quality, delivery time, technical support and pricing. We believe that we compete favorably with respect to these factors and that our vertical integration, manufacturing facilities and equipment, experienced technical and manufacturing employees and worldwide marketing and distribution channels provide us with competitive advantages. The representative groups of our competitors by segment are as follows:

Segment:	Areas of Competition:	Competitors:
II-VI Laser Solutions	Infrared laser optics	• Sumitomo Electric Industries, Ltd. • MKS Instruments • Wavelength OptoElectronic Pte Ltd. • SIGMAKOKI Co., LTD.
Automated equipment and laser material processing tools to deliver high-power one-micron laser systems	• Optoskand AB • Precitec GmbH & Co. KG • MITSUBISHI CABLE INDUSTRIES, LTD
Bio-medical instruments for flow cytometry, DNA sequencing, fluorescence microscopy	• Coherent, Inc. • Pavilion Integration Corporation • SHIMADZU CORPORATION
Semiconductor laser diodes for the industrial and consumer markets	• Lumentum Operations LLC • Finisar Corporation • Broadcom Ltd. • Koninklijke Philips N.V • Jenoptik AG • Osram Licht AG • Sony Corporation • Hamamatsu Photonics K.K.
II-VI Photonics	Optics, optical components, modules & subsystems for optical communications	• Oplink Communications, Inc. • Lumentum Operations LLC
Optical and crystal components, thin film coatings and sub-assemblies for lasers and metrology instruments	• Casix, Inc. • CASTECH Inc. • Research Electro-Optics, Inc. • IDEX Corporation
II-VI Performance Products	Infrared optics for military applications	• In-house fabrication and thin-film coating capabilities of major military customers
Thermoelectric components, sub-assemblies and systems	• Komatsu, Ltd. • Laird PLC • Ferrotec Corporation
Metal Matrix Composites and reaction bonded ceramics products	• Berliner Glas KGaA Herbert Kubatz GmbH & Co. • CoorsTek, Inc. • Japan Fine Ceramics Co. Ltd.
Single crystal SiC substrates	• Cree, Inc. • Dow Corning Corporation • SICC Co., Ltd • TankeBlue CO., LTD. • SiCrystal AG
Refining and materials recovery services for high purity rare metals	• Vital Materials Co., Limited • 5N Plus Inc. • RETORTE GmbH Selenium Chemicals & Metals

In addition to competitors who manufacture products similar to those we produce, there are other technologies and products available that may compete with our technologies and products.

Our Strategy

Our strategy is to grow businesses with world-class engineered material capabilities to advance our current customers’ strategies, penetrate new markets through innovative technologies and platforms, and enable new applications in large and growing markets. A key strategy of ours is to develop and manufacture high-performance materials and in certain cases components from those materials that are differentiated from those produced by our competitors. We focus on providing components that are critical to the heart of our customers’ assembly lines, for products serving the applications mentioned above.

We have grown substantially the number and size of our key accounts. Now, a substantial portion of our business is based on sales orders with market leaders, which enable our forward planning and production efficiencies. We intend to continue capitalizing and executing on this proven model, participating effectively in the growth of the markets discussed above, and continuing our focus on operational excellence as we execute our primary business strategies:

Key Business Strategies:	Our Plan to Execute:
Identify New Products and Markets	Identify new technologies, products and markets to meet evolving customer requirements for high-performance engineered materials through our dedicated RD&E programs to increase new product revenue and maximize return on investment.
Balanced Approach to Research and Development	Internally and externally funded RD&E expenditures, targeting an overall investment of between 10% - 15% of revenues, depending on the nature of the investment in terms of technology platforms or products.
Leverage Vertical Integration	Combine RD&E and manufacturing expertise, operating with a bias to components and production machines, reducing cost and lead time to enhance competitiveness, time to market, profitability and quality and enabling our customers to offer competitive products.
Investment in Scalable Manufacturing	Strategically invest in, evaluate and identify opportunities to consolidate manufacturing operations worldwide to increase production capacity, capabilities and cost effectiveness.
Enhance Our Performance and Reputation as a Quality and Customer Service Leader	Continue to improve upon our established reputation as a consistent, high-quality supplier of engineered materials and optoelectrical components that are built into our customers’ products.
Execute our global quality transformation process, eliminating costs of non-conforming materials and processes.
Identify and Complete Strategic Acquisitions and Alliances	Identify acquisition opportunities that accelerate our access to emerging, high-growth segments of the markets we serve and further leverage our competencies and economies of scale.

