Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("Management Discussion and Analysis") are forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “projects” or similar expressions.

Although our management considers these expectations and assumptions to have a reasonable basis, there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this Annual Report on Form 10-K include, but are not limited to: (i) the failure of any one or more of the assumptions stated above to prove to be correct; and (ii) the risks relating to forward-looking statements and other “Risk Factors” discussed herein at Item 1A. The Company disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or developments, or otherwise.

In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not possible for management to anticipate all such risk factors, or to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Annual Report on Form 10-K are based only on information currently available to us and speak only as of the date of this Report. We do not assume any obligation, and do not intend to, update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.

Investors should also be aware that, while the Company does communicate with securities analysts from time to time, such communications are conducted in accordance with applicable securities laws. Investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

Overview

II-VI Incorporated (“II-VI,” the “Company,” “we,” “us” or “our”), a worldwide leader in engineered materials and opto-electronic components, is a vertically integrated manufacturing company that develops innovative products for industrial materials processing, communications, aerospace and defense, consumer electronics, semiconductor capital equipment, life sciences and automotive end markets. The Company produces a wide variety of application-specific photonic and electronic materials and components, and deploys them in various forms, including integration with advanced software.

The Company generates revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products for our end markets. We also generate revenue, earnings and cash flows from government-funded research and development contracts relating to the development and manufacture of new technologies, materials and products.

Our customer base includes original equipment manufacturers, laser end users, system integrators of high-power lasers, manufacturers of equipment and devices for industrial, optical communications, consumer electronics, security and monitoring applications, U.S. government prime contractors, and various U.S. government agencies.

On July 7, 2020, the Company closed its underwritten public offering and sale of 2 million shares of Series A Mandatory Convertible Preferred Stock, as well as its underwritten public offering and sale of approximately 11 million shares of its common stock. See Note 11. Equity and Redeemable Preferred Stock, to our Consolidated Financial Statements contained in this Annual Report on Form 10-K for further details.

As we grow, we are focused on scaling our Company and deriving the continued benefits of vertical integration as we strive to be a best in class competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company operates or is organized in the future to enable the most efficient implementation of our strategy.

Pending Acquisition of Coherent, Inc.

On March 25, 2021, II-VI, Coherent, Inc. (“Coherent”) and Watson Merger Sub Inc., a wholly owned subsidiary of II-VI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, Merger Sub will be merged with and into Coherent, and Coherent will continue as the surviving corporation in the merger and wholly owned subsidiary of II-VI (the “Merger”).

Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each share of common stock of Coherent (the “Coherent Common Stock”) issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”): (A) $220.00 in cash, without interest (the “Cash Consideration”), and (B) 0.91 of a validly issued, fully paid and nonassessable share of our common stock of II-VI.

Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement, a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent RSU multiplied by the sum of (A) 0.91, and (B) the quotient obtained by dividing the Cash Consideration by the volume weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger

(the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of achievement of such goals or metrics immediately prior to the Effective Time.

The converted Coherent RSUs generally will be subject to the same terms and conditions that applied to the awards immediately prior to the Effective Time, provided that any Coherent RSUs subject to performance-based vesting conditions will be subject solely to time- and service-based vesting. Each Coherent RSU that is outstanding as of the date of the Merger Agreement and as of immediately prior to the Effective Time will be entitled to certain vesting acceleration benefits.

Each Coherent RSU granted to a non-employee member of Coherent’s Board of Directors (“Director RSUs”) (whether or not vested) that is outstanding immediately prior to the Effective Time will automatically vest in full and be canceled and converted into the right to receive the Merger Consideration as if such Director RSU had been settled in shares of Coherent Common Stock immediately prior to the Effective Time.

The Boards of Directors of II-VI and Coherent unanimously approved the Merger and the Merger Agreement. II-VI filed with the SEC a registration statement on Form S-4 relating to the Merger, and the SEC declared that registration statement to be effective on May 6, 2021. Shareholders of II-VI and stockholders of Coherent voted to approve proposals related to the Merger at special meetings held on June 24, 2021 by the respective companies.

