Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management’s Responsibility for Preparation of the Financial Statements

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

Management’s Report on Internal Control Over Financial Reporting

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

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

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2021. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Management’s evaluation included reviewing the documentation of its controls, evaluating the design effectiveness of controls and testing their operating effectiveness. Management excluded from the scope of its assessment of internal control over financial reporting the internal controls of Ascatron, which was acquired in August 2020, and Innovion, which was acquired in October 2020. The recent acquisitions excluded from management’s assessment of internal controls over financial reporting represented approximately $141.4 million and $117.4 million of total assets and net assets, respectively, as of June 30, 2021 and approximately $22.4 million and $2.5 million of total revenues and net loss, respectively, for the fiscal year then ended. Based on the evaluation, management concluded that as of June 30, 2021, the Company’s internal controls over financial reporting were effective.

Ernst & Young LLP, an independent registered public accounting firm, has issued its report on the effectiveness of our internal control over financial reporting as of June 30, 2021. Its report is included herein.

Report of Independent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of II-VI Incorporated and Subsidiaries (the Company) as of June 30, 2021 and 2020, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 20, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the

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

Critical Audit Matters

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

Accounting for Series A Mandatory Convertible Preferred Stock
Description of the Matter			As described in Note 11 to the consolidated financial statements, on July 7, 2020, the Company issued shares of Series A Mandatory Convertible Preferred Stock. Upon conversion, on the mandatory conversion date, each outstanding share of Series A Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a number of shares of the Company’s common stock determined based on the market value of the Company’s common stock on the mandatory conversion date. Auditing the Company’s accounting for the Series A Mandatory Convertible Preferred Stock was complex due to the significant estimation uncertainty involved in estimating the future market value of the Company’s common stock on the mandatory conversion date, which was used to determine whether the Series A Mandatory Convertible Preferred Stock should be classified within shareholders’ equity on the consolidated balance sheet as well as the related impact to the Company’s earnings per share. The Company used a Monte Carlo simulation model to estimate the future market value of its common stock on the mandatory conversion date, which considers inputs such as volatility and cost of equity, which are forward-looking and could be affected by future economic and market conditions.

How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design and tested the operating effectiveness of controls relating to management’s accounting for the Series A Mandatory Convertible Preferred Stock. For example, we tested controls that address the risks of material misstatement relating to the estimation of the future market value of the Company’s common stock on the mandatory conversion date, including management’s review of the estimation methodology and significant inputs. To test the Company’s accounting for the Series A Mandatory Convertible Preferred Stock, our audit procedures included, among others, reading the relevant agreements and the Company’s accounting analysis and evaluating the Company’s conclusions as compared to the relevant accounting guidance. To test the estimated future market value of the Company’s common stock, our audit procedures included, among others, assessing the appropriateness of the estimation methodology used and evaluating the significant inputs. We compared the forecasted volatility of the Company’s common stock price to its historical volatility and compared the cost of equity to prior valuations performed by the Company. We also performed sensitivity analyses to evaluate the changes in the estimated future market value of the Company’s common stock that would result from changes in the significant inputs. We involved our valuation specialist to assist in evaluating the methodology used, to test certain significant inputs and to perform comparative calculations.
Accounting for Series B Convertible Preferred Stock
Description of the Matter			As described in Notes 3, 11 and 16 to the consolidated financial statements, the Company entered into an investment agreement, dated March 25, 2021, and amended and restated as of March 30, 2021, pursuant to which: (1) on March 31, 2021, the Company issued shares of Series B-1 Convertible Preferred Stock; and (2) the Company agreed to issue, immediately prior to the closing of the Company’s acquisition of Coherent, Inc., additional shares of Series B-2 Convertible Preferred Stock. The Series B-1 and B-2 Convertible Preferred Stock are contingently redeemable at the option of the holder on or after the tenth anniversary of the issuance or upon a certain change in control. The Company has concluded that (1) the obligation to issue the shares of Series B-1 Convertible Preferred Stock was required to be measured at fair value as an asset or liability with changes in fair value recognized in earnings; and (2) the obligation to issue the shares of Series B-2 Convertible Preferred Stock is an embedded feature that does not require bifurcation for separate accounting. Auditing the Company’s accounting for the obligations to issue shares of Series B-1 and B-2 Convertible Preferred Stock was complex due to the significant judgments made by management in determining whether each obligation should be classified and measured as an asset or liability on the consolidated balance sheet or comprises an embedded feature requiring bifurcation and separate accounting.
How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design and tested the operating effectiveness of controls relating to management’s accounting for the Series B Convertible Preferred Stock, including management’s review of the relevant agreements and evaluation of the accounting guidance. To test the Company’s accounting for the obligations to issue shares of Series B-1 and B-2 Convertible Preferred Stock, our audit procedures included, among others, reading the relevant agreements and the Company’s accounting analysis, assessing the pertinent provisions of the Series B-1 and B-2 Convertible Preferred Stock, and evaluating the Company’s conclusions as compared to the relevant accounting guidance.

