Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management’s Responsibility for Preparation of the Financial Statements

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

Management’s Report on Internal Control Over Financial Reporting

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

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

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included reviewing the documentation of its controls, evaluating the design effectiveness of controls and testing their operating effectiveness. Management excluded from the scope of its assessment of internal control over financial reporting the internal controls of Finisar Corporation, which was acquired in September 2019. The recent acquisition excluded from management’s assessment of internal controls over financial reporting represented approximately $3.1 billion and $2.8 billion of total assets and net assets, respectively, as of June 30, 2020, and approximately $938.4 million and $94.6 million of total revenues and net loss, respectively, for the fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2020, the Company’s internal controls over financial reporting were effective.

Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal control over financial reporting as of June 30, 2020. Its report is included herein.

Report of Independent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries (the Company) as of June 30, 2020 and 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 26, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matter

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

			Valuation of customer relationship and technology intangible assets in the acquisition of Finisar Corporation
Description of the Matter			As discussed in Note 3 to the consolidated financial statements, during the year ended June 30, 2020, the Company completed the acquisition of Finisar Corporation ("Finisar") for a total purchase price of approximately $2,908.5 million. The acquisition was accounted for as a business combination. The consideration paid in the acquisition must be allocated to the acquired assets and liabilities assumed generally based on their fair value with the excess of the purchase price over those fair values allocated to goodwill. Auditing the Company’s accounting for its acquisition of Finisar was complex due to the significant estimation uncertainty involved in estimating the fair value of certain customer relationship and technology intangible assets. The total fair value ascribed to customer relationship and technology intangible assets amounted to $323.8 million and $334.7 million, respectively. The Company used the multi-period excess earnings method and the relief from royalty method to value the customer relationship and technology intangible assets, respectively. The significant assumptions used to estimate the fair value of customer relationships included the forecasted revenue growth and projected operating expenses inclusive of expected synergies, including future cost savings, and other benefits expected to be achieved by combining the Company and Finisar. The significant assumptions used to estimate the fair value of technology included the forecasted revenue growth and an estimated royalty rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for the acquisition of Finisar. For example, we tested controls that address the risks of material misstatement relating to the valuation of the customer relationship and technology intangible assets, including management’s review of the methods and significant assumptions used to develop such estimates. To test the estimated fair value of the acquired customer relationship and technology intangible assets, our audit procedures included, among others, assessing the appropriateness of the valuation methodologies used, evaluating the significant assumptions discussed above, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For the forecasted revenue growth and projected operating expenses inclusive of expected synergies, including future cost savings, and other benefits expected to be achieved by combining the Company and Finisar, we compared the financial projections to current industry and economic trends, the historic financial performance of the acquired business, the Company’s history with other acquisitions, and forecasted performance of guideline public companies. We also performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from changes in the significant assumptions. We involved our valuation specialist to assist in evaluating the methodologies used to estimate the fair value of the customer relationship and technology intangible assets and to test certain significant assumptions, including the royalty rate, which included a comparison of the selected royalty rate to a range of royalty rates we identified by performing an independent search of comparable licensing agreements.

/s/ Ernst & Young LLP

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

Pittsburgh, Pennsylvania

August 26, 2020

Report of Independent Registered Public Accounting Firm

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

Opinion on Internal Control over Financial Reporting

We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, II-VI Incorporated and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Finisar Corporation (“Finisar”), which is included in the June 30, 2020 consolidated financial statements of the Company and constituted $3.1 billion and $2.8 billion of total and net assets, respectively, as of June 30, 2020 and $938.4 million and $94.6 million of revenues and net loss, respectively, for the fiscal year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Finisar.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 2020 and 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 26, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

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

Definition and Limitations of Internal Control Over Financial Reporting

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

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

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

August 26, 2020

II-VI Incorporated and Subsidiaries

Consolidated Balance Sheets

($000)

June 30,						2020						2019
Assets
Current Assets
Cash and cash equivalents						$	493,046					$	204,872
Accounts receivable - less allowance for doubtful accounts of $1,698 at June 30, 2020 and $1,292 at June 30, 2019						598,124						269,642
Inventories						619,810						296,282
Prepaid and refundable income taxes						12,279						11,778
Prepaid and other current assets						65,710						30,337
Total Current Assets						1,788,969						812,911
Property, plant & equipment, net						1,214,772						582,790
Goodwill						1,239,009						319,778
Other intangible assets, net						758,368						139,324
Investments						73,767						76,208
Deferred income taxes						22,938						8,524
Other assets						136,891						14,238
Total Assets						$	5,234,714					$	1,953,773
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt						$	69,250					$	23,834
Accounts payable						268,773						104,462
Accrued compensation and benefits						157,557						71,847
Operating lease current liabilities						24,634						—
Accrued income taxes payable						33,341						20,476
Other accrued liabilities						119,338						49,944
Total Current Liabilities						672,893						270,563
Long-term debt						2,186,092						443,163
Deferred income taxes						45,551						23,913
Operating lease liabilities						94,701						—
Other liabilities						158,674						82,925
Total Liabilities						3,157,911						820,564
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 - 105,916,068 shares at June 30, 2020; 76,315,337 shares at June 30, 2019						1,486,947						382,423
Accumulated other comprehensive loss						(87,383)						(24,221)
Retained earnings						876,552						943,581
						2,276,116						1,301,783
Treasury stock, at cost - 13,356,447 shares at June 30, 2020 and 12,603,781 shares at June 30, 2019						(199,313)						(168,574)
Total Shareholders' Equity						2,076,803						1,133,209
Total Liabilities and Shareholders' Equity						$	5,234,714					$	1,953,773

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Earnings (Loss)

Year Ended June 30,						2020						2019						2018
($000, except per share data)
Revenues						$	2,380,071					$	1,362,496					$	1,158,794
Costs, Expenses and Other Expense (Income)
Cost of goods sold						1,560,521						841,147						696,591
Internal research and development						339,073						139,163						116,875
Selling, general and administrative						440,998						233,518						208,565
Interest expense						89,409						22,417						18,352
Other expense (income), net						13,998						(2,562)						(3,783)
Total Costs, Expenses and Other Expense (Income)						2,443,999						1,233,683						1,036,600
Earnings (Loss) Before Income Taxes						(63,928)						128,813						122,194
Income Tax Expense						3,101						21,296						34,192
Net Earnings (Loss)						$	(67,029)					$	107,517					$	88,002
Basic Earnings (Loss) Per Share						$	(0.79)					$	1.69					$	1.41
Diluted Earnings (Loss) Per Share						$	(0.79)					$	1.63					$	1.35

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Year Ended June 30,						2020						2019						2018
($000)
Net earnings (loss)						$	(67,029)					$	107,517					$	88,002
Other comprehensive income (loss):
Foreign currency translation adjustments						(15,969)						(14,319)						7,152
Change in fair value of interest rate swap						(44,085)						—						—
Pension adjustment, net of taxes of ($851), ($1,642) and $763 for the years ended June 30, 2020, 2019, and 2018, respectively						(3,108)						(6,122)						2,846
Other comprehensive income (loss)						(63,162)						(20,441)						9,998
Comprehensive income (loss)						$	(130,191)					$	87,076					$	98,000

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, 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
Share-based and deferred compensation activities						2,888						116,817						—						—						(702)						(29,114)						87,703
Purchases of treasury stock						—						—						—						—						(50)						(1,625)						(1,625)
Shares issued related to Finisar acquisition						26,713						987,707						—						—						—						—						987,707
Net loss						—						—						—						(67,029)						—						—						(67,029)
Foreign currency translation adjustments						—						—						(15,969)						—						—						—						(15,969)
Change in fair value of interest rate swap						—						—						(44,085)						—						—						—						(44,085)
Pension adjustment, net of taxes of ($851)						—						—						(3,108)						—						—						—						(3,108)
Balance - June 30, 2020						105,916						$	1,486,947					$	(87,383)					$	876,552					(13,356)						$	(199,313)					$	2,076,803