The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by the end of the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.

In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21, 2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc., PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA) LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively, the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the Commitment Letter is subject to a number of customary conditions.

In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement, dated as of as of March 30, 2021, the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (the “Investor”). Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold, and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company (“II-VI Series B-1 Convertible Preferred Stock”) for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the company would issue, sell and deliver to the Investor:

• 105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company (“II-VI Series B-2 Convertible Preferred Stock”) for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.1 billion, immediately prior to Closing; and

• immediately prior to Closing, the company will receive up to an additional 35,000 shares of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million. This was agreed on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.

The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other within this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its Consolidated Financial Statements and accompanying notes. Note 1. Nature of Business and Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K describes the significant accounting policies and accounting methods used in the preparation of the Company’s Consolidated Financial Statements. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Management has discussed the development and selection of the critical accounting policies and estimates described below with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosure. In addition, there are other items within our Consolidated Financial Statements that require estimation but are not deemed critical. Changes in estimates used in these and other items could impact the Consolidated Financial Statements.

Series A Preferred Stock

As described in Note 11. Equity and Redeemable Preferred Stock, of the Notes to our Consolidated Financial Statements, on July 7, 2020, the Company issued shares of Series A Mandatory Convertible Preferred Stock. Upon conversion, on the mandatory conversion date, each outstanding share of Series A Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a number of shares of the Company’s common stock determined based on the market value of the Company’s common stock on the mandatory conversion date, defined as July 1, 2023.

The accounting for the issuance of the Series A Mandatory Convertible Preferred Stock involved significant estimation in approximating the future market value of the Company’s common stock on the mandatory conversion date, which was used to determine whether the Series A Mandatory Convertible Preferred Stock should be classified within shareholders’ equity on the consolidated balance sheet as well as the whether the Preferred Stock should be classified as a participating security.

Management estimated the future market value of its common stock on the mandatory conversion date, through development of a Monte Carlo simulation model. A sensitivity analysis was also performed to confirm the reasonableness of the assumptions, which included volatility and cost of equity. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Goodwill

The Company tests goodwill for impairment annually, and when events or changes in circumstances indicate that goodwill might be impaired. The determination of whether goodwill is impaired requires us to make judgments based on long-term projections of future performance. Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated results and general economic and market conditions and their projections. For fiscal year 2021, the fair values of the reporting units were determined using a discounted cash flow analysis with projected financial information based on our most recently completed long-term strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting units. As of June 30, 2021, no reporting units are at risk for impairment. Due to the cyclical nature of our business, and the other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges and other factors. If material adverse conditions occur that impact one or both of our reporting units, our determination of future fair value might not support the carrying amount of one or both of our reporting units, and the related goodwill would need to be impaired.

Income Taxes

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

Management evaluates the realizability of deferred tax assets for each jurisdiction in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in a three-year period including the current and prior two years, management normally concludes that the income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in a three-year period, management then considers a series of factors in the determination of whether the deferred tax assets can be realized. The Company has recorded valuation allowances against certain of its deferred tax assets, primarily those that have been generated from net operating losses in certain foreign taxing jurisdictions and acquired U.S. carryforwards. In evaluating whether the Company would more likely than not recover these deferred tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense.

COVID-19 Update

On March 11, 2020, the World Health Organization designated the novel coronavirus disease known as COVID-19 as a global pandemic. In response to the global spread of COVID-19, governments at various levels have implemented unprecedented response measures. Overall, the COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. Certain of the measures taken in response to the COVID-19 pandemic have adversely affected, and could in the future materially adversely impact, our business, results of operations, financial condition and stock price. In particular, the COVID-19 pandemic continues to have a significant impact on global markets due to resulting supply chain and production disruptions, workforce and travel restrictions.

Our focus has been on the protection of the health and safety of our employees and business partners. In our facilities, we have deployed new safety measures, including guidance to employees on matters such as effective hygiene and disinfection, social distancing, limited and remote access working where feasible and use of protective equipment. We also are prioritizing efforts to understand and support the changing business needs of our customers and suppliers in light of restrictions that are applicable to them.