Research, Development and Engineering

During the fiscal year ended June 30, 2018, the Company continued to identify, invest in and focus our research and development on, new products in an effort to accelerate our organic growth. This approach is managed under a disciplined innovation program that we refer to as the “II-VI Phase Gate Process.”

From time to time, the ratio of externally funded contract activity to internally funded contract activity varies due to the unevenness of government funded research programs and changes in the focus of our internally funded research programs. We are committed to having the right mix of internally and externally funded research that ties closely to our long-term strategic objectives.

We devote significant resources to RD&E programs directed at the continuous improvement of our existing products and processes and to the timely development of new technologies, materials and products. We believe that our RD&E activities are essential to establish and maintain a leadership position in each of the markets we serve. As of June 30, 2018, we employed 1,513 people in RD&E functions, 1,439 of whom are engineers or scientists. In addition, certain manufacturing personnel support or participate in our research and development efforts on an ongoing basis. We believe this interaction between the development and manufacturing functions enhances the direction of our projects, reducing costs and accelerating technology transfers.

During the fiscal year ended June 30, 2018, we focused our RD&E investments in the following areas:

Segment:	Area of Development:	Our Research and Development Investments:
II-VI Laser Solutions	High Power Laser Diodes and High Volume Manufacturing	Focusing on increasing fiber coupled optical output power of multi-emitter modules.
Developing high power VCSELs for consumer devices and next generation high speed VCSELs for 3D sensing and datacom applications.
CVD Diamond Technology	Developing CVD diamond for EUV applications.
Broadening our portfolio beyond infrared windows applications.
II-VI Photonics	Photonics Design	Continuing to improve photonic crystal materials, precision optical parts, and laser device components.
Pump Lasers	Continuing to invest in next generation GaAs pump portfolio to address evolving terrestrial and undersea markets.
Developing InP growth and processing capability.
Optical Amplifiers and Subsystems	Investing and broadening the range of amplifiers and integrated subsystems including ROADMs.
Optical Monitoring	Continuing optical channel monitor investment.
Developing compact OTDRs embedded in optical system equipment to monitor the health of the fiber plant.
Micro-Optics Manufacturing	Shifting toward smaller, more compact platforms and packages.
Investing in manufacturing equipment for computerized processes.
II-VI Performance Products	SiC Technology	Developing advanced SiC substrate growth technologies to support emerging markets in GaN RF and SiC power electronics.
Continuous improvements to maintain world-class, high quality, large diameter substrates and epitaxial wafers.
Thermoelectric Materials and Devices	Continuing to develop leading Bi2Te3 for thermoelectric cooling/heating.
Focusing on thermoelectric power generation capability in order to introduce new products to the market.
Metal Matrix Composites and Reaction Bonded Ceramics	Support Industrial customers in developing application-specific wear and thermal management solutions.

The development of our products and manufacturing processes is largely based on proprietary technical know-how and expertise. We rely on a combination of contract provisions, trade secret laws, invention disclosures and patents to protect our proprietary rights. We have entered into selective intellectual property licensing agreements. We have asserted in the past, and expect that we will continue to assert and vigorously protect our intellectual property rights. We have a total of approximately 800 patents globally.

Internally funded research and development expenditures were $117.2 million, $96.8 million and $60.4 million for the fiscal years ended June 30, 2018, 2017 and 2016, respectively. For these same periods, externally funded research and development expenditures were $12.7 million, $8.7 million and $9.5 million, respectively and were included in Cost of goods sold in the Consolidated Statements of Earnings.