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended June 30,						2020						2019						2018
($000)
Cash Flows from Operating Activities
Net earnings (loss)						$	(67,029)					$	107,517					$	88,002
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation						156,690						75,745						66,202
Amortization						64,192						16,620						14,568
Share-based compensation expense						68,480						21,946						15,312
Amortization of discount on convertible debt and debt issuance costs						22,150						12,550						10,057
Debt extinguishment expense						3,960						—						—
Gains on disposals of property, plant and equipment						(1,461)						—						—
Losses on foreign currency remeasurements and transactions						14,442						3,155						850
Earnings from equity investments						(2,775)						(3,214)						(3,594)
Deferred income taxes						(42,454)						(10,462)						945
Impairment of investment						4,980						—						—
Increase (decrease) in cash from changes in (net of effects of acquisitions):
Accounts receivable						(91,981)						(50,764)						(21,044)
Inventories						112,572						(36,392)						(38,732)
Accounts payable						45,026						15,999						17,436
Income taxes						40,061						366						7,380
Other operating net assets						(29,561)						25,409						3,632
Net cash provided by operating activities						297,292						178,475						161,014
Cash Flows from Investing Activities
Additions to property, plant & equipment						(136,877)						(137,122)						(153,438)
Purchases of businesses, net of cash acquired						(1,036,609)						(83,067)						(80,503)
Purchases of technology intangible assets						(3,750)						—						—
Purchase of equity investments and other investing activities						(2,054)						(3,787)						(51,009)
Net cash used in investing activities						(1,179,290)						(223,976)						(284,950)
Cash Flows from Financing Activities
Proceeds from borrowings of Term A Facility						1,241,000						—						—
Proceeds from borrowings of Term B Facility						720,000						—						—
Proceeds from borrowings of Revolving Credit Facility						160,000						—						—
Proceeds from borrowings under prior Credit Facility						10,000						150,000						100,000
Proceeds from issuance of 0.25% convertible senior notes due 2022						—						—						345,000
Payment of Finisar Notes						(560,112)						—						—
Payments on borrowings under prior Term Loan, Credit Facility, and other loans						(176,618)						(135,000)						(292,000)
Payments on borrowings under Term A Facility						(46,538)						—						—
Payments on borrowings under Term B Facility						(5,400)						—						—
Payments on borrowings under Revolving Credit Facility						(86,000)						—						—
Debt issuance costs						(63,510)						(5,589)						(10,061)
Proceeds from exercises of stock options						13,467						8,698						10,469
Common stock repurchases						(1,625)						(1,616)						(49,875)
Payments in satisfaction of employees' minimum tax obligations						(28,700)						(7,092)						(6,564)
Other financing activities						(2,339)						(4,524)						—
Net cash provided by financing activities						1,173,625						4,877						96,969
Effect of exchange rate changes on cash and cash equivalents						(3,453)						(1,542)						2,117
Net increase (decrease) in cash and cash equivalents						288,174						(42,166)						(24,850)
Cash and Cash Equivalents at Beginning of Period						204,872						247,038						271,888
Cash and Cash Equivalents at End of Period						$	493,046					$	204,872					$	247,038
Cash paid for interest						$	62,190					$	8,680					$	6,555
Non cash transactions:
Purchases of business - earnout consideration recorded in accrued liabilities						$	900					$	4,397					$	—
Additions to property, plant & equipment included in accounts payable						$	21,801					$	10,986					$	12,313

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.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread

throughout the United States and world. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our

business including the impact to our suppliers and customers as well as the impact to the countries and markets in which we

operate. At the onset of the COVID-19 outbreak, we began focusing intensely on mitigating the adverse impacts of COVID-19

on our foreign and domestic operations starting by protecting our employees, suppliers and customers.

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

Business Segments. Effective July 1, 2019, the Company realigned its organizational structure into two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. Refer to Note 14 for further information on reporting segments.

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

Foreign Currency Translation. For all foreign subsidiaries whose functional currency is not the U.S. dollar, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates while income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income (loss) within shareholders’ equity in the accompanying Consolidated Balance Sheets.

Cash and Cash Equivalents. The Company considers highly liquid investment instruments with an original maturity of three months or less to be cash equivalents. We place our cash and cash equivalents with high credit quality financial institutions and to date have not experienced credit losses in these instruments.

Accounts Receivable. The Company makes estimates evaluating its allowance for doubtful accounts. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience, current market conditions and any specific customer collection issues that it has identified.

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

Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair value upon acquisition. Major improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its property, plant and equipment and other long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. Depreciation on property, plant and equipment and amortization on finance lease right-of-use assets for financial reporting purposes is computed primarily by the straight-line method over the estimated useful lives for building, building improvements and land improvements of 10 to 20 years and 3 to 20 years for machinery and equipment.

Leases. Leases are recognized under ASC 842, Leases. The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments, unless the implicit rate is readily determinable. If lease terms include options to extend or terminate the lease, the ROU asset and lease liability are measured based on the reasonably certain decision. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all classes of leased assets for which the Company is the lessee. Additionally, for certain equipment leases, the portfolio approach is applied to account for the operating lease ROU assets and lease liabilities. In the Consolidated Statements of Earnings (Loss), lease expense for operating lease payments is recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the ROU asset is amortized over the lease term. Some leasing arrangements require variable payments that are dependent upon usage or output, or may vary for other reasons, such as insurance or tax payments. Variable lease payments are recognized as incurred and are not presented as part of the ROU asset or lease liability. See Notes 2 and 12 for additional information.

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

On September 24, 2019, the Company completed the acquisition of Finisar Corporation (“Finisar”). The Company’s Consolidated Financial Statements include the operating results of Finisar from the date of acquisition. Refer to Note 3 for further information regarding the Finisar acquisition.

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

The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative assessment described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the quantitative assessment. Otherwise, the Company will forego the quantitative assessment and does not need to perform any further testing. As of April 1 of fiscal years 2020 and 2019, the Company completed its annual impairment tests of its reporting units using the quantitative assessment. Based on the results of these analyses the Company’s goodwill was not impaired.

Intangibles. Intangible assets are initially recorded at their cost or fair value upon acquisition. Finite-lived intangible assets are amortized for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from 3 to 20 years. Indefinite-lived intangible assets are not amortized but tested annually for impairment at April 1, or when events or changes in circumstances indicate that indefinite-lived intangible assets might be impaired.

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

The Company generally accounts for investments it makes in VIEs in which it has determined that it does not have a controlling financial interest but has significant influence over and holds at least a 20% ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for under ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

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

Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Such accruals are adjusted as further information develops or circumstances change. Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. If we are unable to correct defects or other problems, we could experience, among other things, loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers. The Company had no material loss contingency liabilities at June 30, 2020 related to commitments and contingencies.

Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the Consolidated Financial Statements and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount more likely than not to be realized. The Company’s accounting policy is to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets.

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

Revenue Recognition. Revenue is recognized under Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606), when or as obligations under the terms of a contract with the Company’s customer have been satisfied and control has transferred to the customer. The Company has elected the practical expedient to exclude all taxes from the measurement of the transaction price.

For contracts with commercial customers, which comprise the majority of the Company’s performance obligations, ownership of the goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a product (“Direct Ship Parts”) to the customer or receipt of the product by the customer and without significant judgments. The majority of contracts typically require payment within 30 to 90 days after transfer of ownership to the customer.

Contracts with the U.S. government through its prime contractors are typically for products or services with no alternative future use to the Company with an enforceable right to payment for performance completed to date, whereas commercial contracts typically have alternative use. Customized products with no alternative future use to the Company with an enforceable right to payment for performance completed to date are recorded over time utilizing the output method of units delivered. The Company considers this to be a faithful depiction of the transfer to the customer of revenue over time due to short cycle time and immaterial work-in-process balances. The majority of contracts typically require payment within 30 to 90 days after transfer of ownership to the customer.

Service revenue includes repairs, non-recurring engineering, tolling arrangements and installation. Repairs, tolling and installation activities are usually completed in a short period of time (normally less than one month) and therefore recorded at a point in time when the services are completed. Non-recurring engineering arrangements are typically recognized over time under the time and material practical expedient, as the entity has a right to consideration from a customer, in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. The majority of contracts typically require payment within 90 days.

The Company's revenue recognition policy is consistently applied across the Company's segments, product lines, and geographical locations. For the periods covered herein, the Company measures revenue based on the amount of consideration it expects to be entitled to in exchange for products, reduced by the amount of variable consideration related to products expected to be returned. The Company determines variable consideration, which primarily consists of product returns and distributor sales price reductions resulting from price protection agreements, by estimating the impact of such reductions based on historical analysis of such activity.

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

The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of future returns, based on historical experience.

The Company offers an assurance-type limited warranty that products will be free from defects in materials and workmanship. The Company establishes an accrual for estimated warranty expenses at the time revenue is recognized. The warranty is typically one year, although can be longer periods for certain products, and is limited to either (1) the replacement or repair of the product or (2) a credit against future purchases.

Research and Development. Internal research and development costs are expensed as incurred.

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

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss is a measure of all changes in shareholders’ equity that result from transactions and other economic events in the period other than transactions with owners. Accumulated other comprehensive loss is a component of shareholders’ equity and consists of accumulated foreign currency translation adjustments, changes in the fair value of interest rate swap derivative instruments, and pension adjustments.

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

Note 2. Recently Issued Financial Accounting Standards

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). This ASU modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company adopted this standard on July 1, 2019, and has elected to utilize the optional transition method. See Note 12.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which more closely aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The Company adopted this standard on July 1, 2019. The adoption of this standard did not have a material effect on the Consolidated Financial Statements.

Pronouncements Currently Under Evaluation

In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which among other things, requires the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company has completed the evaluation of the impact of ASU 2016-13. This pronouncement is not expected to have a material impact to the Consolidated Financial Statements.

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2018-16”), which permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate eligible for hedge accounting purposes. For public business entities that already have adopted the amendments in ASU 2017-12, the amendments in ASU 2018-16 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this update if an entity already has adopted ASU 2017-12. The Company is in the process of evaluating the impact of the update.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients to ease the potential burden of accounting for the effects of reference rate reform as it pertains to contract modifications of debt and lease contracts and derivative contracts identified in a hedging relationship. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is in the process of evaluating the impact of the pronouncement.

Note 3. Acquisitions

Finisar Corporation

On September 24, 2019 (the “Closing Date”), the Company completed its acquisition of Finisar, a global technology leader for subsystems and components for fiber optic communications.

Pursuant to the terms of the Agreement and Plan of Merger, dated as of November 8, 2018 (the “Merger Agreement”), Mutation Merger Sub Inc., a wholly owned subsidiary of the Company (“Merger Sub”), merged with and into Finisar (the “Merger”), with Finisar surviving the Merger. Each issued and outstanding share of Finisar’s common stock was automatically

cancelled and converted into the right to receive the following consideration (collectively, the “Merger Consideration”), at the election of the holder of the share of Finisar’s common stock:

• $26.00 in cash, without interest (the “Cash Consideration”),

• 0.5546 of a share of the Company’s common stock (the “Stock Consideration”), or

• a combination of $15.60 in cash, without interest, and 0.2218 of a share of the Company’s common stock (the “Mixed Consideration”).