At this time, we believe that our existing balances of cash and cash equivalents, along with our existing committed borrowing availability and other short-term liquidity arrangements, will be sufficient to satisfy our working capital needs, make necessary capital asset purchases and debt repayments and meet other liquidity requirements associated with our existing operations. Likewise, our current estimates indicate that we will remain in compliance with financial covenants applicable under our debt arrangements.

The full extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial performance is currently uncertain and will depend on many factors outside our control, including, without limitation, the duration and severity of the pandemic, the imposition of protective public safety measures, and the impact of the pandemic on the global economy as a whole and, in particular, demand for our products. Due to these uncertainties, we cannot reasonably estimate the related impact on us at this time.

For additional information regarding the risks that we face as a result of the COVID-19 pandemic, please see Item 1A, Risk Factors, in Part I of this Form 10-K. Further, to the extent the COVID-19 pandemic adversely affects our business and financial results, it also may have the effect of heightening many of the other risks described in the risk factors in Item 1A of this Form 10-K.

Fiscal Year 2021 Compared to Fiscal Year 2020

The Company aligns its organizational structure into the following two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report on Form 10-K.

The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2021 and 2020 ($ in millions except per share information):

						Year Ended June 30, 2021												Year Ended June 30, 2020
												% of Revenues												% of Revenues
Total revenues						$	3,106					100		%				$	2,380					100		%
Cost of goods sold						1,890						61		%				1,561						66		%
Gross margin						1,216						39						820						34
Operating expenses:
Internal research and development						330						11						339						14
Selling, general and administrative						484						16						441						19
Interest and other, net						50						2						103						4
Earnings (Loss) before income tax						353						11						(64)						(3)
Income taxes						55						2						3						—
						$	298					10		%				$	(67)					(3)		%
Diluted earnings (loss) per share						$	2.37											$	(0.79)

Consolidated

Revenues. Revenues for the year ended June 30, 2021 increased 30% to $3,106 million, compared to $2,380 million for the prior fiscal year. Revenue for 2021 was a record with growth across all end markets compared to the same period last fiscal year. Communications, our largest vertical, grew 30% compared to the same period last year. This growth was due to a full year of Finisar revenue, strong demand across transceivers, including 200/400G products, as well as other optical communications products. The strong demand for our 3D sensing products drove 118% growth in revenue for Consumer Electronics. Life Sciences grew 65%, driven by demand for our filters, optics and thermo-electric coolers for COVID-19 related PCR testing and sequencing instrumentation. Our Industrial business grew 11% compared to the same period last year, due to strong growth in both "CO 2" and one micron laser components.

Gross margin. Gross margin for the year ended June 30, 2021 was $1,216 million, or 39%, of total revenues, compared to $820 million, or 34% of total revenues, for the same period last fiscal year. Gross margin as a percentage of revenues increased 470 basis points compared to the prior fiscal year. Gross margin was negatively impacted in the prior year by the effects of purchase accounting on inventory, an increased value of $87.7 million related to the fair value adjustment of the acquired Finisar inventory.

Internal research and development. Company-funded internal research and development (“IR&D”) expenses for the fiscal year ended June 30, 2021 were $330 million, or 11% of revenues, compared to $339 million, or 14%. of revenues, last fiscal year. The IR&D expenses are primarily related to the Company continuing to invest in new products and processes across all its businesses including investments in high speed datacom and telecom transceivers, high speed integrated circuits (ICs), 5G technology, 3D sensing, indium phosphide semiconductor lasers, gallium arsenide semiconductor lasers, silicon carbide semiconductor technology, and other emerging market trends.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2021 were $484 million, or 16% of revenues, compared to $441 million, or 19% of revenues, last fiscal year. The Company incurred transaction and integration costs relating to the acquisitions of Finisar, Ascatron and Innovion, the pending acquisition of Coherent, increased stock compensation due to the increased II-VI stock price, as well as the SG&A from the operations of Ascatron and Innovion.

