Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management’s Responsibility for Preparation of the Financial Statements

Management is responsible for the preparation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management. The other financial information contained in this Annual Report on Form 10-K is consistent with the consolidated financial statements.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance concerning the reliability of the financial data used in the preparation of the Company’s consolidated financial statements, as well as reasonable assurance with respect to safeguarding the Company’s assets from unauthorized use or disposition.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement presentation and other results of such systems.

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2019. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included reviewing the documentation of its controls, evaluating the design effectiveness of controls and testing their operating effectiveness. Management excluded from the scope of its assessment of internal control over financial reporting the internal controls of CoAdna Holdings, Inc., which was acquired in September 2018, and Redstone Aerospace Corporation, which was acquired in March 2019. The recent acquisitions excluded from management’s assessment of internal controls over financial reporting represented approximately $98.1 million and $84.1 million of total assets and net assets, respectively, as of June 30, 2019 and approximately $15.5 million and $1.2 million of total revenues and net loss, respectively, for the fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2019, the Company’s internal controls over financial reporting were effective.

Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal control over financial reporting as of June 30, 2019. Its report is included herein.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries (the Company) as of June 30, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 16, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

	Accounting for acquisition of CoAdna Holdings, Inc.
Description of the Matter	As discussed in Note 3 to the consolidated financial statements, during the year ended June 30, 2019, the Company completed the acquisition of CoAdna Holdings, Inc (“CoAdna”) for a total purchase price of approximately $42.8 million, net of cash acquired. The acquisition was accounted for under the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the respective fair values. Auditing the Company’s accounting for its acquisition of CoAdna was complex due to the significant estimation uncertainty in determining the fair value of identified intangible assets, which principally consisted of customer relationships and developed technology. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business which rely upon innovation and growth within the optical communications market and applicability of the existing offerings to future technologies. The Company used the multi-period excess earnings method and the relief from royalty method to value the customer relationships and developed technology, respectively. The significant assumptions used to estimate the fair value of the customer relationships included the forecasted revenue and earnings generated by the customer relationships and a discount rate that reflected the level of risk associated with the future cash flows attributable to the customer relationships. The significant assumptions used to estimate the fair value of the developed technology included the forecasted revenue generated by the asset group and a discount rate that reflected the level of risk associated with the future revenue attributable to the developed technology. These significant assumptions are forward-looking and could be affected by future economic and market conditions.

How We Addressed the Matter in Our Audit	We tested controls that address the risks of material misstatement relating to the valuation of the customer relationships and developed technology. For example, we tested controls over management’s review of the significant assumptions, such as the acquired business’s forecasted revenue and earnings and the discount rates used in the valuation. To test the estimated fair value of the acquired customer relationships and developed technology, our audit procedures included, among others, assessing the appropriateness of the valuation methodologies and testing the significant assumptions discussed above and the underlying data used by the Company. For example, we compared the forecasted revenue and earnings to current industry and economic trends as well as the historic financial performance of the acquired business and its primary customers, and compared the projected revenue growth to the assumptions used in the valuation of the Company’s Photonics reporting unit. We also performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from changes in the significant assumptions. We involved our valuation specialist to assist in evaluating the valuation techniques and discount rate used to value the customer relationships and developed technology, which included comparison of the selected discount rate to the acquired business’s weighted average cost of capital, an evaluation of the relationship of the weighted average cost of capital, internal rate of return and weighted-average return on assets, and consideration of implied deal multiples exhibited by recent transactions of guideline public companies.
	Accounting for acquisition of Redstone Aerospace Corporation
Description of the Matter	As discussed in Note 3 to the consolidated financial statements, during the year ended June 30, 2019, the Company completed the acquisition of Redstone Aerospace Corporation (“Redstone”) for a total purchase price of approximately $29.7 million, net of cash acquired. The acquisition was accounted for under the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the respective fair values. Auditing the Company’s accounting for its acquisition of Redstone was complex due to the significant estimation uncertainty in determining the fair value of identified intangible assets, which principally consisted of developed technology. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair value to underlying assumptions about the future performance of the acquired business which rely upon significant revenue growth arising from accelerating the deployment and expansion of the acquired business’s operating capacity as well as market-participant based revenue synergies. The Company used the relief from royalty method to value the developed technology. The significant assumptions used to estimate the fair value of the developed technology included the forecasted revenue generated by the asset group and a discount rate that reflected the level of risk associated with the future revenue attributable to the developed technology. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit	We tested controls that address the risks of material misstatement relating to the valuation of the developed technology. For example, we tested controls over management’s review of the significant assumptions, such as the acquired business’s forecasted revenue and the discount rate used in the valuation. To test the estimated fair value of the acquired developed technology, our audit procedures included, among others, assessing the appropriateness of the valuation methodology and testing the significant assumptions discussed above and the underlying data used by the Company. For example, we compared the forecasted revenue growth rate to current industry and economic trends and performed sensitivity analyses to evaluate the changes in the fair value of the intangible asset that would result from changes in the significant assumptions, including the timing of projected revenue growth. We involved our valuation specialist to assist in evaluating the valuation techniques and discount rate used to value the developed technology, which included comparison of the selected discount rate to the acquired business’s weighted average cost of capital, an evaluation of the relationship of the weighted average cost of capital, internal rate of return and weighted-average return on assets, and consideration of guideline public company benchmarking analyses reflecting the composition of purchase prices for similar transactions.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2008.

Pittsburgh, Pennsylvania

August 16, 2019

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of II-VI Incorporated and Subsidiaries

Opinion on Internal Control over Financial Reporting

We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, II-VI Incorporated and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of CoAdna Holdings, Inc. (“CoAdna”) and Redstone Aerospace Corporation (“Redstone”), which are included in the June 30, 2019 consolidated financial statements of the Company and constituted $98.1 million and $84.1 million of total and net assets, respectively, as of June 30, 2019 and $15.5 million and $1.2 million of revenues and net loss, respectively, for the fiscal year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of CoAdna and Redstone.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 16, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

August 16, 2019

II-VI Incorporated and Subsidiaries

Consolidated Balance Sheets

($000)

June 30,		2019				2018
Assets
Current Assets
Cash and cash equivalents		$	204,872			$	247,038
Accounts receivable - less allowance for doubtful accounts of $1,292 at June 30, 2019 and $837 at June 30, 2018			269,642				215,032
Inventories			296,282				248,268
Prepaid and refundable income taxes			11,778				7,845
Prepaid and other current assets			30,337				43,654
Total Current Assets			812,911				761,837
Property, plant & equipment, net			582,790				524,890
Goodwill			319,778				270,678
Other intangible assets, net			139,324				125,069
Investments			76,208				69,215
Deferred income taxes			8,524				2,046
Other assets			14,238				7,926
Total Assets		$	1,953,773			$	1,761,661
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt		$	23,834			$	20,000
Accounts payable			104,462				89,774
Accrued compensation and benefits			71,847				66,322
Accrued income taxes payable			20,476				17,392
Other accrued liabilities			49,944				42,979
Total Current Liabilities			270,563				236,467
Long-term debt			443,163				419,013
Deferred income taxes			23,913				27,241
Other liabilities			82,925				54,629
Total Liabilities			820,564				737,350
Shareholders' Equity
Preferred stock, no par value; authorized - 5,000,000 shares; none issued			-				-
Common stock, no par value; authorized - 300,000,000 shares; issued - 76,315,337 shares at June 30, 2019; 75,692,683 shares at June 30, 2018			382,423				351,761
Accumulated other comprehensive income (loss)			(24,221	)			(3,780	)
Retained earnings			943,581				836,064
			1,301,783				1,184,045
Treasury stock, at cost - 12,603,781 shares at June 30, 2019 and 12,395,791 shares at June 30, 2018			(168,574	)			(159,734	)
Total Shareholders' Equity			1,133,209				1,024,311
Total Liabilities and Shareholders' Equity		$	1,953,773			$	1,761,661

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Earnings

Year Ended June 30,		2019				2018				2017
($000, except per share data)
Revenues		$	1,362,496			$	1,158,794			$	972,046
Costs, Expenses and Other Expense (Income)
Cost of goods sold			841,147				696,591				583,684
Internal research and development			139,163				116,875				96,806
Selling, general and administrative			233,518				208,565				176,000
Interest expense			22,417				18,352				6,809
Other expense (income), net			(2,562	)			(3,783	)			(10,041	)
Total Costs, Expenses and Other Expense (Income)			1,233,683				1,036,600				853,258
Earnings Before Income Taxes			128,813				122,194				118,788
Income Taxes			21,296				34,192				23,514
Net Earnings		$	107,517			$	88,002			$	95,274
Basic Earnings Per Share		$	1.69			$	1.41			$	1.52
Diluted Earnings Per Share		$	1.63			$	1.35			$	1.48

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income

Year Ended June 30,		2019				2018				2017
($000)
Net earnings		$	107,517			$	88,002			$	95,274
Other comprehensive income (loss):
Foreign currency translation adjustments			(14,319	)			7,152				(2,275	)
Pension adjustment, net of taxes of $(1,642), $763, and $674 for the years ended June 30, 2019, 2018, and 2017, respectively			(6,122	)			2,846				2,514
Other comprehensive income (loss)			(20,441	)			9,998				239
Comprehensive income		$	87,076			$	98,000			$	95,513

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity

											Accumulated
											Other
		Common Stock									Comprehensive					Retained					Treasury Stock
		Shares				Amount					Income (Loss)					Earnings					Shares				Amount					Total
($000, including share amounts)
Balance - June 30, 2016			72,840			$		243,812			$		(14,017	)		$		652,788				(10,966	)		$		(100,245	)		$		782,338
Share-based and deferred compensation activities			1,241					25,826					-					-				26					(3,114	)				22,712
Net earnings			-					-					-					95,274				-					-					95,274
Foreign currency translation adjustments			-					-					(2,275	)				-				-					-					(2,275	)
Pension adjustment, net of taxes of $674			-					-					2,514					-				-					-					2,514
Balance - June 30, 2017			74,081			$		269,638			$		(13,778	)		$		748,062				(10,940	)		$		(103,359	)		$		900,563
Share-based and deferred compensation activities			1,612					25,717					-					-				(41	)				(6,500	)				19,217
Net earnings			-					-					-					88,002				-					-					88,002
Purchases of treasury stock			-					-					-					-				(1,415	)				(49,875	)				(49,875	)
Foreign currency translation adjustments			-					-					7,152					-				-					-					7,152
Equity portion of convertible debt, net of issuance costs of $1,694			-					56,406					-					-				-					-					56,406
Pension adjustment, net of taxes of $763			-					-					2,846					-				-					-					2,846
Balance - June 30, 2018			75,693			$		351,761			$		(3,780	)		$		836,064				(12,396	)		$		(159,734	)		$		1,024,311
Share-based and deferred compensation activities			622					30,662					-					-				(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, 2019			76,315			$		382,423			$		(24,221	)		$		943,581				(12,604	)		$		(168,574	)		$		1,133,209