The per share Cash Consideration and Stock Consideration were subject to adjustment pursuant to the terms of the Merger Agreement such that the aggregate Merger Consideration consisted of approximately 60.0% cash and approximately 40.0% shares of the Company’s common stock (assuming a per share price of the Company’s common stock equal to the closing price as of November 8, 2018, which was $46.88 per share) across all shares of Finisar’s common stock (the “Proration Adjustment”). Following the Proration Adjustment, the resulting consideration for Cash Consideration was adjusted to $15.94 in cash and 0.2146 shares of the Company’s Common Stock. No adjustment was made to the Stock Consideration and Mixed Consideration.

The total fair value of consideration paid in connection with the acquisition of Finisar consisted of the following (in $000):

			Shares						Per Share						Total Consideration
Cash paid for outstanding shares of Finisar common stock															$	1,879,086
II-VI common shares issued to Finisar stockholders			26,712,822						$	36.98					987,707
Replacement equity awards attributable to pre-combination service															41,710
															$	2,908,503

The Company recorded $44.4 million of acquisition related costs in the year ended June 30, 2020, representing professional and other direct acquisition costs. These costs are recorded within selling, general, and administrative expense in our Consolidated Statements of Earnings (Loss).

On the Closing Date, the Company entered into an Amended and Restated Credit Agreement, dated as of September 24, 2019 (the “Credit Agreement”), by and among the Company, Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lender parties thereto. Refer to Note 9 for additional information on the credit facility.

From the Closing Date, Finisar contributed $938.4 million of our consolidated revenue for the year ended June 30, 2020. Finisar’s contribution to our consolidated net loss for the year ended June 30, 2020 was a loss of $94.6 million. Finisar's contribution included amortization expense of $47.4 million for the year ended June 30, 2020. Finisar's contribution to our consolidated net loss includes $26.1 million of severance, restructuring, and related expense for the year ended June 30, 2020. Additionally, a $87.7 million fair value adjustment to inventory was expensed through cost of goods sold during the year ended June 30, 2020.

The Company allocated the fair value of the purchase price consideration to the tangible assets, liabilities, and intangible assets acquired, based on estimated fair values. The excess purchase price over those fair values is recorded as goodwill. Our valuation assumptions of acquired assets and assumed liabilities require significant estimates with respect to intangible assets. In determining the fair value of intangible assets acquired, the Company must make assumptions about the future performance of the acquired business, including among other things, the forecasted revenue growth attributable to the asset group and projected operating expenses inclusive of expected synergies, future cost savings, and other benefits expected to be achieved by combining the Company and Finisar. The Company’s intangible assets are comprised of customer relationships, trade names and developed technology. The estimated fair value of the customer relationships, trade names and developed technology are determined using the multi-period excess earnings method and relief from royalty methods. Both methods require forward looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future economic and market conditions. The estimated fair value of the developed technology is also dependent on the selection of the royalty rate used in the valuation method.

Certain data necessary to complete the purchase price allocation remains preliminary, including, but not limited to, finalization of certain income tax computations and other assumed liabilities. The Company expects to complete the purchase price allocation within 12 months from the Closing Date, at which time the purchase price allocation set forth herein may be revised. Any such revisions or changes may be material. The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocation. Income-based valuation approaches included the use of the multi-period excess earnings and relief-from-royalty methods for certain acquired intangible assets.

Our preliminary allocation of the purchase price of Finisar, based on the estimated fair value of the assets acquired and liabilities assumed as of the Closing Date, is as follows (in $000):

						Preliminary Purchase Price Allocation
						Previously												Measurement
						Reported						Reclassification						Period						As Adjusted
						September 30, 2019						Adjustments						Adjustments (a)						(preliminary)
Cash and cash equivalents						$	842,764					$	(287)					$	—					$	842,477
Accounts receivable						260,864						—						(1,523)						259,341
Inventories						437,867						—						1,841						439,708
Property, plant & equipment (b)						748,858						—						(91,145)						657,713
Intangible assets (c)						827,689						—						(162,489)						665,200
Other assets (d) (h)						82,624						287						(6,443)						76,468
Deferred tax assets (e)						—						—						16,267						16,267
Accounts payable						(123,707)						—						—						(123,707)
Other accrued liabilities (d) (f) (h)						(148,425)						(43,964)						(9,727)						(202,116)
Deferred tax liabilities (e)						(197,809)						43,964						86,805						(67,040)
Debt						(575,000)						—						—						(575,000)
Goodwill						759,239						—						159,953						919,192
Total Purchase Price (g)						$	2,914,964					$	—					$	(6,461)					$	2,908,503

(a) The Company recorded measurement period adjustments to its preliminary acquisition date fair values due to the refinement of its valuation models, assumptions and inputs. The following measurement period adjustments were based upon information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of the amounts recognized at that date.

(b) The Company estimated the fair value of the property, plant, and equipment acquired as part of the Finisar acquisition to be $657.7 million. Upon finalization of the valuation, the fair value of the property, plant, and equipment was decreased by $91.1 million as of June 30, 2020 with a corresponding increase to goodwill.

(c) The Company estimated the fair value of the intangible assets acquired as part of the Finisar acquisition to be $665.2 million. Upon finalization of the valuation, the fair value of the intangible assets was decreased by $162.5 million as of June 30, 2020 with a corresponding increase to goodwill.

(d) The Company reassessed the lease term and discount rates on the right of use assets acquired as part of the Finisar acquisition. As a result, the preliminary fair value of the right of use assets acquired were decreased by $16.0 million during the measurement period with a corresponding decrease in the lease liability.

(e) The Company has adjusted its deferred tax asset and liability positions as of June 30, 2020, to $16.3 million and $67.0 million respectively, as a result of measurement period adjustments.

(f) In addition to the $16.0 million reduction of lease liabilities described in (d) above, the Company recorded approximately $11.5 million of uncertain tax positions, approximately $13.4 million of warranty reserve liabilities, and approximately $5.5 million of increases in other liabilities, as measurement period adjustments.

(g) Total purchase price decreased $6.5 million for the deferred tax impact of the purchase price component associated with replacement equity awards attributable to pre-combination service of Finisar employees.

(h) Other assets and other accrued liabilities increased $6.8 million for a litigation matter and related insurance recovery.

As of June 30, 2020, the goodwill has been recorded within the Photonic Solutions reporting unit. As of June 30, 2020, the other intangible assets have been recorded within the Photonic Solutions and Compound Semiconductors segments. The preliminary goodwill of $919.2 million arising from the acquisition is attributed to the expected synergies, including future cost savings, and other benefits expected to be generated by combining II-VI and Finisar. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes. See Note 8 for additional information on goodwill and intangibles.

Supplemental Pro Forma Information (Unaudited)

The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, and is not indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that we believe are reasonable under the circumstances.

The following unaudited supplemental pro forma information presents the combined results of operations for the years ended June 30, 2020 and 2019 as if Finisar had been acquired as of July 1, 2018. The supplemental pro forma information includes adjustments to amortization and depreciation for acquired intangible assets, property, plant and equipment, adjustments to share-based compensation expense, fair value adjustments on the inventories acquired, transaction costs, and interest expense and amortization of debt issuance costs related to the Senior Credit Facilities as defined in Note 9.

The unaudited supplemental pro forma financial information for the period presented is as follows (in $000):

						Year Ended June 30, 2020						Year Ended June 30, 2019
Revenue						$	2,638,278					$	2,625,714
Net Earnings (Loss)						$	12,902					$	(138,452)

Note 4. Other Investments

Purchase of Equity Investment

The Company holds an equity investment in a privately-held company (“Equity Investment”), which it acquired for $51.5 million. The Company’s pro-rata share of earnings from this investment was $1.1 million and $1.3 million for the years ended June 30, 2020 and 2019, respectively, and was recorded in other expense (income), net in the Consolidated Statements of Earnings (Loss).

This investment is accounted for under the equity method of accounting. The following table summarizes the Company's equity in this nonconsolidated investment:

Location						Interest Type						Ownership % as of June 30, 2020						Equity as of June 30, 2020 ($000)
USA						Equity Investment						93.8%						$	58,751

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

As of June 30, 2020, the Company’s maximum financial statement exposure related to the Equity Investment was approximately $58.8 million, which is included in Investments on the Consolidated Balance Sheet as of June 30, 2020.

In August 2020, the Company agreed to purchase the remaining 6.2% ownership from the minority holders.

Note 5. Revenue from Contracts with Customers

The following table summarizes disaggregated revenue by market and product for the year ended June 30, 2020 ($000):

						Year Ended June 30, 2020
						Photonic Solutions						Compound Semiconductors						Unallocated & Other						Total
Commercial
Direct Ship Parts						$	1,524,799					$	607,318					$	22,051					$	2,154,168
Services						11,991						36,224						—						48,215
U.S. Government
Direct Ship Parts						—						158,790						—						158,790
Services						—						18,898						—						18,898
Total Revenues						$	1,536,790					$	821,230					$	22,051					$	2,380,071

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

						Year Ended June 30, 2019
						Photonic Solutions						Compound Semiconductors						Unallocated & Other						Total
Commercial
Direct Ship Parts						$	631,407					$	563,102					$	—					$	1,194,509
Services						7,482						14,164						—						21,646
U.S. Government
Direct Ship Parts						—						130,313						—						130,313
Services						—						16,028						—						16,028
Total Revenues						$	638,889					$	723,607					$	—					$	1,362,496

Contracts with the U.S. government disclosed above are through the U.S. Government's prime contractors.