Interest and other, net. Interest and other, net for the year ended June 30, 2021 was expense of $50 million compared to expense of $103 million last fiscal year, or a decrease of $53 million year over year. Interest and other, net primarily includes $60 million for interest expense on borrowings, and $6 million of foreign currency losses. The decrease compared to prior fiscal year is driven by lower levels of debt outstanding, due to the Term Loan B being repaid with funds from the July 2020 equity raise, as well as gains of $7 million and $11 million recognized in relation to the Innovion acquisition and the Preferred Series B forward sale agreement, respectively. These gains were offset by $25 million of debt issuance costs recognized in conjunction with the repayment of the Company's Term Loan B Facility in fiscal 2021.

There were foreign currency losses of $6 million for the year ended June 30, 2021 due to the volatility in the foreign exchange market, compared to $8 million of losses for the year ended June 30,2020.

Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2021 was 16%, compared to an effective tax rate of (5)% last fiscal year. The current fiscal year’s effective tax rate was lower than statutory rates because of favorable research and development incentives in certain jurisdictions and stock option exercise benefits from the strong II-VI stock price.

Segment Reporting

Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from income from operations in that operating income excludes certain expenses included in interest and other (net), as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See Note 15. Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference.

Photonic Solutions ($ in millions)

						Year Ended June 30,												% Increase/(Decrease)
						2021						2020
Revenues						$	2,038					$	1,537					33		%
Operating income						$	208					$	50					316		%

The above operating results for the year ended June 30, 2021 include the Company’s acquisition of Finisar in September 2019.

Revenues for the year ended June 30, 2021 for Photonic Solutions increased 33% to $2,038 million, compared to $1,537 million for last fiscal year. The largest driver of the increase is the inclusion of four full fiscal quarters of revenue from Finisar compared to 6 days and three quarters of revenue in the prior year. Our transceiver business grew across all product lines including the 200G and 400G modules.

Operating income for the year ended June 30, 2021 for Photonic Solutions increased 316% to $208 million, compared to an operating income of $50 million last fiscal year. The drivers of the increased operating income were higher sales volume, and improved operating performance and the absence of costs related to purchase accounting that were present in fiscal year 2020.

Compound Semiconductors ($ in millions)

						Year Ended June 30,												% Increase/(Decrease)
						2021						2020
Revenues						$	1,068					$	821					30		%
Operating income						$	221					$	62					255		%

The above operating results for the year ended June 30, 2021 include the Company’s acquisition of Finisar in September 2019.

Revenues for the fiscal year ended June 30, 2021 for Compound Semiconductors increased 30% to $1,068 million, compared to revenues of $821 million last fiscal year. The increase in revenues during the current fiscal year was primarily driven by over a 100% increase in VCSEL product shipments addressing the 3D sensing consumer market, and increased revenues to customers in all of our other markets with significant growth in our Life Sciences business.

Operating income for the fiscal year ended June 30, 2021 for Compound Semiconductors increased 255% to $221 million, compared to operating income of $62 million last fiscal year. The increase in operating income during the current fiscal year was primarily driven by product mix and improved absorption of operating costs due to higher volumes and shipping 3D sensing products. In addition, the expenses associated with the fair value inventory write-up and other related acquisition expenses for Finisar did not repeat in the current year.

Fiscal Year 2020 Compared to Fiscal Year 2019

The Company aligned its organizational structure into the following two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report on Form 10-K.