Export and Import Compliance

We are required to comply with various export/import control and economic sanction laws, including:

	•	The International Traffic in Arms Regulations administered by the U.S. Department of State, Directorate of Defense Trade Controls, which, among other things, impose licensing requirements on the export from the United States of certain defense articles and defense services, which generally include items that are specially designed or adapted for a military application and/or listed on the U.S. Munitions List;

	•	The Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and Security, which, among other things, impose licensing requirements on certain dual-use goods, technology and software, which are items that potentially have both commercial and military applications;

	•	The regulations administered by the U.S. Department of Treasury, Office of Foreign Assets Control, which implement economic sanctions imposed against designated countries, governments and persons based on U.S. foreign policy and national security considerations; and

	•	The import regulations administered by the U.S. Customs and Border Protection.

Foreign governments have also implemented similar export and import control regulations, which may affect our operations or transactions subject to their jurisdiction. For additional discussions regarding our import and export compliance, see the discussion set forth in Item 1A – Risk Factors of this Annual Report Form on Form 10-K.

Trade Secrets, Patents and Trademarks

Our use of trade secrets, proprietary know-how, trademarks, copyrights, patents and contractual confidentiality and IP ownership provisions help us develop and maintain our competitive position with respect to our products and manufacturing processes. We aggressively pursue process and product patents in certain areas of our businesses. We have entered into selective intellectual property licensing agreements. We have confidentiality and non-competition agreements with certain personnel. We require that our U.S. employees sign a confidentiality and non-competition agreement upon their commencement of employment with us.

The design, processes and specialized equipment utilized in our engineered materials, advanced components and subsystems are innovative, complex and difficult to duplicate. However, there can be no assurance that others will not develop or patent similar technology, or that all aspects of our proprietary technology will be protected. Others have obtained patents covering a variety of materials, devices, equipment, configurations and processes, and others could obtain patents covering technology similar to ours. We may be required to obtain licenses under such patents, and there can be no assurance that we would be able to obtain such licenses, if required, on commercially reasonable terms, or that claims regarding rights to technology will not be asserted that may adversely affect our results of operations. In addition, our research and development contracts with agencies of the U.S. Government present a risk that project-specific technology could be disclosed to competitors as contract reporting requirements are fulfilled.

Executive Officers of the Registrant

The executive officers of the Company and their respective ages and positions as of June 30, 2018 are set forth below. Each executive officer listed has been appointed by the Board of Directors to serve until removed or until such person’s successor is appointed and qualified.

Name		Age		Position
Vincent D. Mattera, Jr.		62		President and Chief Executive Officer; Director
Mary Jane Raymond		57		Chief Financial Officer and Treasurer and Assistant Secretary
Giovanni Barbarossa		56		Chief Technology Officer and President II-VI Laser Solutions
Gary A. Kapusta		58		Chief Operating Officer
Jo Anne Schwendinger		62		Chief Legal and Compliance Officer and Secretary
David G. Wagner		55		Vice President, Human Resources

Vincent D. Mattera, Jr. Dr. Mattera initially served as a member of the II-VI Board of Directors from 2000-2002. Dr. Mattera joined the company as a Vice President in 2004 and served as Executive Vice President from January of 2010 to November of 2013, when he became the Chief Operating Officer. In November of 2014, Dr. Mattera became the President and Chief Operating Officer, and was reappointed to the Board of Directors. In November of 2015, he became the President of II-VI. In September of 2016, Dr. Mattera became the Company’s third President and Chief Executive Officer in 45 years. During his career at II-VI he has assumed

successively broader management roles, including as a lead architect of the Company’s diversification strategy. He has provided vision, energy and dispatch to the Company’s growth initiatives including overseeing the acquisition-related integration activities in the US, Europe, and Asia-especially in China-thereby establishing additional platforms. These have contributed to a new positioning of the Company into large and transformative global growth markets while increasing considerably the global reach of the Company, deepening the technology and IP portfolio, broadening the product roadmap and customer base, and increasing potential of II-VI.

Prior to joining II-VI as an executive, Dr. Mattera had a continuous 20 year career in the Optoelectronic Device Division of AT&T Bell Laboratories, Lucent Technologies and Agere Systems during which he led the development and manufacturing of semiconductor laser based materials and devices for optical and data communications networks. Dr. Mattera has 34 years of leadership experience in the compound semiconductor materials and device technology, operations and markets that are core to II-VI’s business and strategy. Dr. Mattera holds a B.S. in chemistry from the University of Rhode Island (1979), and a Ph.D. degree in chemistry from Brown University (1984). He completed the Stanford University Executive Program (1996).