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended June 30,		2019				2018				2017
($000)
Cash Flows from Operating Activities
Net earnings		$	107,517			$	88,002			$	95,274
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			75,745				66,202				50,894
Amortization			16,620				14,568				12,743
Share-based compensation expense			21,946				15,312				11,756
Amortization of discount on convertible debt and debt issuance costs			12,550				10,057				-
Losses (gains) on foreign currency remeasurements and transactions			3,155				850				(1,275	)
Earnings from equity investments			(3,214	)			(3,594	)			(744	)
Deferred income taxes			(10,462	)			945				(1,184	)
Increase (decrease) in cash from changes in (net of effects of acquisitions):
Accounts receivable			(50,764	)			(21,044	)			(26,247	)
Inventories			(36,392	)			(38,732	)			(24,992	)
Accounts payable			15,999				17,436				6,704
Contract liabilities			15,889				1,168				2,345
Income taxes			366				7,380				735
Other operating net assets			9,520				2,464				(7,393	)
Net cash provided by operating activities			178,475				161,014				118,616
Cash Flows from Investing Activities
Additions to property, plant & equipment			(137,122	)			(153,438	)			(138,517	)
Purchases of businesses, net of cash acquired			(83,067	)			(80,503	)			(40,015	)
Purchases of equity investments			(4,480	)			(52,056	)			-
Other investing activities			693				1,047				1,291
Net cash used in investing activities			(223,976	)			(284,950	)			(177,241	)
Cash Flows from Financing Activities
Proceeds from issuance of 0.25% convertible senior notes due 2022			-				345,000				-
Proceeds from borrowings under Credit Facility			150,000				100,000				129,000
Proceeds from exercises of stock options			8,698				10,469				15,092
Payments on borrowings under Credit Facility			(135,000	)			(292,000	)			(25,000	)
Payments in satisfaction of employees' minimum tax obligations			(7,092	)			(6,564	)			(4,136	)
Debt issuance costs			(5,589	)			(10,061	)			(1,384	)
Payments on earnout considerations			(4,524	)			-				(2,000	)
Purchases of treasury stock			(1,616	)			(49,875	)			-
Net cash provided by financing activities			4,877				96,969				111,572
Effect of exchange rate changes on cash and cash equivalents			(1,542	)			2,117				496
Net (decrease) increase in cash and cash equivalents			(42,166	)			(24,850	)			53,443
Cash and Cash Equivalents at Beginning of Period			247,038				271,888				218,445
Cash and Cash Equivalents at End of Period		$	204,872			$	247,038			$	271,888
Non cash transactions:
Purchases of business - earnout consideration recorded in other accrued liabilities		$	4,397			$	-			$	2,250
Capital lease obligation incurred on facility lease		$	-			$	-			$	25,000
Additions to property, plant & equipment included in accounts payable and accrued liabilities		$	10,986			$	12,313			$	4,428

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Notes to the Consolidated Financial Statements

Note 1.	Nature of Business and Summary of Significant Accounting Policies

Nature of Business. II-VI Incorporated and its subsidiaries (the “Company,” “we,” “us,” or “our”), a global leader in engineered materials and optoelectronic components and devices, is a vertically-integrated manufacturing company that develops, manufactures and markets engineered materials and optoelectronic components and devices for precision use in industrial materials processing, optical communications, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive applications. The Company markets its products through its direct sales force and through distributors and agents.

The Company uses certain uncommon materials and compounds to manufacture its products. Some of these materials are available from only one proven outside source. The continued high quality of these materials is critical to the stability of the Company’s manufacturing yields. The Company has not experienced significant production delays due to a shortage of materials. However, the Company does occasionally experience problems associated with vendor-supplied materials not meeting specifications for quality or purity. A significant failure of the Company’s suppliers to deliver sufficient quantities of necessary high-quality materials on a timely basis could have a material adverse effect on the Company’s results of operations.

Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company. All intercompany transactions and balances have been eliminated.

Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation. For II-VI Singapore Pte., Ltd. and its subsidiaries, II-VI Laser Enterprise of the II-VI Laser Solutions segment, II-VI Network Solutions Division of the II-VI Photonics segment, and II-VI Performance Metals of the II-VI Performance Products segment, the functional currency is the United States (U.S.) dollar. The determination of the functional currency is made based on the appropriate economic and management indicators.

For all other foreign subsidiaries, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates while income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income within shareholders’ equity in the accompanying Consolidated Balance Sheets.

Cash and Cash Equivalents. The Company considers highly liquid investment instruments with an original maturity of three months or less to be cash equivalents. We place our cash and cash equivalents with high credit quality financial institutions and to date have not experienced credit losses in these instruments. Cash of foreign subsidiaries is on deposit at banks in China, Vietnam, Singapore, Japan, Switzerland, the Netherlands, Germany, the Philippines, Belgium, Italy, Hong Kong, the United Kingdom, South Korea and Taiwan.

Accounts Receivable. The Company establishes an allowance for doubtful accounts based on historical experience and believes the collection of revenues, net of this allowance, is reasonably assured.

Inventories. Inventories are valued at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis. Inventory costs include material, labor and manufacturing overhead. In evaluating the net realizable value of inventory, management also considers, if applicable, other factors, including known trends, market conditions, currency exchange rates and other such issues. The Company generally records a reduction to the carrying value of inventory as a charge against earnings for all products on hand more than 12 to 24 months, depending on the products that have not been sold to customers or cannot be further manufactured for sale to alternative customers. An additional charge may be recorded for product on hand that is in excess of product sold to customers over the same periods noted above. The cumulative adjustments to the carrying value of inventory totaled $23.5 million and $22.5 million at June 30, 2019 and 2018, respectively.

Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair value upon acquisition. Major improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its property, plant and equipment and other long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. Depreciation for financial reporting purposes is computed primarily by the straight-line method over the estimated useful lives for building, building improvements and land improvements of 10 to 20 years and three to 20 years for machinery and equipment.

Business Combinations. The Company accounts for business acquisitions by establishing the acquisition-date fair value as the measurement for all assets acquired and liabilities assumed. Certain provisions of U.S. GAAP prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting.

Goodwill. The excess purchase price over the fair value allocated to identifiable tangible and intangible net assets of businesses acquired is reported as goodwill in the accompanying Consolidated Balance Sheets. The Company tests goodwill for impairment at least annually as of April 1, or when events or changes in circumstances indicate that goodwill might be impaired. The evaluation of impairment involves comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill). The Company uses a discounted cash flow (“DCF”) model and/or a market analysis to determine the fair value of its reporting units. A number of assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical experience and all available information at the time the fair values of the reporting units are estimated. Goodwill impairment is now measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative assessment described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the quantitative assessment. Otherwise, the Company will forego the quantitative assessment and does not need to perform any further testing. As of April 1 of fiscal years 2019 and 2018, the Company completed its annual impairment tests of its reporting units using the quantitative assessment. Based on the results of these analyses the Company’s goodwill was not impaired.

Intangibles. Intangible assets are initially recorded at their cost or fair value upon acquisition. Finite-lived intangible assets are amortized for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from five to 20 years. Indefinite-lived intangible assets are not amortized but tested annually for impairment at April 1st, or when events or changes in circumstances indicate that indefinite-lived intangible assets might be impaired.

Investments in Other Entities. In the normal course of business, the Company enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by the Company in business entities, including general or limited partnerships, contractual ventures, or other forms of equity participation. The Company determines whether such investments involve a variable interest entity (“VIE”) based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management determines if the Company is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. When the Company is deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a noncontrolling interest.

The Company generally accounts for investments it makes in VIEs in which it has determined that it does not have a controlling financial interest but has significant influence over and holds at least a 20% ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for under ASU 2016-01.

If an entity fails to meet the characteristics of a VIE, management then evaluates such entity under the voting model. Under the voting model, management consolidates the entity if they determine that the Company, directly or indirectly, has greater than 50% of the voting shares and determines that other equity holders do not have substantive participating rights.

Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Such accruals are adjusted as further information develops or circumstances change. Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. If we are unable to correct defects or other problems, we could experience, among other things, loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers. The Company had no material loss contingency liabilities at June 30, 2019 related to commitments and contingencies.

Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount more likely than not to be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company believes that its estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of its tax returns. The Company recognizes both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Revenue Recognition. Revenue is recognized under ASC 606 when or as obligations under the terms of a contract with the Company’s customer have been satisfied and control has transferred to the customer. The Company has elected to exclude all taxes from the measurement of the transaction price.

For contracts with commercial customers, which comprise the majority of the Company’s performance obligations, ownership of the goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a product (“Direct Ship Parts”) to the customer or receipt of the product by the customer and without significant judgments. The majority of contracts typically require payment within 30 to 60 days after transfer of ownership to the customer.

Contracts with the United States (“U.S.”) government through its prime contractors are typically for products or services with no alternative future use to the Company with an enforceable right to payment for performance completed to date, whereas commercial contracts typically have alternative use. Customized products with no alternative future use to the Company with an enforceable right to payment for performance completed to date are recorded over time utilizing the output method of units delivered. The Company considers this to be a faithful depiction of the transfer to the customer of revenue over time due to short cycle time and immaterial work-in-process balances. The majority of contracts typically require payment within 30 to 60 days after transfer of ownership to the customer.

Service revenue includes repairs, non-recurring engineering, tolling arrangements and installation. Repairs, tolling and installation activities are usually completed in a short period of time (normally less than one month) and therefore recorded at a point in time when the services are completed. Non-recurring engineering arrangements are typically recognized over time under the time and material practical expedient, as the entity has a right to consideration from a customer, in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. The majority of contracts typically require payment within 60 days.

The Company’s revenue recognition policy is consistently applied across the Company’s segments, product lines and geographical locations. Further for the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions, credits and discounts, rebates and price protection, or other similar privileges. Our distributors and agents are not granted price protection. Our distributors and agents, which comprise less than 10% of consolidated revenues, have no additional product return rights beyond the right to return defective products covered by our warranty policy.

Under ASC 606, the Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administration expenses. The Company has elected to recognize the costs for freight and shipping when control over products has transferred to the customer as an expense in cost of sales.

The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of future returns, based on historical experience. The Company makes estimates evaluating its allowance for doubtful accounts. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that it has identified.

The Company offers an assurance-type limited warranty that products will be free from defects in materials and workmanship. The warranty is typically one year or the industry standard in length and is limited to either (1) the replacement or repair of the product or (2) a credit against future purchases. The products are not sold with a right of return.

The Company has elected not to disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations, as our contracts have an original expected duration of less than one year.

Research and Development. Internal research and development costs and costs not related to customer and government funded research and development contracts are expensed as incurred.

Share-Based Compensation. Share-based compensation arrangements require the recognition of the grant-date fair value of stock compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period.

Accumulated Other Comprehensive Income. Accumulated other comprehensive income is a measure of all changes in shareholders’ equity that result from transactions and other economic events in the period other than transactions with owners. Accumulated other comprehensive (loss) income is a component of shareholders’ equity and consists of accumulated foreign currency translations adjustments and pension adjustments.

Fair Value Measurements. The Company applies fair value accounting for all financial assets and liabilities that are required to be recognized or disclosed at fair value in the financial statements. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which the Company would transact, and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

Operating Leases. The Company classifies operating leases in accordance with the provisions of lease accounting. Rent expense under noncancelable operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess straight-line rent expense over scheduled payments is recorded as a deferred liability. The current portion of unamortized deferred lease costs is included in other accrued liabilities and the long-term portion is included in other liabilities in the Consolidated Balance Sheets.