The following table sets forth select items from our Consolidated Statements of Earnings for the years ended June 30, 2020 and 2019 ($ in millions except per share information):

						Year Ended June 30, 2020												Year Ended June 30, 2019
												% of Revenues												% of Revenues
Total revenues						$	2,380					100		%				$	1,362					100		%
Cost of goods sold						1,561						66						841						62
Gross margin						820						34						521						38
Operating expenses:
Internal research and development						339						14						139						10
Selling, general and administrative						441						19						234						17
Interest and other, net						103						4						20						1
Earnings before income tax						(64)						(3)						129						9
Income taxes						3						—						21						2
Net earnings						$	(67)					(3)		%				$	108					8		%
Diluted earnings per share						$	(0.79)											$	1.63

Consolidated

Revenues. Revenues for the year ended June 30, 2020 increased 75% to $2,380 million, compared to $1,362 million for fiscal year 2019. The increase in revenues was primarily attributed to the acquisition of Finisar, which contributed $938 million of revenues for the fiscal year ended June 30, 2020. In addition to the acquisition of Finisar, the increase in revenues within Photonic Solutions was driven by increased demand from customers in the optical communication market, ROADM and other optical communication products addressing the growing deployment of 5G optical networks. Compound Semiconductors recorded a 13% revenue increase during fiscal year 2020, which in addition to revenues from Finisar, was driven by strengthening demand for SiC substrate products addressing RF electronics and high-power switching systems. This segment also realized increased revenues from its aerospace and defense products addressing strengthening demand from customers in the intelligence, surveillance and reconnaissance markets.

Gross margin. Gross margin for the year ended June 30, 2020 was $820 million, or 34%, of total revenues, compared to $521 million, or 38% of total revenues, for the same period fiscal year 2019. Gross margin as a percentage of revenues decreased 380 basis points compared to fiscal year 2019 despite the 75% increase in revenues during this same fiscal year. Gross margin was negatively impacted by additional cost of goods sold of $88 million related to the fair value adjustment of the acquired Finisar inventory, and as the result of product mix relating to Finisar's Transceiver product line which has a lower gross margin profile than the Company's historical margins.

Internal research and development. Company-funded IR&D expenses for the fiscal year ended June 30, 2020 were $339 million, or 14% of revenues, compared to $139 million, or 10% of revenues, fiscal year 2019. The increase in IR&D expenses was primarily due to the Company continuing to invest in new products and processes across all its businesses including investments in 5G technology, 3D Sensing, indium phosphide, LIDAR and other emerging market trends.

Selling, general and administrative. SG&A expenses for the year ended June 30, 2020 were $441 million, or 19% of revenues, compared to $234 million, or 17% of revenues, fiscal year 2019. The increase in SG&A was primarily the result of transaction costs incurred relating to the acquisition of Finisar as well as the SG&A from the Finisar acquisition.

Interest and other, net. Interest and other, net for the year ended June 30, 2020 was expense of $103 million compared to expense of $20 million fiscal year 2019. Interest and other, net primarily includes $89 million for interest expense on borrowings, $14 million of foreign currency losses, and $3 million of equity earnings from unconsolidated investments. Interest expense increased due to the higher levels of outstanding debt incurred in conjunction with the acquisition of Finisar. In addition, the Company expensed $4 million of debt extinguishment costs during fiscal year 2020 and recorded a $5 million impairment charge for an unconsolidated investment as its carrying value was determined to be unrecoverable.

Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2020 was a (5)% benefit, compared to an effective tax rate of 17% fiscal year 2019. Fiscal year 2020’s effective tax rate was negatively impacted by the U.S. enacted tax legislation related to GILTI partially offset by research and development incentives in certain jurisdictions.

Photonic Solutions ($ in millions)

						Year Ended June 30,												% Increase
						2020						2019
Revenues						$	1,537					$	639					141		%
Operating income						$	50					$	82					(39)		%

The above operating results for the year ended June 30, 2020 include the Company’s acquisitions of Finisar in September 2019.

Revenues for the year ended June 30, 2020 for Photonic Solutions increased 141% to $1,537 million, compared to $639 million for fiscal year 2019. Included in revenue for fiscal year 2020 was $904 million of revenues from the Finisar acquisition. Exclusive of the acquisition, the increase in revenues was attributed to increased demand of our 5G optical networks driven by the China broadband initiative.

Operating income for the year ended June 30, 2020 for Photonic Solutions decreased 39% to $50 million, compared to an operating income of $82 million for fiscal year 2019. The decrease in operating income was primarily due to acquisition related expenses related to amortization expense on acquired intangible assets and the expensing of acquired inventory fair value step-up partially offset by incremental margin realized on increased revenues during the year.