Mary Jane Raymond has been Chief Financial Officer and Treasurer of the Company since March 2014. Previously, Ms. Raymond was Executive Vice President and Chief Financial Officer of Hudson Global, Inc. (NASDAQ: HSON) from 2005 to 2013. Ms. Raymond was the Chief Risk Officer and Vice President and Corporate Controller at Dun and Bradstreet, Inc., from 2002 to 2005. Additionally, she was the Vice President, Merger Integration, at Lucent Technologies, Inc., from 1997 to 2002 and held several management positions at Cummins Engine Company from 1988 to 1997. Ms. Raymond holds a B.A. degree in Public Management from St. Joseph’s University, and an MBA from Stanford University.

Giovanni Barbarossa joined II-VI in 2012 and has been the President, Laser Solutions Segment, since 2014, and the Chief Technology Officer since 2012. Dr. Barbarossa was employed at Avanex Corporation from 2000 through 2009, serving in various executive positions in product development and general management, ultimately serving as President and Chief Executive Officer. When Avanex merged with Bookham Technology, forming Oclaro, Dr. Barbarossa became a member of the Board of Directors of Oclaro and served as such from 2009 to 2011. Previously, he had management responsibilities at British Telecom, AT&T Bell Labs, Lucent Technologies, and Hewlett-Packard. Dr. Barbarossa graduated from the University of Bari, Italy, with a B.S. degree in Electrical Engineering, and holds a Ph.D. in Photonics from the University of Glasgow, U.K.

Gary A. Kapusta joined II-VI in February 2016 and has served since then as the Company’s Chief Operating Officer. Prior to his employment with the Company, Mr. Kapusta served in various roles at Coca-Cola, including as President & Chief Executive Officer, Coca-Cola Bottlers’ Sales & Services L.L.C.; President, Customer Business Solutions; and Vice President, Procurement Transformation, Coca-Cola Refreshments. He joined Coca-Cola following a 19 year career at Agere Systems, Lucent Technologies, and AT&T. Mr. Kapusta graduated from The University of Pittsburgh with B.S. and M.S. degrees in Industrial Engineering, and holds an MBA from Lehigh University. Jo Anne Schwendinger has served as the Company’s Chief Legal and Compliance Officer and Secretary since March 2017. Ms. Schwendinger also served as the Company’s General Counsel and Secretary from when she joined the Company in March 2017 until November 2017. Prior to her employment with the Company, Ms. Schwendinger practiced law with the law firm Blank Rome, LLP from August 2016 until February 2017. Previously, Ms. Schwendinger served in various legal roles at Deere & Company from February 2000 until August 2016, including Regional General Counsel-Asia-Pacific and Sub-Saharan Africa and Assistant General Counsel. Ms. Schwendinger holds a Bachelor’s degree from the Université d'Avignon et des Pays de Vaucluse, a Master’s degree from the Université de Strasbourg, and a Juris Doctor degree from the University of Pittsburgh Law School.

David G. Wagner has been employed by the Company since 2008, and has been the Vice President, Human Resources since 2011. Prior to his employment with the Company, Mr. Wagner was employed with Owens Corning (NYSE:OC) from 1985 through 2008, serving in various human resource management positions, ultimately becoming the Vice President, Human Resources, for Owen Corning’s global sales force. Mr. Wagner graduated with a B.S. degree in Human Resources Management from Juniata College in 1985. Mr. Wagner has announced his intention to retire from the Company, effective in 2019, as of a date to be determined.

Availability of Information

Our Internet address is www.ii-vi.com. Information contained on our website is not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K. We post the following reports on our website as soon as reasonably practical after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”): our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, we post our proxy statements on Schedule 14A related to our annual shareholders’ meetings as well as reports filed by our directors, officers and 10% beneficial owners pursuant to Section 16 of the Exchange Act. In addition, all filings are available via the SEC’s website (www.sec.gov). We also make our corporate governance documents available on our website, including the Company’s Code of Business Conduct and Ethics, governance guidelines and the charters for our board committees. All such documents are located on the Investors page of our website and are available free of charge.