Capital Leases. The Company accounts for capital leases at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments. The current and long-term portion of the capital lease obligation is recorded in other accrued liabilities and other liabilities, respectively, in the Consolidated Balance Sheet. Capital lease assets are included in property, plant & equipment and are generally depreciated over the term of the lease. Interest expense on capital leases are included in interest expense in the Consolidated Statements of Earnings.

Recently Issued Financial Accounting Standards

Revenue Recognition Pronouncement

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this standard on July 1, 2018 using the modified retrospective method of adoption applied to all contracts at that date. Adoption of the ASU did not require an adjustment to the opening balance of equity. The standard did not have a significant effect on its results of operations, liquidity or financial position in fiscal year 2019. The Company implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and to generate the disclosures required under the new standard. For the disclosures required by this ASU, see Note 5, Revenue from Contracts with Customers.

Other Adopted Pronouncements

In August 2018, the FASB issued ASU 2018-14, Disclosure Framework – Changes to the disclosure framework requirements for Defined Benefit Plans. This update defined a narrower set of disclosures required on the basis of an evaluation of whether the expected benefits of entities providing the information justify the expected costs. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the disclosure requirements for fair value measurements. This update defined a narrower set of disclosures required on the basis of an evaluation of whether the expected benefits of entities providing the information justify the expected costs. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU 2017-07, Compensation (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update affects employers’ presentation of defined benefit retirement plan costs. With the adoption of this standard, the Company restated the prior periods ending June 30, 2018, 2017, and 2016. These restatements did not have a material effect on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This update changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This update requires that when intra-entity asset transfers occur, the entity must recognize tax effects in the period in which the transfer occurs. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flow. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

Pronouncements Currently Under Evaluation

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The new standard will become effective for the Company’s fiscal year 2020, which begins on July 1, 2019. During fiscal year 2019, we conducted a survey to identify all leases across the organization (including embedded leases). We identified that a majority of our leases are categorized into one of three categories: office equipment, real estate and vehicles. We are finalizing the accumulation of lease data, including new leases entered into at the end of fiscal year 2019, and preparing the final transition adjustment calculations. We estimate that total assets and total liabilities will increase within the range of $90 million and $120 million on July 1, 2019 when the ASU is adopted.

In July 2018, the FASB issued targeted improvements to ASU 2016-02 in ASU 2018-11. This update provides entities with an optional transition method, which permits an entity to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We expect to use this new transition approach and the comparative periods presented in our fiscal 2020 consolidated financial statements will continue to be reported in accordance with ASC 840, Leases. We anticipate that we will elect the package of practical expedients allowed in the standard, which among other things, allows us to carry forward our historical lease classification. We also anticipate that we will make an accounting policy election to use the practical expedient allowed in the standard to not separate lease and non-lease components when calculating the lease liability under Topic 842.

In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which among other things, requires the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.

Note 2.	Pending Merger

II-VI and Finisar Corporation (“Finisar”) have entered into an Agreement and Plan of Merger, dated as of November 8, 2018 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Mutation Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of II-VI, will be merged with and into Finisar, and Finisar will continue as the surviving corporation in the merger and a wholly owned subsidiary of II-VI (the “Merger”).

If the Merger is consummated, Finisar stockholders will be entitled to receive, at their election, consideration per share of common stock of Finisar (the “Finisar Common Stock”) consisting of (i) $26.00 in cash, without interest (the “Cash Election Consideration”), (ii) 0.5546 shares of II-VI common stock (the shares, the “II-VI Common Stock,” and the consideration, the “Stock Election Consideration”), or (iii) a combination of $15.60 in cash, without interest, and 0.2218 shares of II-VI Common Stock (the “Mixed Election Consideration,” and, together with the Cash Election Consideration and the Stock Election Consideration, the “Merger Consideration”). The Cash Election Consideration and the Stock Election Consideration are subject to proration adjustment pursuant to the terms of the Merger Agreement such that the aggregate Merger Consideration will consist of approximately 60% cash and approximately 40% II-VI Common Stock (assuming a per share price of II-VI common stock equal to the price when the Merger Agreement was signed on November 8, 2018, which was $46.88 per share) regardless of the individual election.

At the effective time of the Merger (the “Effective Time”), each option granted pursuant to Finisar’s 2005 Stock Incentive Plan, as such plan has been further amended and restated (each, a “Finisar Stock Option”), or portion thereof, that is outstanding and unexercised as of immediately prior to the Effective Time (whether vested or unvested) will be cancelled, terminated and converted into the right to receive an amount of Mixed Election Consideration that would be payable to a holder of such number of shares of Finisar Common Stock equal to the quotient of (i) the product of (a) the excess, if any, of $26.00 over the exercise price per share of such Finisar Stock Option multiplied by (b) the number of shares of Finisar Common Stock subject to such Finisar Stock Option, divided by (ii) $26.00.

At the Effective Time, each restricted stock unit granted pursuant to Finisar’s 2005 Stock Incentive Plan, as such plan has been further amended and restated, each, a “Finisar Restricted Stock Unit”), or portion thereof, that is outstanding and subject to a performance-based vesting condition that relates solely to the value of Finisar Common Stock will, to the extent such Finisar Restricted Stock Unit vests in accordance with its terms in connection with the Merger (the “Participating RSUs”), be cancelled and extinguished and converted into the right to receive the Cash Election Consideration, the Stock Election Consideration or the Mixed Election Consideration at the election of the holder of such Participating RSUs, subject to proration adjustment.

At the Effective Time, each Finisar Restricted Stock Unit (or portion thereof) that is outstanding and unvested, does not vest in accordance with its terms in connection with the Merger and is either (x) subject to time-based vesting requirements only or (y) subject to a performance-based vesting condition other than the value of Finisar Common Stock will be assumed by II-VI (each, an “Assumed RSU”). Each Assumed RSU will be subject to substantially the same terms and conditions as applied to the related Finisar Restricted Stock Unit immediately prior to the Effective Time, including the vesting schedule (and the applicable performance-vesting conditions in the case of a grant contemplated by clause (y) of the preceding sentence) and any provisions for accelerated vesting applicable thereto, except that the number of shares of II-VI Common Stock subject to each Assumed RSU will be equal to the product of (i) the number of shares of Finisar Common Stock underlying such unvested Finisar Restricted Stock Unit award as of immediately prior to the Effective Time multiplied by (ii) the sum of (a) 0.2218 plus (b) the quotient obtained by dividing (1) $15.60 by (2) the volume weighted average price per share of II-VI Common Stock (rounded to the nearest cent) on the Nasdaq Global Select Market for the ten consecutive trading days ending on (and including) the third trading day immediately prior to the Effective Time (with the resulting number rounded down to the nearest whole share).

II-VI filed with the Securities and Exchange Commission a registration statement on Form S-4 relating to the Merger, and that registration statement became effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933, as amended, on February 7, 2019. Shareholders of II-VI and stockholders of Finisar voted to approve proposals related to the Merger at special meetings held on March 26, 2019 by the respective companies.

The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to the Merger has expired without a request for additional information. Other regulatory approvals applicable to the Merger have been obtained in Germany, Mexico and Romania.

On November 8, 2018, in connection with its entry into the Merger Agreement, II-VI entered into a commitment letter (together with a related fee letter) with Bank of America, N.A., which was subsequently amended and restated on December 7, 2018 and on December 14, 2018 (together with one or more related fee letters, the “Commitment Letter”). Subject to the terms and conditions set forth in the Commitment Letter, the lender parties thereto severally committed to provide 100% of up to $2.425 billion in aggregate principal amount of senior secured credit facilities of II-VI.

On March 4, 2019, II-VI entered into a Credit Agreement (the “New Credit Agreement”), by and among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and a L/C Issuer, and the other lenders party thereto. Pursuant to the terms and subject to the conditions therein, the New Credit Agreement provides for senior secured financing of $1.625 billion in the aggregate, consisting of (i) a five-year senior secured first-lien term A loan facility in an aggregate principal amount of $1.175 billion (the “Term A Facility”) and (ii) a five-year senior secured first-lien revolving credit facility in an aggregate principal amount of $450.0 million (the “Revolving Credit Facility” and together with the Term A Facility, the “New Senior Credit Facilities”). The New Credit Agreement also provides for a letter of credit sub-facility not to exceed $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million, subject to adjustment in accordance with the terms of the New Credit Agreement. II-VI anticipates using the proceeds from the Term A Facility, together with a separately committed term B loan facility in an aggregate principal amount of up to $720.0 million (the “Term B Facility”) and cash and short-term investments of II-VI and Finisar, to pay the cash portion of the merger consideration payable in connection with the Merger and related fees and expenses. II-VI currently does not intend to draw on the Revolving Credit Facility in order to fund the cash portion of the merger consideration payable in connection with the Merger.

The funding obligations of the lenders under the New Senior Credit Facilities are subject to certain currently unsatisfied conditions, including the consummation of the Merger. Accordingly, no borrowings are currently outstanding under the New Senior Credit Facilities, and II-VI currently is not able to borrow under the New Senior Credit Facilities. Further, II-VI expects that the New Credit Agreement will be amended prior to the Closing Date to reflect syndication of the Term B Facility and to finalize certain other terms in the New Credit Agreement. Upon the consummation of the Merger, the New Senior Credit Facilities, governed by the New Credit Agreement as it may be amended as of such time, will be used (i) to refinance in full the Amended Credit Facility (as defined in Note 9) and (ii) on or after the date of the consummation of the Merger, to repay amounts owed in connection with Finisar’s outstanding convertible notes, currently in an aggregate principal amount outstanding of $575.0 million, including the proceeds of a portion of the Term A Facility which will be available to II-VI for a certain period after the initial funding under the New Senior Credit Facilities.

Unless and until the Merger is consummated and the other currently unsatisfied conditions to the funding obligations of the lenders under the New Senior Credit Facilities are satisfied or waived, the Amended Credit Facility remains in effect in accordance with its terms.

The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. The Company is planning to refile with the State Administration for Market Regulation in China, extending the approval period. Subject to the satisfaction or waiver of each of the closing conditions, II-VI and Finisar expect that the Merger will be completed in the second half of calendar 2019. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.

Note 3.	Acquisitions

CoAdna, Inc.

In September 2018, the Company acquired CoAdna Holdings, Inc. (“CoAdna”), a previously publicly traded company on the Taiwan Stock Exchange with headquarters in Sunnyvale, CA, in a cash transaction valued at approximately $85.0 million, inclusive of cash acquired of approximately $42.2 million at closing.

CoAdna is a global leader in wavelength selective switches based on its patented liquid crystal platform. CoAdna operates within the Company’s II-VI Photonics operating segment.

The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):

Assets
Accounts receivable		$		5,684
Inventories				6,189
Prepaid and other assets				2,454
Property, plant & equipment				3,181
Intangible assets				16,072
Goodwill				24,898
Total assets acquired		$		58,478
Liabilities
Accounts payable		$		4,006
Other accrued liabilities				4,103
Long term accrued income taxes				6,656
Deferred tax liabilities				897
Total liabilities assumed				15,662
Net assets acquired		$		42,816

The goodwill of $24.9 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled workforce of CoAdna. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $5.7 million, with the gross contractual amount being $5.7 million. The Company expensed transaction costs during the year ended June 30, 2019 of $1.9 million.

The amount of revenues of CoAdna included in the Company’s Consolidated Statements of Earnings for the year ended June 30, 2019 was $12.4 million, excluding sales to customers through our sales offices. The amount of net loss of CoAdna included in the Company’s Consolidated Statement of Earnings for the year ended June 30, 2019 was $0.6 million.