Compound Semiconductors ($ in millions)

						Year Ended June 30,												% Increase
						2020						2019
Revenues						$	821					$	724					13		%
Operating income						$	62					$	82					(24)		%

The above operating results for the year ended June 30, 2020 include the Company's acquisition of Finisar in September 2019.

Revenues for the fiscal year ended June 30, 2020 for Compound Semiconductors increased 13% to $821 million, compared to revenues of $724 million for fiscal year 2019. The increase in revenues during fiscal year 2020 was primarily driven by increased VCSEL product shipments addressing the 3D Sensing consumer market, and increased revenues to customers in the aerospace and defense market.

Operating income for the fiscal year ended June 30, 2020 for Compound Semiconductors decreased 24% to $62 million, compared to operating income of $82 million for fiscal year 2019. The decrease in operating income during fiscal year 2020 was primarily driven by the acquisition of Finisar, which includes unabsorbed operating costs incurred at the segment's Sherman, Texas wafer fabrication facility during the qualification phase. In addition, the segment incurred acquisition related expenses associated with expensing of the fair value inventory write-up and other related acquisition expenses.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary sources of cash have been provided from operations, long-term borrowing, and advance funding from customers. Other sources of cash include proceeds received from the exercises of stock options and sale of equity investments and businesses. Our historic uses of cash have been for capital expenditures, investments in research and development, business acquisitions, payments of principal and interest on outstanding debt obligations, payments of debt issuance costs to obtain financing, payments in satisfaction of employees’ minimum tax obligations and purchases of treasury stock. Supplemental information pertaining to our sources and uses of cash for the periods indicated is presented as follows:

Sources (uses) of Cash (millions):

Year Ended June 30,						2021						2020						2019
Net cash provided by operating activities						$	574					$	297					$	179
Net proceeds from equity issuance						1,611						—						—
Proceeds from exercises of stock options						32						14						9
Proceeds on new long-term borrowings						—						2,121						—
Proceeds from prior credit facility and other borrowings						—						10						150
Payments on Finisar Notes						—						(560)						—
Payments under prior term loan and credit facility						—						(177)						(135)
Debt issuance costs						—						(64)						(6)
Common stock repurchases						—						(2)						(2)
Payments under new long-term borrowings and credit facility						(926)						(138)						—
Additions to property, plant & equipment						(146)						(137)						(137)
Purchases of businesses, net of cash acquired						(34)						(1,037)						(83)
Payment of dividends						(20)						—						—
Payments in satisfaction of employees' minimum tax obligations						(20)						(29)						(7)
Other investing and financing						5						—						—
Effect of exchange rate changes on cash and cash equivalents and other items						22						(12)						(10)

Net cash provided by operating activities:

Net cash provided by operating activities was $574 million during the current fiscal year ended June 30, 2021 compared to $297 million of cash provided by operating activities during the same period last fiscal year. The increase in cash flows provided by operating activities during the year ended June 30, 2021 compared to the same period last fiscal year was primarily driven by additional net earnings of $277 million in the year ended June 30, 2021 compared to the same period last fiscal year.

Net cash provided by operating activities was $297 million and $179 million for the fiscal years ended June 30, 2020 and 2019, respectively. The increase in cash flows provided by operating activities during fiscal year ended June 30, 2020 compared to fiscal year ended June 30, 2019 was primarily driven by increased non-cash charges for depreciation and amortization as well as overall favorable changes in working capital offset by lower earnings as a result of acquisition-related expenses incurred for the acquisition of Finisar. Acquisition-related expenses include transaction expenses, expensing of the fair value write-up of acquired inventory and increased depreciation and amortization charges for acquired property, plant and equipment and intangible assets.

Net cash used in investing activities:

Net cash used in investing activities was $173 million for the fiscal year ended June 30, 2021, compared to net cash used of $1,179 million for the same period last fiscal year. Net cash used in investing activities during the current period primarily included $34 million for net cash paid for the acquisitions of Ascatron AB and INNOViON Corporation and $146 million of capital expenditures to continue to increase capacity to meet the growing demand for the Company’s product portfolio.