Contract Liabilities

Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the year ended June 30, 2020, the Company recognized revenue of $9.4 million related to customer payments that were included in the consolidated balance sheet as of July 1, 2019. As of June 30, 2020, the Company had $38.7 million of contract liabilities recorded in the consolidated balance sheet.

Note 6. Inventories

The components of inventories were as follows:

June 30,						2020						2019
($000)
Raw materials						$	190,237					$	119,917
Work in progress						298,577						101,091
Finished goods						130,996						75,274
Total Inventories						$	619,810					$	296,282

Note 7. Property, Plant & Equipment

Property, plant & equipment consists of the following:

June 30,						2020						2019
($000)
Land and land improvements						$	18,396					$	9,001
Buildings and improvements						345,736						249,238
Machinery and equipment						1,352,835						739,330
Construction in progress						111,394						71,425
Finance lease right-of-use asset						25,000						—
						1,853,361						1,068,994
Less accumulated depreciation						(638,589)						(486,204)
Property, plant, and equipment, net						$	1,214,772					$	582,790

Included in the table above is a building acquired under a finance lease. As of June 30, 2020 and June 30, 2019, the accumulated depreciation of the finance lease right-of-use asset was $5.8 million and $4.2 million, respectively.

Note 8. Goodwill and Other Intangible Assets

Effective July 1, 2019, the Company realigned its organizational structure into two reporting segments for the purpose of

making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions.

All applicable information has been restated to reflect this change. See Note 14 for further information regarding this segment realignment.

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

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

						Year Ended June 30, 2020
						Photonic Solutions						Compound Semiconductors						Total
Balance-beginning of period						$	134,057					$	185,721					$	319,778
Goodwill acquired						919,192						—						919,192
Foreign currency translation						(755)						794						39
Balance-end of period						$	1,052,494					$	186,515					$	1,239,009

						Year Ended June 30, 2019
						Photonic Solutions						Compound Semiconductors						Total
Balance-beginning of period						$	109,670					$	161,008					$	270,678
Goodwill acquired						26,069						25,569						51,638
Foreign currency translation						(1,682)						(856)						(2,538)
Balance-end of period						$	134,057					$	185,721					$	319,778

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2020 and 2019 were as follows ($000):

						June 30, 2020																														June 30, 2019
						Gross Carrying Amount						Accumulated Amortization						Net Book Value						Gross Carrying Amount						Accumulated Amortization						Net Book Value
Technology						$	444,315					$	(68,048)					$	376,267					$	91,637					$	(39,679)					$	51,958
Trade Names						22,369						(3,669)						18,700						15,759						(1,601)						14,158
Customer Lists						456,223						(92,822)						363,401						132,872						(59,664)						73,208
Other						1,570						(1,570)						—						1,572						(1,572)						—
Total						$	924,477					$	(166,109)					$	758,368					$	241,840					$	(102,516)					$	139,324

Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2020, 2019 and 2018 was $64.2 million, $16.6 million, and $14.6 million, respectively. The technology intangible assets are being amortized over a range of 60 to 240 months with a weighted-average remaining life of approximately 133 months. The customer lists are being amortized over 60 to 240 months with a weighted-average remaining life of approximately 134 months.

In conjunction with the acquisition of Finisar, the Company recorded the following intangible assets ($000):

			Gross Carrying Amount																		Weighted Average Assigned Useful Life (Years)
Technology			$	334,700																	12.5
Trade Names			6,700																		3.0
Customer Lists			323,800																		10.2
			$	665,200

In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade names of $14.3 million as of June 30, 2020 is not amortized but tested annually for impairment. The Company completed its impairment test of these trade names with indefinite lives in the fourth quarter of fiscal years 2020 and 2019. Based on the results of these tests, the trade names were not impaired.

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

Year Ending June 30,
2021			$	77,011
2022			74,252
2023			73,380
2024			64,394
2025			62,334

Note 9. Debt

The components of debt for the periods indicated were as follows ($000):

			June 30, 2020						June 30, 2019
Term A Facility, interest at LIBOR, as defined, plus 2.00%			$	1,194,463					$	—
Revolving Credit Facility, interest at LIBOR, as defined, plus 2.00%			74,000						—
Debt issuance costs, Term A Facility and Revolving Credit Facility			(32,174)						—
Term B Facility, interest at LIBOR, as defined, plus 3.50%			714,600						—
Debt issuance costs, Term B Facility			(24,747)						—
0.50% convertible senior notes, assumed in the Finisar acquisition			14,888						—
0.25% convertible senior notes			345,000						345,000
0.25% convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount			(30,688)						(43,859)
Term loan, interest at LIBOR, as defined, plus 1.75%			—						45,000
Line of credit, interest at LIBOR, as defined, plus 1.75%			—						115,000
Credit facility unamortized debt issuance costs			—						(761)
Yen denominated line of credit, interest at LIBOR, as defined, plus 1.75%			—						2,783
Note payable assumed in IPI acquisition			—						3,834
Total debt			2,255,342						466,997
Current portion of long-term debt			(69,250)						(23,834)
Long-term debt, less current portion			$	2,186,092					$	443,163

The scheduled maturities of principal amounts of debt obligations for the next five years and thereafter is as follows ($000):

						Year Ending
						June 30,
2021						$	69,250
2022						84,138
2023						414,250
2024						69,250
2025						1,027,463
Thereafter						678,600
Total						$	2,342,951

Senior Credit Facilities

On September 24, 2019, in connection with the Finisar acquisition, the Company entered into a Credit Agreement (the "Credit Agreement") with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.

The Credit Agreement provides for senior secured financing of $2.425 billion in the aggregate, consisting of

(i)Aggregate principal amount of $1,255 million for a five-year senior secured first-lien term A loan facility (the “Term A Facility”),

(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”) and

(iii)Aggregate principal amount of $450 million for a five-year senior secured first-lien revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Senior Credit Facilities”).

The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25.0 million and a swing loan sub-facility initially not to exceed $20.0 million.

The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of the Closing Date. Similarly, the Company is obligated to repay the outstanding principal amount of the Term B Facility in quarterly installments equal to 0.25% of the initial aggregate principal amount of the Term B Facility, with the remaining outstanding balance due and payable on the seventh anniversary of the Closing Date. The Company is obligated to repay the aggregate principal amount of all outstanding revolving loans made under the Revolving Credit Facility on the fifth anniversary of the Closing Date.

The Company’s obligations under the Senior Credit Facilities are guaranteed by each of the Company’s existing or future direct and indirect domestic subsidiaries, including Finisar and its domestic subsidiaries (collectively, the “Guarantors”). Borrowings under the Senior Credit Facilities are collateralized by a first priority lien in substantially all of the assets of the Company and the Guarantors, except that no real property is collateral under the Senior Credit Facilities.

All amounts outstanding under the Senior Credit Facilities will become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25% Convertible Senior Notes due 2022 (the “II-VI Notes”) if (i) the II-VI Notes remain outstanding, and (ii) the Company has insufficient cash and borrowing availability to repay the principal amount of the II-VI Notes.

The Company voluntarily may prepay, at any time or from time to time, any amounts outstanding under the Senior Credit Facilities in whole or in part without premium or penalty; except for the Term B Facility, pursuant to which in the event of (a) a repayment made before September 24, 2020, (b) the occurrence of a repricing event, or (c) a change to the lenders, the Company will be subject to a prepayment premium in an amount equal to one percent of: (i) the principal amount of the Term B Facility that is prepaid under an optional or mandatory prepayment due to a repricing event, (ii) the aggregate outstanding principal amount of the Term B Facility resulting from an amendment to the Credit Agreement, and (iii) the principal amount of the Term B Facility that is mandatorily assigned. The Company may be subject to mandatory prepayment of amounts outstanding under the Senior Credit Facilities under certain circumstances, including in connection with certain asset sales or other dispositions of property and debt issuances.

The Company also may be required to prepay amounts under the Term B Facility based on the Company’s excess cash flow (as calculated in accordance with the terms of the Credit Agreement) for the Company’s prior fiscal year beginning with its fiscal year ending June 30, 2020 and the Company’s consolidated secured net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of such fiscal year.

Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances relating to events of default. The Company has entered into an interest rate swap contract to hedge its exposure to interest rate risk on its variable rate borrowings under the Senior Credit Facilities. Refer to Note 15 for further information regarding this interest rate swap.

The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00:1.00. The Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Closing Date, commencing with the first full fiscal quarter after the Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2020, the Company was in compliance with all financial covenants under the Credit Agreement.

The Company incurred $69.8 million of debt issuance costs in connection with the Senior Credit Facilities. The Company evaluated these costs to determine appropriate recognition of expense under Accounting Standards Codification 470, Debt, to account for debt modification and extinguishment. As a result of the Company’s assessment, $65.8 million have been capitalized in the Consolidated Balance Sheet. Debt extinguishment costs of $4.0 million were expensed in other expense (income), net in the Consolidated Statements of Earnings (Loss) during the year ended June 30, 2020. The Company expensed $8.8 million of capitalized debt issuance costs during the year ended June 30, 2020, in interest expense in the Consolidated Statements of Earnings (Loss). The capitalized costs are being amortized to interest expense using the effective interest rate method from the issuance date of September 24, 2019, through the end of each facility. The unamortized discount amounted to $56.9 million as of June 30, 2020 and is being amortized over five and seven years, for the Term A Facility and Revolving Credit Facility, and the Term B Facility, respectively.