Purchase of a Product Line

In November 2018, the Company acquired certain assets of a product line in a cash transaction valued at approximately $10.0 million. The transaction was accounted for as a business combination under ASC 805 and ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. In conjunction with the acquisition of the product line, the Company acquired inventory of $0.2 million, equipment of $2.3 million, acquired technology of $6.3 million, and recorded goodwill of $1.2 million. The goodwill is deductible for income tax purposes. The goodwill is recorded in the II-VI Photonics segment and is attributable to the workforce acquired as part of the transaction. Transaction expenses for this acquisition were insignificant for the year ended June 30, 2019.

Redstone Aerospace Corporation

In March 2019, the Company acquired Redstone Aerospace Corporation (“Redstone”), an aerospace and defense company located in Colorado. Redstone has unique capabilities to continue our growth in the emerging high-energy market. The consideration consisted of initial cash paid at the acquisition date of $28.0 million, net of cash acquired. In addition, the acquisition agreement provides up to a maximum of $2.0 million of additional cash earn out opportunities based on achievement of certain agreed-upon financial objectives.

The following table presents the final purchase price at the date of acquisition ($000):

Net cash paid at acquisition		$		27,959
Fair value of cash earnout arrangement				1,776
Purchase price		$		29,735

The following table presents a final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):

Assets
Accounts receivable		$		1,606
Other Assets				215
Property, plant & equipment				350
Intangible assets				9,100
Goodwill				21,596
Total assets acquired		$		32,867
Liabilities
Non-Interest bearing liabilities		$		980
Deferred tax liabilities				2,152
Total liabilities assumed				3,132
Net assets acquired		$		29,735

The goodwill of $21.6 million is recorded in the II-VI Performance Products segment and is attributed to the expected synergies and the assembled workforce of Redstone. The goodwill is non-deductible for income tax purposes. At the time of the acquisition, the Company expected to collect all of the accounts receivable. Transaction expenses for this acquisition were insignificant for the year ended June 30, 2019.

The amount of revenues and net earnings from the acquisition included in the Company’s Consolidated Statements of Earnings for the year ended June 30, 2019 were insignificant.

Note 4.	Other Investments

Purchase of Equity Investment

In November 2017, the Company acquired a 93.8% equity investment in a privately-held company for $51.5 million. The Company’s pro-rata share of earnings from this investment since the acquisition date was $1.3 million and $2.4 million for the years ended June 30, 2019 and 2018, respectively, and was recorded in other expense (income), net in the Consolidated Statement of Earnings.

This investment is accounted for under the equity method of accounting (“Equity Investment”). The following table summarizes the Company's equity in this nonconsolidated investment:

		Interest		Ownership % as of			Equity as of
Location		Type		June 30, 2019			June 30, 2019 ($000)
USA		Equity Investment		93.8%			$	57,645

The Equity Investment has been determined to be a variable interest entity because the Company has an overall 93.8% economic position in the investee, comprising a significant portion of its capitalization, but has only a 25% voting interest. The Company’s obligation to receive rewards and absorb expected losses is disproportionate to its voting interest. The Company is not the primary beneficiary because it does not have the power to direct the activities of the equity investment that most significantly impact its economic performance. Certain business decisions, including decisions with respect to operating budgets, material capital expenditures, indebtedness, significant acquisitions or dispositions, and strategic decisions, require the approval of owners holding a majority percentage in the Equity Investment. Beginning on the date it was acquired, the Company accounted for its interest as an equity method investment as the Company has the ability to exercise significant influence over operating and financial policies of the Equity Investment.

As of June 30, 2019, the Company’s maximum financial statement exposure related to the Equity Investment was approximately $57.6 million, which is included in Investments on the Consolidated Balance Sheet as of June 30, 2019.

The Company has the right to purchase all of the outstanding interest of each of the minority equity holders and the minority equity holders have the right to cause the Company to purchase all of their outstanding interests at any time on or after the third anniversary of the investment, or earlier upon certain events. The purchase price is equal to the greater of: (a) (i) the product of the aggregate trailing 12-month revenues of the equity investment preceding the date of purchase, multiplied by (ii) a factor of 2.9 multiplied by (iii) a factor of 0.723, multiplied by (iv) the percentage interest owned by each minority equity holder and (b) $966,666. The Company performed a Monte Carlo simulation to estimate the fair value of the net put option at the investment date and recorded a liability of $2.2 million in Other long-term liabilities in the Consolidated Balance Sheet in accordance with ASC 815-10, Derivatives and Hedging. The fair value of the net put option is adjusted as necessary on a quarterly basis, with any changes in the fair value recorded through earnings. The change in fair value of the net purchase option from the investment date to June 30, 2019 was not material.

Guangdong Fuxin Electronic Technology Equity Investment

The Company has an equity investment of 20.2% in Guangdong Fuxin Electronic Technology, based in Guangdong Province, China, which is accounted for under the equity method of accounting. The total carrying value of the investment recorded at June 30, 2019 and June 30, 2018 was $14.1 million and $12.9 million, respectively. During the years ended June 30, 2019, 2018 and 2017, the Company’s pro-rata share of earnings from this investment was $1.9 million, $1.2 million and $0.7 million, respectively, and was recorded in other expense (income), net in the Consolidated Statements of Earnings. During the years ended June 30, 2019, 2018 and 2017, the Company received dividends from this equity investment of $0.7 million, $0.4 million and $0.4 million, respectively.

Other Equity Investment

During the quarter ended September 30, 2018, the Company acquired a 10% equity investment in a privately-held company for $4.5 million. The Company has determined that the equity interest does not give it the ability to exercise significant influence or joint control. Therefore, the Company will not account for this investment under the equity method of accounting. Under ASU 2016-01, Financial Instruments, the Company has elected the measurement alternative, as the investment does not have a readily determinable fair value. Under the alternative, the Company measures the investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investment of the Company for which there were none during the year ended June 30, 2019.

Note 5.	Revenue from Contracts with Customers

The following table summarizes disaggregated revenue by market and product for the year ended June 30, 2019 ($000):

		Twelve Months Ended June 30, 2019
		II-VI										II-VI
		Laser					II-VI					Performance
		Solutions					Photonics					Products					Total
Commercial
Direct Ship Parts		$		382,066			$		631,407			$		181,036			$		1,194,509
Services				3,738					7,482					10,426					21,646
U.S. Government
Direct Ship Parts		$		10,751			$		-			$		119,562			$		130,313
Services				18					-					16,010					16,028
Total Revenues		$		396,573			$		638,889			$		327,034			$		1,362,496

Contract Liabilities

Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the year ended June 30, 2019, the Company recognized revenue of $3.4 million related to customer payments that were included in the consolidated balance sheet as of July 1, 2018. As of June 30, 2019, the Company had $19.4 million of contract liabilities recorded in the consolidated balance sheet.

Note 6.	Inventories

The components of inventories were as follows:

June 30,		2019				2018
($000)
Raw materials		$	119,917			$	97,502
Work in progress			101,091				83,002
Finished goods			75,274				67,764
		$	296,282			$	248,268

Note 7.	Property, Plant & Equipment

Property, plant & equipment consist of the following:

June 30,		2019				2018
($000)
Land and land improvements		$	9,001			$	9,072
Buildings and improvements			249,238				216,507
Machinery and equipment			739,330				633,934
Construction in progress			71,425				88,350
			1,068,994				947,863
Less accumulated depreciation			(486,204	)			(422,973	)
		$	582,790			$	524,890

Note 8.	Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses. Identifiable intangible assets acquired in business combinations are recorded based upon fair value at the date of acquisition.

Changes in the carrying amount of goodwill were as follows ($000):

		Year Ended June 30, 2019
		II-VI Laser				II-VI				II- VI Performance
		Solutions				Photonics				Products				Total
Balance-beginning of period		$	98,737			$	109,670			$	62,271			$	270,678
Goodwill acquired			-				26,069				25,569				51,638
Foreign currency translation			(856	)			(1,682	)			-				(2,538	)
Balance-end of period		$	97,881			$	134,057			$	87,840			$	319,778

		Year Ended June 30, 2018
		II-VI Laser				II-VI				II- VI Performance
		Solutions				Photonics				Products				Total
Balance-beginning of period		$	79,527			$	108,544			$	62,271			$	250,342
Goodwill acquired			18,956				-				-				18,956
Goodwill adjustment for prior year acquisition - IPI			-				407				-				407
Foreign currency translation			254				719				-				973
Balance-end of period		$	98,737			$	109,670			$	62,271			$	270,678

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2019 and 2018 were as follows ($000):

		June 30, 2019												June 30, 2018
		Gross								Net				Gross								Net
		Carrying				Accumulated				Book				Carrying				Accumulated				Book
		Amount				Amortization				Value				Amount				Amortization				Value
Technology and Patents		$	91,637			$	(39,679	)		$	51,958			$	66,812			$	(32,979	)		$	33,833
Trade Names			15,759				(1,601	)			14,158				15,882				(1,471	)			14,411
Customer Lists			132,872				(59,664	)			73,208				127,603				(50,792	)			76,811
Other			1,572				(1,572	)			-				1,573				(1,559	)			14
Total		$	241,840			$	(102,516	)		$	139,324			$	211,870			$	(86,801	)		$	125,069

Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2019, 2018 and 2017 was $16.6 million, $14.6 million, and $12.7 million, respectively. The technology and patents are being amortized over a range of 60 to 240 months with a weighted-average remaining life of approximately 84 months. The customer lists are being amortized over 60 to 240 months with a weighted-average remaining life of approximately 130 months.

In conjunction with the acquisition of CoAdna, the Company recorded $9.8 million attributed to the value of technology and patents and $6.3 million of customer lists. The intangibles were recorded based on the Company’s purchase price allocation utilizing either the multi-period excess earnings method or relief from royalty method to derive the fair value.

In conjunction with the acquisition of the product line, the Company recorded $6.3 million of acquired technology. The acquired technology was recorded based on the Company’s purchase price allocation utilizing a relief from royalty method to derive the fair value.

In conjunction with the acquisition of Redstone, the Company recorded $9.1 million of acquired technology. The acquired technology was recorded based on the Company’s purchase price allocation utilizing a relief from royalty method to derive the fair value.

In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade names of $14.0 million as of June 30, 2019 is not amortized but tested annually for impairment. The Company completed its impairment test of these trade names with indefinite lives in the fourth quarter of fiscal years 2019 and 2018. Based on the results of these tests, the trade names were not impaired in fiscal years 2019 and 2018.

The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows ($000):

Year Ending June 30,
2020		$	16,700
2021			16,300
2022			14,800
2023			14,400
2024			14,000

Note 9.	Debt

The components of debt were as follows ($000):

June 30,		2019				2018
0.25% Convertible senior notes		$	345,000			$	345,000
Convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount			(43,859	)			(56,409	)
Term loan, interest at LIBOR, as defined, plus 1.75%			45,000				65,000
Line of credit, interest at LIBOR, as defined, plus 1.75%			115,000				80,000
Amended credit facility unamortized debt issuance costs			(761	)			(1,126	)
Yen denominated line of credit, interest at LIBOR, as defined, plus 1.75%			2,783				2,714
Note payable assumed in IPI acquisition			3,834				3,834
Total debt			466,997				439,013
Current portion of long-term debt			(23,834	)			(20,000	)
Long-term debt, less current portion		$	443,163			$	419,013

0.25% Convertible Senior Notes

On August 24, 2017, the Company entered into a purchase agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein (collectively, the “Initial Purchasers”), pursuant to which the Company issued and sold $345 million aggregate principal amount of our 0.25% convertible senior notes due 2022 (the "Notes") in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.