Net cash used in investing activities was $1,179 million and $224 million for the fiscal years ended June 30, 2020 and 2019, respectively. Net cash used in investing activities during the fiscal year ended June 30, 2020 primarily included $1,037 million for net cash paid for the acquisition of Finisar, and $137 million of cash paid for property, plant and equipment to increase capacity to meet the growing demand for the Company’s product portfolio.

Net cash provided by financing activities:

Net cash provided by financing activities was $676 million for the fiscal year ended June 30, 2021, compared to net cash provided by financing activities of $1,174 million for the same period last fiscal year. Net cash provided by financing activities was primarily impacted by $1,611 million of net proceeds from the Company's underwritten public offering in July 2020 as well as the issuance of the Series B Preferred Stock in March 2021, offset by cash used to repay borrowings of $926 million.

Net cash provided by financing activities was $1,174 million for the year ended June 30, 2020 compared to net cash provided by financing activities of $5 million for the year ended June 30, 2019. Net cash provided by financing activities during the fiscal year ended June 30, 2020 included net borrowings on long-term debt of $1,256 million primarily to fund the acquisition of Finisar, and $14 million of cash received from exercises of stock options. Net cash provided by financing activities was offset by $64 million of debt issuance costs associated with the increased borrowings, $29 million of cash payments in satisfaction of employees’ minimum tax obligations from the vesting of equity awards and a $2 million payment to repurchase common stock through the Company's share repurchase program.

Senior Credit Facilities

The Company currently has Senior Credit Facilities with Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other lenders party thereto.

The credit agreement governing the Senior Credit Facilities (the "Credit Agreement") provides for senior secured financing of $2.4 billion in the aggregate, consisting of

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

(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”), which was repaid in full during the quarter ended September 30, 2020, and

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

The Credit Agreement also provides for a letter of credit sub-facility not to exceed $25 million and a swing loan sub-facility initially not to exceed $20 million.

The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. In conjunction with the repayment, the Company paid $1 million in associated interest and expensed $25 million of debt issuance costs related to the Term B Facility.

The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of September 24, 2019 (the "Finisar Closing Date").

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

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

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

The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00 to 1.00. The Company will be obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Finisar Closing Date, commencing with the first full fiscal quarter after the Finisar Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Finisar Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2021, the Company was in compliance with all financial covenants under the Credit Agreement.

0.50% Finisar Convertible Notes

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

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

common stock, is changed to a right to convert Finisar Notes into cash and shares of the Company’s common stock, subject to the terms of the Finisar Indenture.

0.25% Convertible Senior Notes

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

As a result of our cash conversion option, the Company separately accounted for the value of the embedded conversion option as a debt discount, which was $58 million as of June 30, 2021. The value of the embedded conversion option was determined based on the estimated fair value of the debt without the conversion feature, which was determined using an expected present value technique (income approach) to estimate the fair value of similar nonconvertible debt; the debt discount is being amortized as additional non-cash interest expense over the term of the II-VI Notes using the effective interest method.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is 21.25 shares of common stock per $1,000 principal amount of II-VI Notes, which is equivalent to an initial conversion price of $47.06 per share of II-VI common stock. Throughout the term of the II-VI Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Notes amounted to $532 million as of June 30, 2021 and $346 million as of June 30, 2020 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended).

Prior to the close of business on the business day immediately preceding June 1, 2022, the Notes will be convertible only under the following circumstances:

(i) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2017 (and only during such fiscal quarter), if the last reported sale price of the II-VI Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(ii) during the five business day period immediately after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the II-VI Common Stock and the conversion rate on each such trading day; or

(iii) upon the occurrence of certain specified corporate events.

On or after June 1, 2022 until the close of business on the business day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the Company’s election.