/s/ Ernst & Young LLP

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

Pittsburgh, Pennsylvania

August 20, 2021

Report of Independent Registered Public Accounting Firm

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

Opinion on Internal Control over Financial Reporting

We have audited II-VI Incorporated and Subsidiaries’ internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, II-VI Incorporated and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Ascatron AB (“Ascatron”) and INNOViON Corporation (“Innovion”), which are included in the June 30, 2021 consolidated financial statements of the Company and constituted $141.4 million and $117.4 million of total and net assets, respectively, as of June 30, 2021 and $22.4 million and $2.5 million of revenues and net loss, respectively, for the fiscal year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Ascatron and Innovion.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 2021 and 2020, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 20, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

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

Definition and Limitations of Internal Control Over Financial Reporting

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

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

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

August 20, 2021

II-VI Incorporated and Subsidiaries

Consolidated Balance Sheets

($000)

June 30,						2021						2020
Assets
Current Assets
Cash and cash equivalents						$	1,591,892					$	493,046
Accounts receivable - less allowance for doubtful accounts of $924 at June 30, 2021 and $1,698 at June 30, 2020						658,962						598,124
Inventories						695,828						619,810
Prepaid and refundable income taxes						13,095						12,279
Prepaid and other current assets						67,617						65,710
Total Current Assets						3,027,394						1,788,969
Property, plant & equipment, net						1,242,906						1,214,772
Goodwill						1,296,727						1,239,009
Other intangible assets, net						718,460						758,368
Deferred income taxes						33,498						22,938
Other assets						193,665						210,658
Total Assets						$	6,512,650					$	5,234,714
Liabilities. Mezzanine Equity and Shareholders' Equity
Current Liabilities
Current portion of long-term debt						$	62,050					$	69,250
Accounts payable						294,486						268,773
Accrued compensation and benefits						181,491						157,557
Operating lease current liabilities						25,358						24,634
Accrued income taxes payable						20,295						33,341
Other accrued liabilities						145,909						119,338
Total Current Liabilities						729,589						672,893
Long-term debt						1,313,091						2,186,092
Deferred income taxes						73,962						45,551
Operating lease liabilities						125,541						94,701
Other liabilities						138,119						158,674
Total Liabilities						2,380,302						3,157,911
Mezzanine Equity
Series B redeemable convertible preferred stock, no par value, 5% cumulative; authorized - 215,000 shares; issued - 75,000 shares at June 30, 2021, redemption value - $759,583						726,178						—
Shareholders' Equity
Series A preferred stock, no par value, 6% cumulative; authorized - 5,000,000 shares; issued - 2,300,000 shares at June 30, 2021						445,319						—
Common stock, no par value; authorized - 300,000,000 shares; issued - 119,126,585 shares at June 30, 2021; issued - 105,916,068 shares at June 30, 2020						2,028,273						1,486,947
Accumulated other comprehensive income (loss)						14,267						(87,383)
Retained earnings						1,136,777						876,552
						3,624,636						2,276,116
Treasury stock, at cost - 13,640,555 shares at June 30, 2021 and 13,356,447 shares at June 30, 2020						(218,466)						(199,313)
Total Shareholders' Equity						3,406,170						2,076,803
Total Liabilities, Mezzanine Equity and Shareholders' Equity						$	6,512,650					$	5,234,714