The Notes mature on September 1, 2022, unless earlier repurchased by the Company or converted by holders in accordance with the terms of the Notes. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2018.

The sale of the Notes to the Initial Purchasers settled on August 29, 2017, and resulted in approximately $336 million in net proceeds to the Company after deducting the initial purchasers’ discount and offering expenses. The net proceeds from the offering and sale of the Notes were used, in part, to repurchase approximately $49.9 million of our common stock. The Company used the remaining net proceeds to repay $252 million on its revolving credit facility and to pay debt issuance costs of $10.1 million.

The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of our indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure secured debt will be available to pay obligations on the Notes only after all indebtedness under such secured debt has been repaid in full from such assets. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election.

As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the Notes using the effective interest method with an effective interest rate of 4.5% per annum.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is 21.25 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $47.06 per share of common stock. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the Notes amounted to $268.0 million as of June 30, 2019 (based on the Company’s closing stock price on the last trading day of the year ended June 30, 2019).

Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.

Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only upon satisfaction of at least one of the conditions as follows:

	a)	During any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

	b)	During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or

	c)	Upon the occurrence of specified corporate events.

On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

As of June 30, 2019, the Notes are not yet convertible. The Notes will become convertible upon the satisfaction of at least one of the above conditions. In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount of offering costs incurred to the debt and equity components based on their relative values. Offering costs attributable to the debt component, totaling $8.4 million, are being amortized as non-cash interest expense over the term of the Notes, and offering costs attributable to the equity component, totaling $1.7 million, were recorded within Shareholders' Equity.

The Company was in compliance with all the covenants set forth under the indenture.

The following table sets forth total interest expense recognized related to the Notes for the fiscal year ended June 30, 2019 (representing an effective interest rate of 4.5%):

Year ended June 30,		2019				2018
0.25% contractual coupon		$	874			$	731
Amortization of debt discount and debt issuance costs including initial purchaser discount			12,550				10,058
Interest expense		$	13,424			$	10,789

The unamortized discount amounted to $38.3 million as of June 30, 2019 and is being amortized over approximately 3 years.

Amended Credit Facility

On July 28, 2016, the Company amended and restated its existing credit agreement. The Third Amended and Restated Credit Agreement (the “Amended Credit Facility”) provides for a revolving credit facility of $325 million, as well as a $100 million term loan. The term loan is being repaid in consecutive quarterly principal payments on the first business day of each January, April, July and October, with the first payment having commenced on October 1, 2016, as follows: (i) twenty consecutive quarterly installments of $5 million and (ii) a final installment of all remaining principal due and payable on the maturity date of July 27, 2021. Amounts borrowed under the revolving credit facility are due and payable on the maturity date. The Amended Credit Facility is unsecured, but is guaranteed by each existing and subsequently acquired or organized wholly-owned domestic subsidiary of the Company. The Company has the option to request an increase to the size of the revolving credit facility in an aggregate additional amount not to exceed $100 million. The Amended Credit Facility has a five-year term through July 27, 2021 and has an interest rate of either a Base Rate Option or a Euro-Rate Option, plus an Applicable Margin, as defined in the agreement governing the Amended Credit Facility. If the Base Rate option is selected for a borrowing, the Applicable Margin is 0.00% to 1.25% and if the Euro-Rate Option is selected for a borrowing, the Applicable Margin is 1.00% to 2.25%. The Applicable Margin is based on the ratio of the Company’s consolidated indebtedness to consolidated EBITDA. Additionally, the Credit Facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2019, the Company was in compliance with all financial covenants under its Amended Credit Facility.

Yen Loan

The Company’s yen denominated line of credit is a 500 million Yen ($4.6 million) facility. The Yen line of credit matures in August 2020. The interest rate equal to LIBOR, as defined in the loan agreement, plus 0.625% to 1.75%. At June 30, 2019 and 2018, the Company had 300 million yen outstanding under the line of credit. Additionally, the facility is subject to certain covenants, including those relating to minimum interest coverage and maximum leverage ratios. As of June 30, 2019, the Company had $2.8 million outstanding and was in compliance with all covenants under its Yen facility.

Note Payable

In conjunction with the acquisition of IPI, the Company assumed a non-interest bearing note payable owed to a major customer of IPI. The agreement, if not terminated early by either party, is payable in full in January 2020.

Aggregate Availability

The Company had aggregate availability of $211.9 million and $246.4 million under its lines of credit as of June 30, 2019 and 2018, respectively. The amounts available under the Company’s lines of credit are reduced by outstanding letters of credit. Total outstanding letters of credit supported by the credit facilities were immaterial as of June 30, 2019, and $0.4 million at June 30, 2018.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 1.6% and 1.3% for the years ended June 30, 2019 and 2018, respectively. The weighted average of total borrowings for the fiscal years ended June 30, 2019 and 2018 was $533.9 million and $476.6 million, respectively. There are no interim maturities or minimum payment requirements related to the credit facilities before their respective expiration dates. Interest and commitment fees paid during the fiscal years ended June 30, 2019, 2018 and 2017 were $9.2 million, $6.6 million and $6.1 million, respectively.

Remaining Annual Principal Payments

Remaining annual principal payments under the Company’s existing credit facilities and notes payable as of June 30, 2019 were as follows ($000):

										U.S.
										Dollar
		Term				Yen Line				Line of				Note				Convertibles
Year Ended		Loan				of Credit				Credit				Payable				Notes				Total
June 30, 2020		$	20,000			$	-			$	-			$	3,834			$	-			$	23,834
June 30, 2021			20,000				2,783				-				-				-			$	22,783
June 30, 2022			5,000				-				115,000				-				-			$	120,000
June 30, 2023			-				-				-				-				345,000			$	345,000
June 30, 2024			-				-				-				-				-			$	-
Total		$	45,000			$	2,783			$	115,000			$	3,834			$	345,000			$	511,617

Note 10.	Income Taxes

The components of earnings (losses) before income taxes were as follows:

Year Ended June 30,		2019				2018				2017
($000)
U.S. loss		$	(34,241	)		$	(15,207	)		$	(6,944	)
Non-U.S. income			163,054				137,401				125,732
Earnings before income taxes		$	128,813			$	122,194			$	118,788

The components of income tax expense were as follows:

Year Ended June 30,		2019				2018				2017
($000)
Current:
Federal		$	1,755			$	699			$	2,133
State			472				401				253
Foreign			29,531				32,147				22,312
Total Current		$	31,758			$	33,247			$	24,698
Deferred:
Federal		$	(3,764	)		$	(3,064	)		$	(6,963	)
State			(2,010	)			1,615				(1,251	)
Foreign			(4,688	)			2,394				7,030
Total Deferred		$	(10,462	)		$	945			$	(1,184	)
Total Income Tax Expense		$	21,296			$	34,192			$	23,514

Principal items comprising deferred income taxes were as follows:

June 30,		2019				2018
($000)
Deferred income tax assets
Inventory capitalization		$	5,687			$	5,267
Non-deductible accruals			1,251				1,125
Accrued employee benefits			9,797				7,614
Net-operating loss and credit carryforwards			54,192				48,738
Share-based compensation expense			7,192				7,925
Other			5,488				3,242
Valuation allowances			(16,558	)			(21,797	)
Total deferred income tax assets		$	67,049			$	52,114
Deferred income tax liabilities
Tax over book accumulated depreciation		$	(28,184	)		$	(24,174	)
Intangible assets			(28,202	)			(24,649	)
Tax on unremitted earnings			(11,662	)			(13,090	)
Convertible debt			(8,662	)			(11,376	)
Other			(5,728	)			(4,020	)
Total deferred income tax liabilities		$	(82,438	)		$	(77,309	)
Net deferred income taxes		$	(15,389	)		$	(25,195	)

The reconciliation of income tax expense at the statutory U.S. federal rate to the reported income tax expense is as follows:

Year Ended June 30,		2019				%				2018				%				2017				%
($000)
Taxes at statutory rate			27,051				21			$	34,284				28			$	41,576				35
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit			(1,212	)			(1	)			1,426				1				(641	)			-
Taxes on non U.S. earnings			(5,857	)			(5	)			(16,058	)			(13	)			(12,907	)			(11	)
Valuation allowance			(6,703	)			(5	)			(6,008	)			(5	)			(806	)			(1	)
Research and manufacturing incentive deductions and credits			(11,756	)			(9	)			(7,024	)			(6	)			(5,681	)			(5	)
Stock compensation			(1,914	)			(1	)			(4,103	)			(3	)			1,770				2
Repatriation tax			14,108				11				36,777				30				-				-
GILTI and FDII			6,437				5				-				-				-				-
Impact of U.S. tax rate change on deferred balances			-				-				(4,209	)			(3	)			-				-
Other			1,142				1				(893	)			(1	)			203				-
		$	21,296				17			$	34,192				28			$	23,514				20

U.S. Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes changes to the U.S. statutory federal tax rate and puts into effect the migration from a worldwide system of taxation to a territorial system, among other things. As of December 31, 2018, the Company completed its analysis of the impact of the Tax Act in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) and the amounts are no longer considered provisional. The Company’s transition tax increased due to finalization of calculations and consideration of Notices and regulations issued by the US Department of Treasury and the Internal Revenue Service; however, the increase is offset by available net operating loss and credit carryforwards which currently have a valuation allowance. Consequently, the tax expense reported is reduced by the release of the valuation allowance on the U.S. deferred tax assets, and as result, there was no material financial statement impact due to finalization.

The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As a result of the Act, among other things, the Company determined it will repatriate earnings for all non-U.S. Subsidiaries with cash in excess of working capital needs. Such distributions could potentially be subject to U.S. state tax in certain states and foreign withholding taxes. Foreign currency gains/losses related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed. The Company has estimated the associated withholding tax to be $11.7 million.

Furthermore, the Tax Act includes certain changes such as introducing a new category of income, referred to as global intangible low tax income (“GILTI”), related to earnings taxed at a low rate of foreign entities without a significant fixed asset base, and imposes additional limitations on the deductibility of interest and officer compensation. The Company made a final accounting policy election to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred. These changes are included in the Company’s 2019 fiscal year income tax expense.

During the fiscal years ended June 30, 2019, 2018, and 2017, net cash paid by the Company for income taxes was $26.3 million, $21.3 million, and $23.6 million, respectively.

Our foreign subsidiaries in the Philippines operate under various tax holiday arrangements. The benefits of such arrangements phased out through the fiscal year ended June 30, 2019. The impact of the tax holidays on our effective rate is a reduction in the rate of 0.25%, 0.17% and 0.31% for the fiscal years ended June 30, 2019, 2018 and 2017, respectively, and the impact of the tax holidays on diluted earnings per share is immaterial.