On June 30, 2020, the Company announced its intention to offer, in concurrent underwritten public offerings, newly issued shares of its common stock and newly issued shares of its Series A Mandatory Convertible Preferred Stock. On July 7, 2020, the Company used the proceeds from the public offerings to pay off the remaining balance of $715 million of the Term B Loan Facility. See Note 21 for further details.

0.50% Finisar Convertible Notes

Finisar’s outstanding 0.50% Convertible Senior Notes due 2036 (the “Finisar Notes”) may be redeemed at any time on or after December 22, 2021 in whole or in part at the option of the Company at a redemption price equal to one hundred percent (100%) of the principal amount of such Finisar Notes plus accrued and unpaid interest. Each holder of Finisar Notes also may require Finisar to repurchase all or any portion of such holder’s outstanding Finisar Notes for cash on December 15, 2021, December 15, 2026 and December 15, 2031 at a repurchase price equal to one hundred percent (100)% of the principal amount of such Finisar Notes plus accrued and unpaid interest. The Finisar Notes will mature on December 15, 2036. Interest on the Finisar Notes accrues at 0.50% per annum, paid semi-annually, in arrears, on June 15 and December 15 of each year.

In connection with the acquisition of Finisar, the Company, Finisar and the trustee entered into a First Supplemental Indenture, dated as of September 24, 2019 (the “First Supplemental Indenture”). The First Supplemental Indenture supplements the base indenture (as supplemented, the “Finisar Indenture”), which governs the Finisar Notes. Pursuant to the terms of the First Supplemental Indenture, the Company has fully and unconditionally guaranteed, on a senior unsecured basis, the due and punctual payment and performance of all obligations of Finisar to the holders of the Finisar Notes. The First Supplemental Indenture also provides that the right of holders of Finisar Notes to convert Finisar Notes into cash and/or shares of Finisar’s common stock, is changed to a right to convert Finisar Notes into cash and/or shares of the Company’s common stock, subject to the terms of the Finisar Indenture.

Under the terms of the Finisar Indenture, the consummation and effectiveness of the Merger on the Closing Date constituted a Fundamental Change (as defined in the Finisar Indenture) and a Make-Whole Fundamental Change (as defined in the Finisar Indenture). Accordingly, in accordance with the terms of the Finisar Indenture, each holder of Finisar Notes had the right to (i) convert its Finisar Notes into cash and/or shares of Company Common Stock, at Finisar’s option, or (ii) require that Finisar repurchase such holder’s Finisar Notes for an amount in cash equal to one hundred percent (100)% of the principal amount of such Finisar Notes plus accrued and unpaid interest.

Holders of approximately $560.1 million in aggregate principal amount of Finisar Notes exercised the repurchase right. The Company repurchased those Finisar Notes on October 23, 2019 for an aggregate consideration of approximately $561.1 million in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed $561.0 million under a delayed draw on its Term Loan A to fund the payment to the holders of Finisar Notes that exercised the repurchase right. As of June 30, 2020, approximately $14.9 million in aggregate principal amount of Finisar Notes remain outstanding.

0.25% Convertible Senior Notes

In August 2017, the Company issued and sold $345 million aggregate principal amount of the II-VI Notes in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended.

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

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is 21.25 shares of common stock per $1,000 principal amount of II-VI Notes, which is equivalent to an initial conversion price of $47.06 per share of common stock. Throughout the term of the II-VI Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Notes amounted to $346.2 million as of June 30, 2020 and $268.0 million as of June 30, 2019 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended). The Notes mature on September 1, 2022, unless earlier repurchased by the Company or converted by holders in accordance with the terms of the Notes. As of June 30, 2020, the II-VI Notes are not yet convertible based upon the II-VI Notes’ conversion features. Holders of the II-VI Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.

The following table sets forth total interest expense recognized related to the II-VI Notes for the years ended June 30, 2020, 2019 and 2018:

						Year Ended June 30, 2020						Year Ended June 30, 2019						Year Ended June 30, 2018
0.25% contractual coupon						$	876					$	874					$	731
Amortization of debt discount and debt issuance costs including initial purchaser discount						13,172						12,550						10,058
Interest expense						$	14,048					$	13,424					$	10,789

The effective interest rate on the liability component for the periods presented was 4.5%. The unamortized discount amounted to $26.8 million as of June 30, 2020, and is being amortized over 3 years.

Aggregate Availability

The Company had aggregate availability of $374.6 million under its line of credit as of June 30, 2020.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 3.4% and 1.6% for the years ended June 30, 2020 and 2019, respectively.

Note 10. Income Taxes

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

Year Ended June 30,						2020						2019						2018
($000)
U.S. loss						$	(302,027)					$	(34,241)					$	(15,207)
Non-U.S. income						238,099						163,054						137,401
Earnings (loss) before income taxes						$	(63,928)					$	128,813					$	122,194

The components of income tax expense were as follows:

Year Ended June 30,						2020						2019						2018
($000)
Current:
Federal						$	7					$	1,755					$	699
State						496						472						401
Foreign						45,052						29,531						32,147
Total Current						$	45,555					$	31,758					$	33,247
Deferred:
Federal						$	(43,955)					$	(3,764)					$	(3,064)
State						1,007						(2,010)						1,615
Foreign						494						(4,688)						2,394
Total Deferred						$	(42,454)					$	(10,462)					$	945
Total Income Tax Expense						$	3,101					$	21,296					$	34,192

Principal items comprising deferred income taxes were as follows:

June 30,						2020						2019
($000)
Deferred income tax assets
Inventory capitalization						$	19,372					$	5,687
Interest rate swap						9,847						—
Non-deductible accruals						9,325						1,251
Accrued employee benefits						11,095						9,797
Net-operating loss and credit carryforwards						182,625						54,192
Share-based compensation expense						8,110						7,192
Other						9,736						5,488
Right of use asset						31,573						—
Valuation allowances						(54,559)						(16,558)
Total deferred income tax assets						$	227,124					$	67,049
Deferred income tax liabilities
Tax over book accumulated depreciation						$	(25,926)					$	(28,184)
Intangible assets						(160,577)						(28,202)
Tax on unremitted earnings						(21,785)						(11,662)
Convertible debt						(6,006)						(8,662)
Lease liability						(29,768)						—
Other						(5,676)						(5,728)
Total deferred income tax liabilities						$	(249,738)					$	(82,438)
Net deferred income taxes						$	(22,614)					$	(15,389)

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,						2020						%						2019						%						2018						%
($000)
Taxes at statutory rate						$	(13,425)					21						$	27,051					21						$	34,284					28
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit						1,194						(2)						(1,212)						(1)						1,426						1
Taxes on non U.S. earnings						(915)						1						(5,857)						(5)						(16,058)						(13)
Valuation allowance						(9,365)						15						(6,703)						(5)						(6,008)						(5)
Research and manufacturing incentive deductions and credits						(15,836)						25						(11,756)						(9)						(7,024)						(6)
Stock compensation						4,334						(7)						(1,914)						(1)						(4,103)						(3)
Repatriation tax						—						—						14,108						11						36,777						30
GILTI and FDII						36,067						(56)						6,437						5						—						—
Impact of U.S. tax rate change on deferred balances						—						—						—						—						(4,209)						(3)
Other						1,047						(2)						1,142						1						(893)						(1)
						$	3,101					(5)						$	21,296					17						$	34,192					28

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 $21.8 million.

Furthermore, the Tax Act includes certain changes such as introducing a new category of income, referred to as global intangible low tax income (“GILTI”), related to earnings taxed at a low rate of foreign entities without a significant fixed asset base, and imposes additional limitations on the deductibility of interest and officer compensation. The Company made a final accounting policy election to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred. These changes are included in the Company’s 2020 fiscal year income tax expense.

During the fiscal years ended June 30, 2020, 2019, and 2018, net cash paid by the Company for income taxes was $39.5 million, $26.3 million, and $21.3 million, respectively.

Our foreign subsidiaries in various tax jurisdictions operate under tax holiday arrangements. The impact of the tax holidays on our effective rate is a reduction in the rate of (8.91)%, 0.25% and 0.17% for the fiscal years ended June 30, 2020, 2019 and 2018, respectively, and the impact of the tax holidays on diluted earnings per share is immaterial.

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2020:

Type						Amount						Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits						$	71,694					June 2021-June 2040
Foreign tax credits						14,354						June 2022-June 2030
State tax credits						14,364						June 2021-June 2035
State tax credits (indefinite)						40,316						Indefinite
Operating loss carryforwards:
Loss carryforwards - federal						$	166,643					June 2021-June 2036
Loss carryforwards - state						110,587						June 2021-June 2039
Loss carryforwards - foreign						10,683						June 2021-June 2040
Loss carryforwards - foreign (indefinite)						36,806						Indefinite

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

Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2020, 2019 and 2018 were as follows:

						2020						2019						2018
($000)
Beginning balance						$	11,520					$	9,892					$	7,577
Increases in current year tax positions						1,506						191						2,536
Increases in prior year tax positions						—						376						224
Decreases in prior year tax positions						—						—						(9)
Acquired business						31,791						6,036						—
Expiration of statute of limitations						(2,014)						(4,975)						(436)
Ending balance						$	42,803					$	11,520					$	9,892

The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2020, 2019 and 2018, there was $0.6 million, $(0.1) million and $0.3 million of interest and penalties within income tax expense, respectively. The Company had $3.8 million, $1.2 million and $0.6 million of interest and penalties accrued at June 30, 2020, 2019 and 2018, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the amounts are not expected to be paid within one year, except for $7.4 million which is expected to be paid within a year. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate, was approximately $24.3 million, $6.2 million and $1.6 million at June 30, 2020, 2019 and 2018, respectively. The Company expects a decrease of $4.9 million of unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.