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Earnings (Loss)

Year Ended June 30,						2021						2020						2019
($000, except per share data)
Revenues						$	3,105,891					$	2,380,071					$	1,362,496
Costs, Expenses and Other Expense (Income)
Cost of goods sold						1,889,678						1,560,521						841,147
Internal research and development						330,105						339,073						139,163
Selling, general and administrative						483,989						440,998						233,518
Interest expense						59,899						89,409						22,417
Other expense (income), net						(10,370)						13,998						(2,562)
Total Costs, Expenses and Other Expense (Income)						2,753,301						2,443,999						1,233,683
Earnings (Loss) Before Income Taxes						352,590						(63,928)						128,813
Income Tax Expense						55,038						3,101						21,296
Net Earnings (Loss)						$	297,552					$	(67,029)					$	107,517
Less: Dividends on Preferred Stock						$	37,231					$	—					$	—
Net Earnings (Loss) available to the Common Shareholder						$	260,321					$	(67,029)					$	107,517
Basic Earnings (Loss) Per Share						$	2.50					$	(0.79)					$	1.69
Diluted Earnings (Loss) Per Share						$	2.37					$	(0.79)					$	1.63

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Year Ended June 30,						2021						2020						2019
($000)
Net earnings (loss)						$	297,552					$	(67,029)					$	107,517
Other comprehensive income (loss):
Foreign currency translation adjustments						86,991						(15,969)						(14,319)
Change in fair value of interest rate swap, net of taxes of $3,372 and $0 for the years ended June 30, 2021 and 2020, respectively						12,312						(44,085)						—
Pension adjustment, net of taxes of $576, ($851) and ($1,642) for the years ended June 30, 2021, 2020, and 2019, respectively						2,347						(3,108)						(6,122)
Other comprehensive income (loss)						101,650						(63,162)						(20,441)
Comprehensive income (loss)						$	399,202					$	(130,191)					$	87,076

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity

																														Accumulated Other
						Common Stock												Preferred Stock												Comprehensive						Retained						Treasury Stock																		Mezzanine Equity
						Shares						Amount						Shares						Amount						Income (Loss)						Earnings						Shares						Amount						Total						Preferred Shares						Amount
(000, including share amounts)
Balance - June 30, 2018						75,693						$	351,761					—						$	—					$	(3,780)					$	836,064					(12,396)						$	(159,734)					$	1,024,311					—						$	—
Share-based and deferred compensation activities						622						30,662						—						—						—						—						(158)						(7,224)						23,438						—						—
Net earnings						—						—						—						—						—						107,517						—						—						107,517						—						—
Purchases of treasury stock						—						—						—						—						—						—						(50)						(1,616)						(1,616)						—						—
Foreign currency translation adjustments						—						—						—						—						(14,319)						—						—						—						(14,319)						—						—
Pension adjustment, net of taxes of ($1,642)						—						—						—						—						(6,122)						—						—						—						(6,122)						—						—
Balance - June 30, 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)						—						—
Balance - Balance - 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					—						$	—
Share-based and deferred compensation activities						2,512						102,737						—						—						—						—						(284)						(19,153)						83,584						—						—
Shares issued in underwritten public offering						10,698						438,589						2,300						445,319						—						—						—						—						883,908						—						—
Net earnings						—						—						—						—						—						297,552						—						—						297,552						—						—
Series B shares issued in March 2021						—						—						—						—						—						—						—						—						—						75						716,087
Accretion to redemption value of Series B shares issued in March 2021						—						—						—						—						—						(508)						—						—						(508)						—						508
Foreign currency translation adjustments						—						—						—						—						86,991						—						—						—						86,991						—						—
Change in fair value of interest rate swap, net of taxes of $3,372						—						—						—						—						12,312						—						—						—						12,312						—						—
Pension adjustment, net of taxes of $576						—						—						—						—						2,347						—						—						—						2,347						—						—
Dividends						—						—						—						—						—						(36,819)						—						—						(36,819)						—						9,583
Balance - June 30, 2021						119,127						2,028,273						2,300						445,319						14,267						1,136,777						(13,640)						(218,466)						3,406,170						75						726,178