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2019:

Type		Amount				Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits		$	20,084			June 2029-June 2039
Foreign tax credits			1,088			June 2025-June 2027
State tax credits			12,449			June 2020-June 2039
State tax credits (indefinite)			448			Indefinite
Operating loss carryforwards:
Loss carryforwards - federal		$	59,749			June 2020-June 2036
Loss carryforwards - state			52,762			June 2020-June 2039
Loss carryforwards - foreign			8,467			June 2021-June 2027
Loss carryforwards - foreign (indefinite)			8,502			Indefinite

The Company has recorded a valuation allowance against the majority of the loss and credit carryforwards. The Company’s U.S. federal loss carryforwards, federal research and development credit carryforwards, and certain state tax credits resulting from the Company’s acquisitions are subject to various annual limitations under Section 382 of the U.S. Internal Revenue Code.

Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2019, 2018 and 2017 were as follows:

		2019				2018				2017
($000)
Beginning balance		$	9,892			$	7,577			$	5,559
Increases in current year tax positions			191				2,536				895
Increases in prior year tax positions			376				224				2,605
Decreases in prior year tax positions			-				(9	)			-
Acquired business			6,036				-				-
Settlements			-				-				(1,143	)
Expiration of statute of limitations			(4,975	)			(436	)			(339	)
Ending balance		$	11,520			$	9,892			$	7,577

The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2019, 2018 and 2017, there was $(0.1) million, $0.3 million and $0.5 million of interest and penalties within income tax expense, respectively. The Company had $1.2 million, $0.6 million and $0.3 million of interest and penalties accrued at June 30, 2019, 2018 and 2017, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate, was approximately $6.2 million, $1.6 million and $1.3 million at June 30, 2019, 2018 and 2017, respectively. The Company expects a decrease of $2.2 million of unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.

Fiscal years 2017 to 2019 remain open to examination by the Internal Revenue Service, fiscal years 2014 to 2019 remain open to examination by certain state jurisdictions, and fiscal years 2008 to 2019 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for the certain subsidiary companies in Florida for the years ended June 30, 2016 through June 30, 2018; Philippines for the year ended June 30, 2017; Germany for the years ended June 30, 2012 through June 30, 2015; and Vietnam for the years June 30, 2018 through June 30, 2019. The Company believes its income tax reserves for these tax matters are adequate.

Note 11.	Earnings Per Share

The following table sets forth the computation of earnings per share for the periods indicated. Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share has been computed using the weighted average number of common shares outstanding during the period plus dilutive potential shares of common stock from (1) stock options, performance and restricted shares (under the treasury stock method) and (2) convertible debt (under the If-Converted method) outstanding during the period. The Company’s convertible debt calculated under the If-Converted method was antidilutive for the fiscal years 2019 and 2018 and was excluded from the calculation of earnings per share.

Year Ended June 30,		2019				2018				2017
($000 except per share)
Net earnings		$	107,517			$	88,002			$	95,274
Divided by:
Weighted average shares			63,584				62,499				62,576
Basic earnings per common share		$	1.69			$	1.41			$	1.52
Net earnings		$	107,517			$	88,002			$	95,274
Divided by:
Weighted average shares			63,584				62,499				62,576
Dilutive effect of common stock equivalents			2,220				2,634				1,931
Diluted weighted average common shares			65,804				65,133				64,507
Diluted earnings per common share		$	1.63			$	1.35			$	1.48

The following table presents potential shares of common stock excluded from the calculation of diluted net income per share, as their effect would have been antidilutive ($000):

Year Ended June 30,		2019				2018				2017
Stock options and restricted shares			115				135				140
0.25% Convertible Senior Notes due 2022			7,331				7,331				-
Total anti-dilutive shares			7,446				7,466				140

Note 12.	Operating Leases

The Company leases certain property under operating leases that expire at various dates. Future rental commitments applicable to the operating leases at June 30, 2019 are as follows:

Year Ending June 30,
($000)
2020		$	23,000
2021			17,700
2022			14,300
2023			11,200
2024			9,700
Thereafter			44,000

Rent expense was approximately $20.0 million, $17.0 million, and $14.7 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Note 13.	Share-Based Compensation

The Company’s Board of Directors adopted the II-VI Incorporated 2018 Omnibus Incentive Plan (the “Plan”), which was approved by the shareholders at the Annual Meeting in November 2018. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to employees, officers and directors of the Company. The maximum number of shares of the Company’s common stock authorized for issuance under the Plan is limited to 3,550,000 shares of common stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability of the grantee. As of June 30, 2019, there were approximately 3.6 million shares available to be issued under the Plan, including forfeited shares from predecessor plans.

The Company records share-based compensation expense for these awards, which requires the recognition of the grant-date fair value of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-based stock appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as liability awards, in accordance with applicable accounting standards.

Share-based compensation expense for the fiscal years ended June 30, 2019, 2018 and 2017 is as follows ($000):

Year Ended June 30,		2019				2018				2017
Stock Options and Cash-Based Stock Appreciation Rights		$	6,801			$	6,605			$	5,611
Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Units			9,242				7,850				6,799
Performance Share Awards and Cash Based Performance Share Unit Awards			8,920				5,221				3,626
		$	24,963			$	19,676			$	16,036

The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and administrative expense in the Consolidated Statements of Earnings, based on the employee classification of the grantee. Share-based compensation expense associated with liability awards was $3.0 million, $4.4 million, and $4.3 million, in the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Stock Options and Cash-Based Stock Appreciation Rights:

The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense. During the fiscal years ended June 30, 2019, 2018 and 2017, the weighted-average fair value of options granted under the stock option plan was $20.66, $14.23 and $8.88, respectively, per option using the following assumptions:

Year Ended June 30,		2019				2018				2017
Risk-free interest rate			2.80	%			2.00	%			1.43	%
Expected volatility			37	%			37	%			37	%
Expected life of options		6.96 years				6.43 years				6.28 years
Dividend yield		None				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. The estimated annualized forfeitures are based on the Company’s historical experience of option pre-vesting cancellations and are estimated at a rate of 16.0%. The Company will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future periods if the actual forfeitures are higher than estimated.

Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2019 was as follows:

		Stock Options								Cash-Based Stock Appreciation Rights
		Number of				Weighted Average				Number of				Weighted Average
		Shares				Exercise Price				Rights				Exercise Price
Outstanding - July 1, 2018			3,928,708			$	20.07				205,448			$	22.56
Granted			412,940			$	47.61				48,305			$	48.56
Exercised			(522,173	)		$	16.66				(21,562	)		$	20.45
Forfeited and Expired			(58,192	)		$	26.29				(4,695	)		$	31.43
Outstanding - June 30, 2019			3,761,283			$	23.47				227,496			$	28.09
Exercisable - June 30, 2019			2,348,812			$	18.62				89,827			$	27.50

As of June 30, 2019, 2018 and 2017, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $56.4 million, $96.1 million and $69.3 million, respectively. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30, 2019, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2019. This amount varies based on the fair market value of the Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years ended June 30, 2019, 2018, and 2017 was $14.7 million, $14.7 million, and $12.3 million, respectively. As of June 30, 2019, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $13.8 million. This cost is expected to be recognized over a weighted-average period of approximately three years. Outstanding and exercisable stock options at June 30, 2019 were as follows:

		Stock Options and Cash-Based Stock												Stock Options and Cash-Based Stock
		Appreciation Rights Outstanding												Appreciation Rights Exercisable
						Weighted				Weighted										Weighted				Weighted
		Number of				Average Remaining				Average				Number of						Average Remaining				Average
Range of		Shares or				Contractual Term				Exercise				Shares or						Contractual Term				Exercise
Exercise Prices		Rights				(Years)				Price				Rights						(Years)				Price
$12.07 - $16.97			825,579				3.52			$	14.41				720,059						3.28			$	14.47
$16.98 - $18.06			799,765				4.52			$	17.72				591,237						3.95			$	17.68
$18.07 - $21.65			734,900				4.04			$	19.24				688,310						3.87			$	19.20
$21.66 - $33.75			679,449				7.15			$	22.25				309,016						7.02			$	22.01
$33.76 - $49.90			949,096				8.62			$	41.48				130,017						8.08			$	35.82
			3,988,789				5.65			$	23.74				2,438,639						4.34			$	18.68

Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Unit Awards:

Restricted share awards, restricted share units, and cash-based restricted share unit awards compensation expense was calculated based on the number of shares or units expected to be earned by the grantee multiplied by the stock price at the date of grant (for restricted share awards) or the stock price at the period end date (for cash-based restricted share unit awards), and is being recognized over the vesting period. Generally, the restricted share awards, restricted share units, and cash-based restricted share unit awards have a three- year tranche vesting provision and an estimated forfeiture rate of 4.5%.

Restricted share, restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30, 2019, was as follows:

		Restricted Share Awards								Restricted Share Units								Cash-Based Restricted Share Units
		Number of				Weighted Average				Number of				Weighted Average				Number of				Weighted Average
		Shares				Grant Date Fair Value				Shares				Grant Date Fair Value				Units				Grant Date Fair Value
Nonvested - June 30, 2018			595,519			$	24.58				-			$	-				117,326			$	25.57
Granted			-			$	-				177,609			$	47.16				30,506			$	49.05
Vested			(401,341	)		$	21.96				-			$	-				(68,846	)		$	22.67
Forfeited			(10,749	)		$	27.15				(1,872	)		$	49.90				(1,344	)		$	35.59
Nonvested - June 30, 2019			183,429			$	30.30				175,737			$	47.13				77,642			$	37.19

As of June 30, 2019, total unrecognized compensation cost related to non-vested restricted share, restricted share unit, and cash-based restricted share unit awards was $9.1 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The restricted share and restricted share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based restricted share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. The total fair value of the restricted share, restricted share unit, and cash-based restricted share unit awards granted during the years ended June 30, 2019, 2018 and 2017, was $9.9 million, $7.5 million and $7.8 million, respectively. The total fair value of restricted shares and cash-based restricted share unit awards vested was $19.9 million, $17.0 million and $6.2 million during fiscal years 2019, 2018 and 2017, respectively.

Performance Share Awards and Cash-Based Performance Share Unit Awards:

The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees performance share awards and performance share unit awards under the Plan. As of June 30, 2019, the Company had outstanding grants covering performance periods ranging from 12 to 36 months. These awards are intended to provide continuing emphasis on specified financial performance goals that the Company considers important contributors to the creation of long-term shareholder value. These awards are payable only if the Company achieves specified levels of financial performance during the performance periods.

The performance share compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. Performance share and cash-based performance share unit award activity relating to the Plan during the year ended June 30, 2019, was as follows:

		Performance Share Awards								Cash-Based Performance Share Units
		Number of				Weighted Average				Number of				Weighted Average
		Shares				Grant Date Fair Value				Units				Grant Date Fair Value
Nonvested - June 30, 2018			382,270			$	24.57				17,279			$	25.71
Granted			218,583			$	38.00				11,943			$	44.00
Vested			(100,481	)		$	17.84				(4,398	)		$	17.84
Forfeited			(86,721	)		$	22.24				(600	)		$	38.77
Nonvested - June 30, 2019			413,651			$	36.80				24,224			$	37.47

As of June 30, 2019, total unrecognized compensation cost related to non-vested performance share and cash-based performance share unit awards was $5.7 million. This cost is expected to be recognized over a weighted-average period of approximately one year. The total fair value of the performance share and cash-based performance share unit awards granted during the fiscal years ended June 30, 2019, 2018 and 2017 was $10.0 million, $3.8 million and $5.3 million, respectively. The total fair value of performance shares vested during the fiscal years ended June 30, 2019, 2018 and 2017 was $10.5 million, $3.6 million and $5.9 million, respectively.