Fiscal years 2017 to 2020 remain open to examination by the Internal Revenue Service, fiscal years 2015 to 2020 remain open to examination by certain state jurisdictions, and fiscal years 2009 to 2019 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for the certain subsidiary companies in Australia for the years ended April 30, 2010 through April 30, 2014; India for the year ended March 31, 2016; Philippines for the year ended June 30, 2018; Germany for the years ended June 30, 2012 through June 30, 2015; and Vietnam for the years June 30, 2015 through June 30, 2016. The Company believes its income tax reserves for these tax matters are adequate.

Note 11. Earnings Per Share

The following table sets forth the computation of earnings (loss) per share for the periods indicated. Basic earnings (loss) per share has been computed using the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share has been computed using the weighted average number of common shares outstanding during the period plus dilutive potential shares of common stock from (1) stock options, performance and restricted shares (under the treasury stock method) and (2) convertible debt (under the If-Converted method) outstanding during the period.

Year Ended June 30,						2020						2019						2018
($000 except per share)
Net earnings (loss)						$	(67,029)					$	107,517					$	88,002
Divided by:
Weighted average shares						84,828						63,584						62,499
Basic earnings (loss) per common share						$	(0.79)					$	1.69					$	1.41
Net earnings (loss)						$	(67,029)					$	107,517					$	88,002
Divided by:
Weighted average shares						84,828						63,584						62,499
Dilutive effect of common stock equivalents						—						2,220						2,634
Diluted weighted average common shares						84,828						65,804						65,133
Diluted earnings (loss) per common share						$	(0.79)					$	1.63					$	1.35

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

Year Ended June 30,						2020						2019						2018
Stock options and restricted shares						2,345						115						135
0.25% Convertible Senior Notes due 2022						7,331						7,331						7,331
0.50% Finisar Convertible Notes						289						—						—
Total anti-dilutive shares						9,965						7,446						7,466

Note 12. Leases

On July 1, 2019, the Company adopted Topic 842 using the modified retrospective transition approach. The reported results for the year ended June 30, 2020 reflect the application of Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.

The Company elected the practical expedient package permitted under the transition approach. As such, the Company did not reassess whether any expired or existing contracts are or contain leases, did not reassess historical lease classification, and did not reassess initial direct costs for any leases that existed prior to July 1, 2019.

As of the date of adoption, the Company recognized operating lease assets and liabilities of approximately $80.1 million on the Consolidated Balance Sheet. In addition, we acquired approximately $29 million of operating lease assets and liabilities through the acquisition of Finisar.

All existing leases that were classified as capital leases under Topic 840 are classified as finance leases under Topic 842. As of the date of adoption, the Company recognized finance lease assets of $25 million in property, plant and equipment, net, with corresponding finance lease liabilities of $24 million on the Consolidated Balance Sheet.

We determine if an arrangement is a lease at inception and classify it as either finance or operating.

Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life. Finance leases are recorded in property, plant and equipment, net, and finance lease liabilities within other current and other non-current liabilities on our Consolidated Balance Sheet. Finance lease assets are amortized in operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component for lease liabilities included in interest expense and recognized using the effective interest method over the lease term.

Operating leases are recorded in other assets and operating lease liabilities, current and non-current on the Company’s Consolidated Balance Sheet. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.

The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to the Company. For the purpose of lease liability measurement, we consider only payments that are fixed and determinable at the time of commencement. Any variable payments that depend on an index or rate are expensed as incurred. We account for non-lease components, such as common area maintenance, as a component of the lease, and include it in the initial measurement of our lease assets and corresponding liabilities. The Company’s lease terms and conditions may include options to extend or terminate. An option is recognized when it is reasonably certain that we will exercise that option.

The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to commencement. Our lease assets are tested for impairment in the same manner as long-lived assets used in operations.

The following table presents lease costs, which include short-term leases, lease term, and discount rates ($000):

						Year Ended June 30, 2020
Finance Lease Cost
Amortization of right-of-use assets						$	1,667
Interest on lease liabilities						1,328
Total finance lease cost						2,995
Operating lease cost						32,466
Sublease income						368
Total lease cost						$	35,093
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases						1,328
Operating cash flows from operating leases						30,816
Financing cash flows from finance leases						1,026
Assets Obtained in Exchange for Lease Liabilities
Right-of-use assets obtained in Finisar acquisition						29,247
Right-of-use assets obtained in exchange for new operating lease liabilities						29,458
Total assets obtained in exchange for new operating lease liabilities						58,705
Weighted-Average Remaining Lease Term (in Years)
Finance leases						11.5
Operating leases						7.2
Weighted-Average Discount Rate
Finance leases						5.6		%
Operating leases						7.3		%

The following table presents future minimum lease payments, which include short-term leases ($000):

Future Years			Operating Leases						Finance Leases						Total
Year 1			$	31,100					$	2,419					$	33,519
Year 2			23,964						2,486						26,450
Year 3			20,621						2,554						23,175
Year 4			17,906						2,624						20,530
Year 5			15,381						2,697						18,078
Thereafter			52,316						19,419						71,735
Total minimum lease payments			$	161,288					$	32,199					$	193,487
Less: amounts representing interest			41,953						8,752						50,705
Present value of total lease liabilities			$	119,335					$	23,447					$	142,782

Note 13. Share-Based Compensation

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

Upon consummation of the acquisition, the Company assumed approximately 6.6 million restricted stock units previously granted by Finisar under the Amended and Restated Finisar Corporation 2005 Stock Incentive Plan (each an “Assumed RSU”). Each Assumed RSU is subject to substantially the same terms and conditions as applied to the Assumed RSU immediately prior to the consummation of the acquisition, except that the number of shares of the Company’s common stock subject to each Assumed RSU has been adjusted in accordance with the terms of the Merger Agreement. Other than the Assumed RSUs, the Company did not assume any other awards outstanding under the Amended and Restated Finisar Corporation 2005 Stock Incentive Plan (the “Finisar Plan”). As of the Closing Date, the Company also assumed the unused capacity under the Finisar 2005 Plan.

As of June 30, 2020, there were approximately 3.1 million shares available to be issued under the II-VI Plan and the Finisar Plan collectively, including forfeited shares from predecessor plans.

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

Share-based compensation expense for the fiscal years ended June 30, 2020, 2019 and 2018 is as follows $000:

Year Ended June 30,						2020						2019						2018
Stock Options and Cash-Based Stock Appreciation Rights						$	11,893					$	6,801					$	6,605
Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Units						49,957						9,242						7,850
Performance Share Awards and Cash Based Performance Share Unit Awards						11,977						8,920						5,221
						$	73,827					$	24,963					$	19,676

Share-based compensation expense associated with liability awards was $5.3 million, $3.0 million, and $4.4 million, in the fiscal years ended June 30, 2020, 2019 and 2018, respectively.

Stock Options and Cash-Based Stock Appreciation Rights:

The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense. During the fiscal years ended June 30, 2020, 2019 and 2018, the weighted-average fair value of options granted under the stock option plan was $14.79, $20.66 and $14.23, respectively, per option using the following assumptions:

Year Ended June 30,						2020						2019						2018
Risk-free interest rate						1.50		%				2.80		%				2.00		%
Expected volatility						39		%				37		%				37		%
Expected life of options						6.91 years						6.96 years						6.43 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. The Company will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future periods if the actual forfeitures are higher than estimated.

Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2020 was as follows:

						Stock Options																		Cash-Based Stock Appreciation Rights
						Number of Shares						Weighted Average Exercise Price						Number of Rights						Weighted Average Exercise Price
Outstanding - July 1, 2019						3,761,283						$	23.74					227,496						$	28.09
Granted						774,116						$	34.75					76,651						$	34.95
Exercised						(774,382)						$	17.39					(65,488)						$	21.25
Forfeited and Expired						(39,216)						$	32.99					(8,285)						$	33.76
Outstanding - June 30, 2020						3,721,801						$	26.99					230,374						$	32.13
Exercisable - June 30, 2020						2,192,315						$	21.53					79,459						$	31.75

As of June 30, 2020, 2019 and 2018, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $79.8 million, $56.4 million and $96.1 million, respectively. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30, 2020, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2020. This amount varies based on the fair market value of the Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years ended June 30, 2020, 2019, and 2018 was $20.2 million, $14.7 million, and $14.7 million, respectively. As of June 30, 2020, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $15.4 million. This cost is expected to be recognized over a weighted-average period of approximately three years.