Because the last reported sale price of II-VI Common Stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended June 30, 2021 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the II-VI Notes are convertible at the option of the holders thereof during the fiscal quarter ending September 30, 2021.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of II-VI Common Stock or a combination of cash and shares of II-VI Common Stock, at the Company’s election.

Holders of the II-VI Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited. II-VI Notes were convertible during the quarters ended March 31, and June 30, 2021; conversions were immaterial.

The following table sets forth total interest expense recognized related to the II-VI Notes for the years ended June 30, 2021, 2020 and 2019 ($000):

						Year Ended June 30, 2021						Year Ended June 30, 2020						Year Ended June 30, 2019
0.25% contractual coupon						$	874					$	876					$	874
Amortization of debt discount and debt issuance costs including initial purchaser discount						13,748						13,172						12,550
Interest expense						$	14,622					$	14,048					$	13,424

The effective interest rate on the liability component for the periods presented was 5%. The unamortized discount amounted to $15 million as of June 30, 2021, and is being amortized over the remaining life of the notes

Aggregate Availability

The Company had aggregate availability of $449 million under its Revolving Credit Facility as of June 30, 2021.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 1% and 3% for the years ended June 30, 2021 and 2020, respectively.

Share Repurchase Programs

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

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase shares pursuant to this Program during the fiscal year ended June 30, 2021. During the fiscal year ended June 30, 2020, the Company purchased 50,000 shares of its common stock for $2 million under this program. As of June 30, 2021, the Company has cumulatively purchased 1,416,587 shares of its common stock pursuant to the Program for approximately $22 million. The dollar value of shares as of June 30, 2021 that may yet be purchased under the Program is approximately $28 million.

Our cash position, borrowing capacity and debt obligations are as follows (in millions):

						June 30, 2021						June 30, 2020
Cash and cash equivalents						$	1,592					$	493
Available borrowing capacity						449						375
Total debt obligations						1,375						2,255

The Company believes cash flow from operations, existing cash reserves and available borrowing capacity from its credit facilities and its recent equity raise will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and lease obligations, investments in internal research and development, share repurchases, and internal and external growth objectives at least through fiscal year 2022.

The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of June 30, 2021, the Company held approximately $406 million of cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the United States.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements include the purchase obligations disclosed in the contractual obligations table below. The Company enters into these off-balance sheet arrangements to acquire goods and services used in its business.

Tabular Disclosure of Contractual Obligations

						Payments Due By Period
												Less Than 1						1-3						3-5						More Than 5
Contractual Obligations						Total						Year						Years						Years						Years
($000)
Long-term debt obligations						$	1,417,270					$	62,050					$	469,069					$	871,263					$	14,888
Interest payments (1)						53,255						16,577						30,415						6,263						—
Operating lease obligations, including imputed interest						193,027						34,076						58,397						41,964						58,590
Finance lease obligations, including imputed interest						29,780						2,486						5,178						5,468						16,648
Purchase and sponsorship obligations (2)						386,980						351,525						32,685						1,231						1,539
Total						$	2,080,312					$	466,714					$	595,744					$	926,189					$	91,665

(1)Interest payments represent both variable and fixed rate interest obligations based on the interest rates in effect at June 30, 2021 relating to the Senior Credit Facilities, the currently outstanding 0.50% convertible senior notes assumed in the Finisar Acquisition, and the currently outstanding 0.25% Convertible Senior Notes due 2022. These interest payments do not reflect the impact of the interest rate swap that hedges our variable interest payments to fixed interest payments.

(2)A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including fixed or minimum quantities to be purchased, minimum or variable price provisions, and the approximate timing of the transaction. These amounts are primarily composed of open purchase order commitments to vendors for the purchase of supplies and materials.

Pension obligations are not included in the table above. Estimated funding obligations are determined by asset performance, workforce and retiree demographics, tax and employment laws and other actuarial assumptions which may change the annual funding obligations. The funded status of our defined benefit plans is disclosed in Note 17 to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Company’s gross unrecognized income tax benefit at June 30, 2021 has been excluded from the table above because the Company is not currently able to reasonably estimate the amount by which the liability will increase or decrease over time.