For our relative Total Shareholder Return (“TSR”) performance-based awards, which are based on market performance of our stock as compared to the Russel 2000 Index, the compensation cost is recognized over the performance period on a straight-line basis net of forfeitures, because the awards vest only at the end of the measurement period and the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate the fair value of the TSR performance-based awards using the Monte-Carlo simulation model.

Note 14.	Segment and Geographic Reporting

The Company reports its business segments using the “management approach” model for segment reporting. This means that the Company determines its reportable business segments based on the way the chief operating decision maker organizes business segments within the Company for making operating decisions and assessing performance.

The Company reports its financial results in the following three segments: (i) II-VI Laser Solutions, (ii) II-VI Photonics, and (iii) II-VI Performance Products, and the Company’s chief operating decision maker receives and reviews financial information based on these segments. The Company evaluates business segment performance based upon segment operating income, which is defined as earnings before income taxes, interest and other income or expense.

The II-VI Laser Solutions segment is located in the United States, Singapore, China, Germany, Switzerland, Japan, Belgium, the United Kingdom, Italy, South Korea, the Philippines and Taiwan. II-VI Laser Solutions designs, manufactures and markets optical and electro-optical components and materials sold under the II-VI Infrared brand name and used primarily in high-power CO2 lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names. II-VI Laser Solutions also manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices, and high-speed communication systems and manufactures 6-inch GaAs wafers allowing for the production of high performance lasers and integrated circuits in high volume sold under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brand names.

The II-VI Photonics segment is located in the United States, China, Vietnam, Germany, Japan, the United Kingdom, Italy and Hong Kong. II-VI Photonics manufactures crystal materials, optics, microchip lasers and optoelectronic modules for use in optical communication networks and other diverse consumer and commercial applications. In addition, the segment manufactures pump lasers, optical isolators, and optical amplifiers and micro-optics for optical amplifiers, for both terrestrial and submarine applications within the optical communications market.

The II-VI Performance Products segment is located in the United States, Vietnam, Japan, China, Germany and the Philippines. II-VI Performance Products is further divided into production and administrative units that are directed by managers. II-VI Performance Products designs, manufactures and markets infrared optical components and high-precision optical assemblies for aerospace and defense, medical and commercial laser imaging applications. In addition, the segment designs, manufactures and markets unique engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, aerospace and defense and medical markets.

Effective July 1, 2018 the Company realigned the composition of its operating segments. The Company moved Laser Systems Group from II-VI Laser Solutions to II-VI Photonics and moved Integrated Photonics, Inc. from II-VI Photonics to II-VI Performance Products. All applicable segment information has been restated to reflect this change.

In September 2018, November 2018, and March 2019, the Company completed its acquisitions of CoAdna, an additional product line, and Redstone, respectively. See Note 3, Acquisitions. The operating results of these acquisitions have been reflected in the selected financial information of the Company’s II-VI Photonics segment, with the exclusion of Redstone that is reflected in the II-VI Performance Products Segment, since the date of the acquisitions.

The accounting policies are consistent across each of the segments. To the extent possible, the Company’s corporate expenses are allocated to the segments. The Company evaluates segment performance based upon reported segment operating income, which is defined as earnings from continuing operations before income taxes, interest and other income or expense. Eliminations and Other include eliminating inter-segment sales and transfers as well as transaction costs related to the pending Finisar acquisition.

The following tables summarize selected financial information of the Company’s operations by segment:

		II-VI								II-VI
		Laser				II-VI				Performance				Eliminations
		Solutions				Photonics				Products				& Other				Total
($000)
2019
Revenues		$	396,573			$	638,889			$	327,034			$	-			$	1,362,496
Inter-segment revenues			91,507				10,745				20,928				(123,180	)			-
Operating income			40,261				81,898				42,153				(15,643	)			148,668
Interest expense			-				-				-				-				(22,417	)
Other income, net			-				-				-				-				2,562
Income taxes			-				-				-				-				(21,296	)
Net earnings			-				-				-				-				107,517
Depreciation and amortization			44,529				26,273				21,563				-				92,365
Expenditures for property, plant & equipment			43,936				44,851				39,963				-				128,750
Segment assets			716,788				681,610				555,375				-				1,953,773
Goodwill			97,881				134,057				87,840				-				319,778

		II-VI								II-VI
		Laser				II-VI				Performance				Eliminations
		Solutions				Photonics				Products				& Other				Total
($000)
2018
Revenues		$	405,940			$	486,485			$	266,369			$	-			$	1,158,794
Inter-segment revenues			34,590				11,180				26,262				(72,032	)			-
Operating income			40,119				63,152				33,492				-				136,763
Interest expense			-				-				-				-				(18,352	)
Other income, net			-				-				-				-				3,783
Income taxes			-				-				-				-				(34,192	)
Net earnings			-				-				-				-				88,002
Depreciation and amortization			38,004				23,242				19,524				-				80,770
Expenditures for property, plant & equipment			80,776				36,122				44,425				-				161,323
Segment assets			740,020				554,574				467,067				-				1,761,661
Goodwill			98,737				109,670				62,271				-				270,678

		II-VI								II-VI
		Laser				II-VI				Performance				Eliminations
		Solutions				Photonics				Products				& Other				Total
($000)
2017
Revenues		$	317,495			$	440,361			$	214,190			$	-			$	972,046
Inter-segment revenues			33,669				8,003				10,189				(51,861	)			-
Operating income			27,459				66,462				21,635				-				115,556
Interest expense			-				-				-				-				(6,809	)
Other income, net			-				-				-				-				10,041
Income taxes			-				-				-				-				(23,514	)
Net earnings			-				-				-				-				95,274
Depreciation and amortization			24,684				21,612				17,341				-				63,637
Expenditures for property, plant & equipment			81,346				28,811				32,788				-				142,945

Geographic information for revenues from the country of origin (shipped from), and long-lived assets from the country of origin, which include property, plant and equipment, net of related depreciation, and certain other long-term assets, were as follows:

		Revenues
Year Ended June 30,		2019				2018				2017
($000)
United States		$	405,404			$	373,735			$	294,200
Non-United States
Hong Kong			319,601				186,978				190,702
China			290,287				253,672				208,595
Germany			155,000				132,161				88,304
Japan			109,670				89,153				76,212
Switzerland			32,770				49,557				50,497
Vietnam			22,322				26,898				22,497
Korea			11,674				9,757				6,584
Singapore			6,868				5,941				3,913
Philippines			4,179				3,909				3,057
United Kingdom			2,712				9,359				8,473
Taiwan			2,005				1,705				718
Belgium			4				4,511				7,503
Italy			-				11,458				10,791
Total Non-United States			957,092				785,059				677,846
		$	1,362,496			$	1,158,794			$	972,046

		Long-Lived Assets
June 30,		2019				2018				2017
($000)
United States		$	345,866			$	309,062			$	240,029
Non-United States
China			108,688				81,175				62,024
United Kingdom			60,369				65,357				396
Switzerland			35,592				37,155				36,795
Germany			14,857				14,876				15,323
Vietnam			11,656				10,042				8,272
Philippines			7,793				6,628				6,115
Hong Kong			5,032				2,818				1,914
Other			1,190				598				704
Total Non-United States			245,177				218,649				131,543
		$	591,043			$	527,711			$	371,572

Note 15.	Fair Value of Financial Instruments

The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:

	•	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.

At June 30, 2019, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts.

The Company has entered into earnout arrangements in conjunction with specified acquisitions, as discussed in Note 3, that provide additional cash earnout opportunities based upon achievement of certain agreed upon financial and operational targets. The fair values of the contingent earnout arrangements and the net put option were measured using valuations based upon other unobservable inputs that are significant to the fair value measurement (Level 3).

The fair values of these contingent earnout arrangements and the net put option (discussed in Note 4) were measured using valuations based on other unobservable inputs that are significant to the fair value measurement (Level 3).

The Company estimated the fair value of the Notes based on quoted market prices as of the last trading day prior to June 30, 2019; however, the Notes have only a limited trading volume and, as such, this fair value estimate is not necessarily the value at which the Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the convertible notes is net of unamortized discount and issuance costs. See Note 9 for details on the Company’s debt facilities. The fair value and carrying value of the convertible notes were as follows at June 30, 2019 ($000):

	Fair Value				Carrying Value
Convertible notes	$	365,700			$	301,141

The following tables provide a summary by level of the fair value of financial instruments that are measured on a recurring basis as of June 30, 2019 and 2018 ($000):

		Fair Value Measurements at June 30, 2019 Using:
						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		June 30, 2019				(Level 1)				(Level 2)				(Level 3)
Liabilities:
Foreign currency forward contracts		$	139			$	-			$	139			$	-
Contingent earnout arrangements		$	4,397			$	-			$	-			$	4,397
Net put option		$	2,024			$	-			$	-			$	2,024

		Fair Value Measurements at June 30, 2018 Using:
						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		June 30, 2018				(Level 1)				(Level 2)				(Level 3)
Assets:
Foreign currency forward contracts		$	121			$	-			$	121			$	-
Liabilities:
Contingent earnout arrangements		$	5,405			$	-			$	-			$	5,405
Net put option		$	2,024			$	-			$	-			$	2,024

The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s level 3 contingent earnout arrangements related to the Company’s acquisitions and the net put option relating to the purchase of the equity investment in November 2017 ($000):

	Significant
	Unobservable Inputs
	(Level 3)
Balance at July 1, 2018	$	7,429
Activity:
Payments		(4,524	)
Changes in fair value recorded in other expense (income), net		(881	)
Other earnout arrangements		4,397
Balance at June 30, 2019	$	6,421

The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings include both variable and fixed interest rates, non-interest bearing debt and a capital lease obligation and are considered Level 2 among the fair value hierarchy and accordingly their carrying amounts approximate fair value.

Note 16.	Derivative Instruments

The Company, from time to time, purchases foreign currency forward exchange contracts, primarily in Japanese Yen, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales, for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk.

The Company has recorded the fair value of these contracts in the Company’s financial statements. These contracts had a total notional amount of $17.0 million and $12.0 million at June 30, 2019 and 2018, respectively. As of June 30, 2019, these forward contracts had expiration dates ranging from July 2019 through October 2019, with Japanese Yen denominations individually between 300 million and 645 million Yen. The Company does not account for these contracts as hedges as defined by U.S. GAAP and records the change in the fair value of these contracts in Other expense (income), net in the Consolidated Statements of Earnings as they occur. The fair value measurement takes into consideration foreign currency rates and the current creditworthiness of the counterparties to these contracts, as applicable, and is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments and thus represents a Level 2 measurement. These contracts are recorded in prepaid and other current assets in the Company’s Consolidated Balance Sheets as of June 30, 2019. The change in the fair value of these contracts for the fiscal year ended June 30, 2019, 2018 and 2017 was insignificant.

Note 17.	Employee Benefit Plans

Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at the discretion of the Company’s board of directors and were $4.6 million, $5.0 million, and $4.3 million for the years ended June 30, 2019, 2018 and 2017, respectively.