Outstanding and exercisable stock options at June 30, 2020 were as follows:

						Stock Options and Cash-Based Stock Appreciation Rights Outstanding																														Stock Options and Cash-Based Stock Appreciation Rights Exercisable
						Number of						Weighted Average Remaining						Weighted Average						Number of						Weighted Average Remaining						Weighted Average
Range of						Shares or						Contractual Term						Exercise						Shares or						Contractual Term						Exercise
Exercise Prices						Rights						(Years)						Price						Rights						(Years)						Price
$13.34 - $17.69						618,493						3.21						$	15.25					611,301						3.19						$	15.21
$17.70 - $19.15						763,173						4.18						$	18.62					635,346						3.88						$	18.43
$19.16 - $26.46						842,141						5.21						$	21.38					658,659						4.91						$	20.86
$26.47 - $36.32						799,316						8.09						$	33.77					226,693						6.88						$	34.56
$36.33 - $49.90						929,052						8.62						$	42.20					139,775						7.86						$	47.18
						3,952,175						6.08						$	27.29					2,271,774						4.54						$	21.65

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

Restricted share awards, restricted share units, and cash-based restricted share unit awards compensation expense was calculated based on the number of shares or units expected to be earned by the grantee multiplied by the stock price at the date of grant (for restricted share awards) or the stock price at the period end date (for cash-based restricted share unit awards), and is being recognized over the vesting period. Generally, the restricted share awards, restricted share units, and cash-based restricted share unit awards have a three-year tranche vesting provision and an estimated forfeiture rate of 4.6%.

Restricted share, restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30, 2020, was as follows:

						Restricted Share Awards																		Restricted Share Units																								Cash-Based Restricted Share Units
						Number of Shares						Weighted Average Grant Date Fair Value						Number of Shares									Weighted Average Grant Date Fair Value						Number of Units						Weighted Average Grant Date Fair Value
Nonvested - June 30, 2019						183,429						$	30.30					175,737									$	47.13					77,642						$	37.19
Assumed in Finisar Acquisition						—						$	—					3,652,191									$	36.98					—						$	—
Granted						—						$	—					250,736									$	36.35					49,444						$	34.84
Vested						(130,382)						$	28.03					(1,475,663)									$	37.49					(43,699)						$	32.31
Forfeited						(2,520)						$	35.34					(360,589)									$	36.97					(1,384)						$	40.99
Nonvested - June 30, 2020						50,527						$	35.92					2,242,412									$	39.46					82,003						$	38.31

As of June 30, 2020, total unrecognized compensation cost related to non-vested restricted share, restricted share unit, and cash-based restricted share unit awards was $63.2 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The restricted share and restricted share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based restricted share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. The total fair value of the restricted share, restricted share unit, and cash-based restricted share unit awards granted during the years ended June 30, 2020, 2019 and 2018, was $10.9 million, $9.9 million and $7.5 million, respectively. The total fair value of restricted share, restricted share unit and cash-based restricted share unit awards vested was $75.2 million, $19.9 million and $17.0 million during fiscal years 2020, 2019 and 2018, respectively.

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

The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees performance share awards and performance share unit awards under the Plan. As of June 30, 2020, the Company had outstanding grants covering performance periods ranging from 12 to 36 months. These awards are intended to provide continuing emphasis on specified financial performance goals that the Company considers important contributors to the creation of long-term shareholder value. These awards are payable only if the Company achieves specified levels of financial performance during the performance periods.

The performance share compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. Performance share and cash-based performance share unit award activity relating to the Plan during the year ended June 30, 2020, was as follows:

						Performance Share Awards																		Cash-Based Performance Share Units
						Number of Shares						Weighted Average Grant Date Fair Value						Number of Units						Weighted Average Grant Date Fair Value
Nonvested - June 30, 2019						413,651						$	36.80					24,224						$	37.47
Granted						414,464						$	30.29					30,199						$	31.79
Vested						(414,582)						$	26.21					(17,200)						$	21.67
Forfeited						(4,287)						$	35.07					(2,035)						$	29.50
Nonvested - June 30, 2020						409,246						$	40.96					35,188						$	38.54

As of June 30, 2020, total unrecognized compensation cost related to non-vested performance share and cash-based performance share unit awards was $13.0 million. This cost is expected to be recognized over a weighted-average period of approximately one year. The total fair value of the performance share and cash-based performance share unit awards granted

during the fiscal years ended June 30, 2020, 2019 and 2018 was $15.4 million, $10.0 million and $3.8 million, respectively. The total fair value of performance shares vested during the fiscal years ended June 30, 2020, 2019 and 2018 was $6.2 million, $10.5 million and $3.6 million, respectively.

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

Note 14. Segment and Geographic Reporting

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

Effective July 1, 2019, the Company realigned the composition of its operating segments. The Company combined II-VI Laser Solutions and II-VI Performance Products and renamed the combined segment Compound Semiconductors. All applicable segment information has been restated to reflect this change. Additionally, the Company changed the name of II-VI Photonics to Photonic Solutions.

The Company reports its financial results in two segments, and the Company’s chief operating decision maker receives and reviews financial information based on these segments. The Company evaluates business segment performance based upon segment operating income, which is defined as earnings before income taxes, interest and other income or expense.

The Compound Semiconductors segment has locations in the United States, Singapore, China, Germany, Switzerland, Japan, Belgium, the United Kingdom, Italy, South Korea, the Philippines, Vietnam, Sweden, and Taiwan. This segment designs, manufactures and markets: (i) optical and electro-optical components and materials sold under the II-VI Infrared brand name and used primarily in high-power CO2 lasers, fiber-delivered beam delivery systems and processing tools and direct diode lasers for industrial lasers sold under the II-VI HIGHYAG and II-VI Laser Enterprise brand names; (ii) infrared optical components and high-precision optical assemblies for aerospace and defense, medical and commercial laser imaging applications; (iii) semiconductor lasers and detectors for optical interconnects and sensing applications with InP; and (iv) unique engineered materials for thermoelectric and silicon carbide applications servicing the semiconductor, aerospace and defense and medical markets. Compound Semiconductors also manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices, and high-speed communication systems and manufactures 6-inch GaAs wafers allowing for the production of high performance lasers and integrated circuits in high volume sold under the II-VI EpiWorks and II-VI OptoElectronic Devices Division brand names.

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

In September 2019, the Company completed its acquisition of Finisar. See Note 3. The operating results of this acquisition have been reflected in the selected financial information of the Company’s Photonic Solutions segment and Compound Semiconductors Segment beginning on October 1, 2019, with the results from September 24, 2019 to September 30, 2019 reflected in Unallocated and Other.

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

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

						Photonic Solutions						Compound Semiconductors						Unallocated & Other						Total
($000)
2020
Revenues						$	1,536,790					$	821,230					$	22,051					$	2,380,071
Inter-segment revenues						31,515						164,884						(196,399)						—
Operating income (loss)						49,930						62,279						(72,730)						39,479
Interest expense						—						—						—						(89,409)
Other income (expense), net						—						—						—						(13,998)
Income taxes						—						—						—						(3,101)
Net earnings (loss)						—						—						—						(67,029)
Depreciation and amortization						112,203						104,936						3,743						220,882
Expenditures for property, plant & equipment						45,795						88,318						2,764						136,877
Segment assets						3,502,467						1,732,247						—						5,234,714
Goodwill						1,052,494						186,515						—						1,239,009

						Photonic Solutions						Compound Semiconductors						Unallocated & Other						Total
($000)
2019
Revenues						$	638,889					$	723,607					$	—					$	1,362,496
Inter-segment revenues						12,568						94,405						(106,973)						—
Operating income (loss)						81,898						82,414						(15,643)						148,668
Interest expense						—						—						—						(22,417)
Other income (expense), net						—						—						—						2,562
Income taxes						—						—						—						(21,296)
Net earnings						—						—						—						107,517
Depreciation and amortization						26,273						66,092						—						92,365
Expenditures for property, plant & equipment						44,851						83,899						—						128,750
Segment assets						681,610						1,272,163						—						1,953,773
Goodwill						134,057						185,721						—						319,778

						Photonic Solutions						Compound Semiconductors						Unallocated & Other						Total
($000)
2018
Revenues						$	486,485					$	672,309					$	—					$	1,158,794
Inter-segment revenues						24,867						37,723						(62,591)						—
Operating income						63,152						73,611						—						136,763
Interest expense						—						—						—						(18,352)
Other income, net						—						—						—						3,783
Income taxes						—						—						—						(34,192)
Net earnings						—						—						—						88,002
Depreciation and amortization						23,242						57,528						—						80,770
Expenditures for property, plant & equipment						36,122						125,201						—						161,323

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

						Revenues
Year Ended June 30,						2020						2019						2018
($000)
United States						$	1,432,492					$	405,404					$	373,735
Non-United States
Hong Kong						299,359						319,601						186,978
China						292,138						290,287						253,672
Japan						146,325						109,670						89,153
Germany						124,934						155,000						132,161
Switzerland						35,895						32,770						49,557
Vietnam						22,152						22,322						26,898
Korea						8,537						11,674						9,757
Singapore						5,791						6,868						5,941
Philippines						4,479						4,179						3,909
United Kingdom						4,226						2,712						9,359
Taiwan						3,743						2,005						1,705
Belgium						—						4						4,511
Italy						—						—						11,458
Total Non-United States						947,579						957,092						785,059
						$	2,380,071					$	1,362,496					$	1,158,794

						Long-Lived Assets
June 30,						2020						2019
($000)
United States						$	754,815					$	345,866
Non-United States
China						369,544						108,688
United Kingdom						55,028						60,369
Malaysia						46,162						—
Switzerland						37,129						35,592
Sweden						24,270						—
Germany						18,631						14,857
Australia						12,321						—
Vietnam						11,140						11,656
Philippines						7,607						7,793
Korea						3,438						—
Hong Kong						2,870						5,032
Other						1,965						1,190
Total Non-United States						590,105						245,177
						$	1,344,920					$	591,043

Note 15. Fair Value of Financial Instruments

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

• Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.

• Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.

• Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurements.

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.

The Company entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate of 1.52%. The Company receives payments with a floor of 0.00%. The interest rate swap agreement has an effective date of November 24, 2019, with an expiration date of September 24, 2024. The initial notional amount of the interest rate swap is scheduled to decrease to $825 million in June 2022 and will remain at that amount through the expiration date. The Company designated this instrument as a cash flow hedge and deemed the hedge relationship effective at inception of the contract. The fair value of the interest rate swap of $44.1 million is recognized in the Consolidated Balance Sheet within other liabilities. Changes in fair value are recorded within other comprehensive income (loss) on the Consolidated Balance Sheet and reclassified into the Consolidated Statements of Earnings (Loss) as interest expense in the period in which the underlying transaction affects earnings. Cash flows from hedging activities are reported in the Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations. The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The interest rate swap is classified as a Level 2 item within the fair value hierarchy.

The Company estimated the fair value of the II-VI Notes and Finisar Notes based on quoted market prices as of the last trading day prior to June 30, 2020; however, the II-VI Notes and Finisar Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the II-VI Notes and Finisar Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the II-VI Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 9. Debt for details on the Company’s debt facilities. The fair value and carrying value of the II-VI Notes and Finisar Notes were as follows at June 30, 2020 ($000):

						Fair Value						Carrying Value
II-VI Notes						$	413,379					$	314,312
Finisar Notes						$	14,404					$	14,888

The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings including its lease obligations, excluding the 0.25% Convertible Notes and the 0.50% Finisar convertible notes, are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value. Additionally, the Company remeasures certain assets to fair value, using Level 3 measurements, as a result of the occurrence of triggering events such as purchase accounting for acquisitions. See Note 3 for further information.

The Company, from time to time, purchases foreign currency forward exchange contracts, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales, for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export

sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk.

Note 16. Employee Benefit Plans

Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at the discretion of the Company’s board of directors and were $6.1 million, $4.6 million, and $5.0 million for the years ended June 30, 2020, 2019 and 2018, respectively.

On August 18, 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“2018 Plan”) for full time U.S. employees who have completed two years of continuous employment with the Company, and the 2018 Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders in November 2018. The employee may purchase the Company’s common stock for the lesser of 90% of the fair market value of the shares (i) on the first trading day of the offering period, or (ii) on the purchase date. Offering periods will run from August through January and from February through July each year. The number of shares which may be bought by an employee during each fiscal year is limited to 15% of the employee’s base pay. The 2018 Plan limits the number of shares of common stock available for purchase to 2,000,000 shares. As of June 30, 2020, there have been 80,469 shares purchased on behalf of the employees under the 2018 Plan.

Switzerland Defined Benefit Plan

The Company maintains a pension plan covering employees of our Swiss subsidiary (the “Swiss Plan”). Employer and employee contributions are made to the Swiss Plan based on various percentages of salary and wages that vary according to employee age and other factors. Employer contributions to the Swiss Plan for years ended June 30, 2020 and 2019 were $3.4 million and $3.0 million, respectively. Net periodic pension cost is not material for any year presented.

The underfunded pension liability was $26.9 million and $20.8 million as of June 30, 2020 and 2019, respectively. The pension adjustment amount recognized in accumulated other comprehensive income was $3.1 million and $11.8 million for the fiscal years ended June 30, 2020 and 2019, respectively. The accumulated benefit obligation was $84.9 million as of June 30, 2020, compared to $69.7 million as of June 30, 2019.

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

Year Ending June 30,
($000)
2021			$	4,100
2022			3,400
2023			3,700
2024			4,300
2025			5,300
Next five years			$	28,400

Note 17. Other Accrued Liabilities

The components of other accrued liabilities were as follows:

June 30,						2020						2019
($000)
Contract liabilities						$	17,328					$	10,390
Warranty reserves						27,620						4,478
Other accrued liabilities						74,390						35,076
						$	119,338					$	49,944

Note 18. Commitments and Contingencies

The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early termination. The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred under these commitments based upon historical experience and current expectations. The Company also has commitments relating to earnout arrangements on its acquisitions of $2.5 million. Total future commitments held by II-VI as of June 30, 2020, were $196.9 million in fiscal 2021, and $2.7 million thereafter.

Note 19. Share Repurchase Programs

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. During each of the fiscal years ended June 30, 2020 and June 30, 2019, the Company purchased 50,000 shares of its common stock for $1.6 million under this program. As of June 30, 2020, the Company has cumulatively purchased 1,416,587 shares of its common stock pursuant to the Program for approximately $22.3 million. The dollar value of shares as of June 30, 2020 that may yet be purchased under the Program is approximately $27.7 million.

Note 20. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2020, 2019, and 2018 were as follows ($000):

						Foreign Currency Translation Adjustment						Interest Rate Swap						Defined Benefit Pension Plan						Total Accumulated Other Comprehensive Income (Loss)
AOCI - June 30, 2017						$	(8,460)					$	—					$	(5,318)					$	(13,778)
Other comprehensive income (loss) before reclassifications						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)
Other comprehensive income (loss) before reclassifications						(15,969)						(46,067)						(3,528)						(65,564)
Amounts reclassified from AOCI						—						1,982						420						2,402
Net current-period other comprehensive income						(15,969)						(44,085)						(3,108)						(63,162)
AOCI - June 30, 2020						$	(31,596)					$	(44,085)					$	(11,702)					$	(87,383)

Note 21. Subsequent Event

On July 2, 2020, II-VI announced the pricing of concurrent underwritten public offerings of (a) 9,302,235 shares of its common stock at a public offering price of $43.00 per share for gross proceeds to II-VI from the offering of approximately $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “common stock offering”), and (b) 2,000,000 shares of its Series A Mandatory Convertible Preferred Stock at a public offering price of $200.00 per share for gross proceeds to II-VI from the offering of $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “preferred stock offering”). In addition, the underwriters had a 30-day option to purchase up to an additional (a) 1,395,335 shares of its common stock at the applicable public offering price, less underwriting discounts and commissions, and (b) 300,000 shares of Series A Mandatory Convertible Preferred Stock at the applicable public offering price, less underwriting discounts and commissions and solely to cover over-allotments with respect to the preferred stock offering. On July 2, 2020, the underwriters exercised both the common stock and preferred stock options in full, raising an additional approximately $120 million in gross proceeds.

On July 7, 2020, the public offerings closed, and the Company raised a total of approximately $920 million in gross proceeds. The Company used the net proceeds from the public offerings to repay the remaining balance of $715 million of the Term B Loan Facility, and will use the remainder of net proceeds, to develop, enhance, invest in or acquire related, emerging or complementary technologies, products, or businesses and for other general corporate purposes.

On August 12, 2020, the Company announced that it entered into a definitive agreement to acquire the outstanding shares of Ascatron AB ("Ascatron"), which will add essential elements to the Company's vertically integrated SiC technology platform. On August 20, 2020, the Company completed the acquisition of Ascatron.

Quarterly Financial Data (unaudited)

Fiscal Year 2020

Quarter Ended						June 30, 2020						March 31, 2020						December 31, 2019						September 30, 2019
($000, except per share)
2020
Net revenues						$	746,290					$	627,041					$	666,331					$	340,409
Cost of goods sold						444,153						381,108						517,991						217,269
Internal research and development						100,489						94,764						107,700						36,120
Selling, general and administrative						134,152						82,133						119,218						105,495
Interest expense						25,521						28,530						28,390						6,968
Other expense (income) - net						1,264						7,168						487						5,079
Earnings (loss) before income taxes						40,711						33,338						(107,455)						(30,522)
Income taxes						(10,550)						27,417						(9,242)						(4,524)
Net Earnings (Loss)						$	51,261					$	5,921					$	(98,213)					$	(25,998)
Basic earnings (loss) per share						$	0.56					$	0.07					$	(1.08)					$	(0.39)
Diluted earnings (loss) per share						$	0.53					$	0.06					$	(1.08)					$	(0.39)

Fiscal Year 2019

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

SCHEDULE II

II-VI INCORPORATED AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JUNE 30, 2020, 2019, AND 2018

(IN THOUSANDS OF DOLLARS)

			Balance at Beginning of Year			Charged to Expense			Charged to Other Accounts									Deduction from Reserves									Balance at End of Year
YEAR ENDED JUNE 30, 2020:
Allowance for doubtful accounts			$	1,292		$	956		$	—					$	(550)		(3)			$	1,698
Warranty reserves			$	4,478		$	11,507		$	37,453		(1)			$	(25,818)					$	27,620
Deferred tax asset valuation allowance			$	20,190		$	(2,186)		$	36,555		(2)			$	—					$	54,559
YEAR ENDED JUNE 30, 2019:
Allowance for doubtful accounts			$	837		$	548		$	—					$	(93)		(3)			$	1,292
Warranty reserves			$	4,679		$	4,185		$	—					$	(4,386)					$	4,478
Deferred tax asset valuation allowance			$	21,797		$	(1,607)		$	—					$	—					$	20,190
YEAR ENDED JUNE 30, 2018:
Allowance for doubtful accounts			$	1,314		$	(129)		$	—					$	(348)		(3)			$	837
Warranty reserves			$	4,546		$	3,821		$	—					$	(3,688)					$	4,679
Deferred tax asset valuation allowance			$	42,562		$	(4,602)		$	(16,163)		(4)			$	—					$	21,797

(1) Related to amounts assumed from the Finisar Acquisition.

(2) Related to the amounts assumed from the Finisar Acquisition.

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

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