On August 18, 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“2018 Plan”) for full time employees who have completed two years of continuous employment with the Company, and the 2018 Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders in November 2018. The employee may purchase the Company’s common stock for the lessor of 90% of the fair market value of the shares (i) on the first trading day of the offering period, or (ii) on the purchase date. Offering periods will run from August through January and from February through July each year. The number of shares which may be bought by an employee during each fiscal year is limited to 15% of the employee’s base pay. The 2018 Plan, limits the number of shares of common stock available for purchase to 2,000,000 shares. As of June 30, 2019, there have been no purchases under the 2018 Plan.

Switzerland Defined Benefit Plan

The Company maintains a pension plan covering employees of our Swiss subsidiary (the “Swiss Plan”). Employer and employee contributions are made to the Swiss Plan based on various percentages of salary and wages that vary according to employee age and other factors. Employer contributions to the Swiss Plan for years ended June 30, 2019 and 2018 were $3.0 million and $2.7 million, respectively. Expected employer contributions in fiscal year 2020 are $3.0 million.

The changes in the funded status of the Swiss Plan during the fiscal years ended June 30, 2019 and 2018 were as follows:

Year Ended June 30,		2019				2018
Change in projected benefit obligation:
Projected benefit obligation, beginning of period		$	62,554			$	59,518
Service cost			3,629				3,766
Interest cost			528				424
Benefits accumulated, net of benefits paid			(103	)			1,474
Plan amendments			-				(4,068	)
Actuarial (gain) loss on obligation			6,690				1,606
Participant contributions			1,557				1,415
Currency translation adjustment			(1,372	)			(1,581	)
Projected benefit obligation, end of period		$	73,483			$	62,554
Change in plan assets:
Plan assets at fair value, beginning of period			49,034				42,990
Actual return on plan assets			342				1,566
Employer contributions			2,965				2,731
Participant contributions			1,557				1,415
Benefits accumulated, net of benefits paid			(103	)			1,474
Currency translation adjustment			(1,076	)			(1,142	)
Plan assets at fair value, end of period		$	52,719			$	49,034
Amounts recognized in consolidated balance sheets:
Other non-current assets:
Deferred tax asset		$	4,392			$	2,859
Other non-current liabilities:
Underfunded pension liability			20,764				13,520
Amounts recognized in accumulated other comprehensive income:
Pension adjustment		$	(11,784	)		$	2,846
Accumulated benefit obligation, end of period		$	69,682			$	59,800

Net periodic pension cost associated with the Swiss Plan included the following components:

Year Ended June 30,		2019				2018				2017
Service cost		$	3,629			$	3,766			$	3,689
Interest cost			528				424				163
Expected return on plan assets			951				849				(742	)
Net actuarial loss and prior service credit			185				203				594
Net periodic pension cost		$	5,293			$	5,242			$	3,704

The projected and accumulated benefit obligations for the Swiss Plan were calculated as of June 30, 2019 and 2018 using the following assumptions:

June 30,		2019				2018
Discount rate			0.5	%			0.9	%
Salary increase rate			2.0	%			2.0	%

The net periodic pension cost for the Swiss Plan was calculated during the fiscal years ended June 30, 2019, 2018, and 2017 using the following assumptions:

Year Ended June 30,		2019				2018				2017
Discount rate			0.9	%			0.8	%			0.3	%
Salary increase rate			2.0	%			2.0	%			2.0	%
Expected return on plan assets			2.0	%			2.0	%			2.0	%

The discount rate is based on assumed pension benefit maturity and estimates developed using the rate of return and yield curves for high quality Swiss corporate and government bonds. The salary increase rate is based on our best assessment for on-going increases over time. The expected long-term rate of return on plan assets is based on the expected asset allocation, taking into consideration historical long-term rates of return for the relevant asset categories.

As is customary with Swiss pension plans, the assets of the plan are invested in a collective fund with multiple employers. We have no investment authority over the assets of the plan, which are held and invested by a Swiss insurance company. The investment strategy of the Swiss Plan is managed by an independent asset manager with the objective of achieving a consistent long-term return which will provide sufficient funding for future pension obligations while limiting risk.

The Swiss Plan is legally separate from II-VI, as are the assets of the plan. As of June 30, 2019, the Swiss Plan’s asset allocation was as follows (all of which are categorized as Level 2 in the fair value hierarchy):

June 30,		2019				2018
Fixed income investments			12.0	%			12.0	%
Equity investments			50.0	%			50.0	%
Real estate			28.0	%			31.0	%
Cash			7.0	%			4.0	%
Other			3.0	%			3.0	%
			100.0	%			100.0	%

Estimated future benefit payments under the Swiss Plan are estimated to be as follows:

Year Ending June 30,
($000)
2020		$	3,400
2021			2,900
2022			3,000
2023			3,300
2024			5,100
Next five years		$	24,300

Note 18.	Other Accrued Liabilities

The components of other accrued liabilities were as follows:

June 30,		2019				2018
($000)
Contract liabilities		$	10,390			$	3,384
Warranty reserve			4,478				4,679
Earnout arrangements			1,861				5,405
Other accrued liabilities			33,215				29,511
		$	49,944			$	42,979

Note 19.	Commitments and Contingencies

The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early termination. The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred under these commitments based upon historical experience and current expectations. The Company also has commitments relating to earnout arrangements on its acquisitions of $4.4 million. Total future commitments are as follows:

Year Ending June 30,
($000)
2020		$	32,048
2021			4,964
2022			-
2023			-
2024			-

Note 20.	Share Repurchase Programs

In August 2017, in conjunction with the Company’s offering and sale of the Notes, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock with a portion of the net proceeds received from the offering and sale of the Notes. The shares that were purchased by the Company pursuant to this authorization were retained as treasury stock and are available for general corporate purposes. The Company purchased 1,414,900 shares of its common stock for approximately $49.9 million pursuant to this authorization in fiscal 2018.

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. During the fiscal year ended June 30, 2019, the Company purchased 50,000 shares of its common stock for $1.6 million under this program. The Company did not repurchase shares pursuant to this Program during the fiscal years ended June 30, 2018 and 2017. As of June 30, 2019, the Company has cumulatively purchased 1,366,587 shares of its common stock pursuant to the Program for approximately $20.7 million. The dollar value of shares as of June 30, 2019 that may yet be purchased under the Program is approximately $29.3 million.

Note 21.	Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2019, 2018, and 2017 were as follows ($000):

		Foreign								Total
		Currency				Defined				Accumulated Other
		Translation				Benefit				Comprehensive
		Adjustment				Pension Plan				Income
AOCI - June 30, 2016		$	(6,185	)		$	(7,832	)		$	(14,017	)
Other comprehensive income (loss) before reclassifications			(2,275	)			1,920				(355	)
Amounts reclassified from AOCI			-				594				594
Net current-period other comprehensive income			(2,275	)			2,514				239
AOCI - June 30, 2017			(8,460	)			(5,318	)			(13,778	)
Other comprehensive income (loss) before reclassifications			7,152				2,643				9,795
Amounts reclassified from AOCI			-				203				203
Net current-period other comprehensive income			7,152				2,846				9,998
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	)

Note 22.	Capital Lease

During fiscal 2017, the Company’s OptoElectronic Devices subsidiary entered into a capital lease related to a building in Warren, New Jersey. The following table shows the future minimum lease payments due under the non-cancelable capital lease ($000):

Fiscal Year Ending June 30,		Amount
2020		$	2,355
2021			2,419
2022			2,486
2023			2,554
2024			2,624
Thereafter			22,116
Total minimum lease payments		$	34,554
Less amount representing interest			10,193
Present value of capitalized payments		$	24,361

The current and long-term portion of the capital lease obligation was recorded in other accrued liabilities and other liabilities, respectively, in the Company’s Consolidated Balance Sheets as of June 30, 2019 and 2018. The present value of the minimum capital lease payments at inception was $25.0 million recorded in Property, Plant & Equipment, net, in the Company’s Consolidated Balance Sheet, with associated depreciation being recorded over the 15-year life of the lease. During the fiscal year ended June 30, 2019, the Company recorded $1.7 million of depreciation expense associated with the capital leased asset. The accumulated depreciation on the capital lease asset was $4.2 million as June 30, 2019.

Quarterly Financial Data (unaudited)

Fiscal Year 2019

		September 30,				December 31,				March 31,				June 30,
Quarter Ended		2018				2018				2019				2019
($000, except per share)
2019
Net revenues		$	314,433			$	342,839			$	342,496			$	362,728
Cost of goods sold			190,526				211,333				215,212				224,076
Internal research and development			33,171				33,764				36,026				36,202
Selling, general and administrative			53,523				58,136				60,128				61,731
Interest expense			5,584				5,580				5,647				5,606
Other expense (income) - net			(713	)			(701	)			(1,532	)			384
Earnings before income taxes			32,342				34,727				27,015				34,729
Income taxes			6,193				6,025				2,377				6,701
Net Earnings		$	26,149			$	28,702			$	24,638			$	28,028
Basic earnings per share		$	0.41			$	0.45			$	0.39			$	0.44
Diluted earnings per share		$	0.40			$	0.44			$	0.38			$	0.43

Fiscal Year 2018

		September 30,				December 31,				March 31,				June 30,
Quarter Ended		2017				2017				2018				2018
($000, except per share)
2018
Net revenues		$	261,503			$	281,470			$	294,746			$	321,075
Cost of goods sold			155,530				172,075				176,521				192,465
Internal research and development			25,575				27,779				30,625				32,896
Selling, general and administrative			50,624				49,130				53,121				55,690
Interest expense			3,645				4,644				5,014				5,049
Other expense (income) - net			(770	)			(2,026	)			(1,755	)			768
Earnings before income taxes			26,899				29,868				31,220				34,207
Income taxes			5,758				20,272				1,122				7,040
Net Earnings		$	21,141			$	9,596			$	30,098			$	27,167
Basic earnings per share		$	0.34			$	0.15			$	0.48			$	0.44
Diluted earnings per share		$	0.32			$	0.15			$	0.45			$	0.42

SCHEDULE II

II-VI INCORPORATED AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JUNE 30, 2019, 2018, AND 2017

(IN THOUSANDS OF DOLLARS)

		Balance at				Charged				Charged				Deduction				Balance
		Beginning				to				to Other				from				at End
		of Year				Expense				Accounts				Reserves				of Year
YEAR ENDED JUNE 30, 2019:
Allowance for doubtful accounts		$	837			$	548			$	-			$	(92	)	(1)	$	1,293
Warranty reserves		$	4,679			$	4,185			$	-			$	(4,386	)		$	4,478
Deferred tax asset valuation allowance		$	21,797			$	(1,607	)		$	-			$	-			$	20,190
YEAR ENDED JUNE 30, 2018:
Allowance for doubtful accounts		$	1,314			$	(129	)		$	-			$	(348	)	(1)	$	837
Warranty reserves		$	4,546			$	3,821			$	-			$	(3,688	)		$	4,679
Deferred tax asset valuation allowance		$	42,562			$	(4,602	)		$	(16,163	)	(2)	$	-			$	21,797
YEAR ENDED JUNE 30, 2017:
Allowance for doubtful accounts		$	2,016			$	(134	)		$	-			$	(568	)	(1)	$	1,314
Warranty reserves		$	3,908			$	4,850			$	-			$	(4,212	)		$	4,546
Deferred tax asset valuation allowance		$	42,641			$	(79	)		$	-			$	-			$	42,562

(1)	Primarily relates to write-offs of accounts receivable.

(2)	Primarily relates to the Company’s deferred taxes on the conversion feature of the convertible debt.