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended June 30,						2021						2020						2019
($000)
Cash Flows from Operating Activities
Net earnings (loss)						$	297,552					$	(67,029)					$	107,517
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation						187,803						156,690						75,745
Amortization						82,266						64,192						16,620
Share-based compensation expense						70,953						68,480						21,946
Amortization of discount on convertible debt and debt issuance costs						20,732						22,150						12,550
Debt extinguishment expense						24,747						3,960						—
Losses (gains) on disposals of property, plant and equipment						2,537						(1,461)						—
Losses on foreign currency remeasurements and transactions						5,545						14,442						3,155
Earnings from equity investments						(14,246)						(2,775)						(3,214)
Deferred income taxes						(371)						(42,454)						(10,462)
Impairment of investment						—						4,980						—
Increase (decrease) in cash from changes in (net of effects of acquisitions):
Accounts receivable						(51,697)						(91,981)						(50,764)
Inventories						(44,645)						112,572						(36,392)
Accounts payable						2,266						45,026						15,999
Income taxes						(18,086)						40,061						366
Accrued compensation and benefits						23,934						—						—
Other operating net assets (liabilities)						(14,937)						(29,561)						25,409
Net cash provided by operating activities						574,353						297,292						178,475
Cash Flows from Investing Activities
Additions to property, plant & equipment						(146,337)						(136,877)						(137,122)
Purchases of businesses, net of cash acquired						(34,394)						(1,036,609)						(83,067)
Other investing activities						7,774						(5,804)						(3,787)
Net cash used in investing activities						(172,957)						(1,179,290)						(223,976)
Cash Flows from Financing Activities
Proceeds from issuance of common shares						460,000						—						—
Proceeds from issuance of Series A preferred shares						460,000						—						—
Proceeds from issuance of Series B preferred shares						750,000						—						—
Proceeds from borrowings of Term A Facility						—						1,241,000						—
Proceeds from borrowings of Term B Facility						—						720,000						—
Proceeds from borrowings of Revolving Credit Facility						—						160,000						—
Proceeds from borrowings under prior Credit Facility						—						10,000						150,000
Payment of Finisar Notes						—						(560,112)						—
Payments on borrowings under prior Term Loan, Credit Facility, and other loans						—						(176,618)						(135,000)
Payments on borrowings under Term A Facility						(137,050)						(46,538)						—
Payments on borrowings under Term B Facility						(714,600)						(5,400)						—
Payments on borrowings under Revolving Credit Facility						(74,000)						(86,000)						—
Debt issuance costs						—						(63,510)						(5,589)
Equity issuance costs						(58,596)						—						—
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan						32,360						13,467						8,698
Common stock repurchases						—						(1,625)						(1,616)
Payments in satisfaction of employees' minimum tax obligations						(19,701)						(28,700)						(7,092)
Payment of dividends						(20,319)						—						—
Other financing activities						(2,367)						(2,339)						(4,524)
Net cash provided by financing activities						675,727						1,173,625						4,877
Effect of exchange rate changes on cash and cash equivalents						21,723						(3,453)						(1,542)
Net increase (decrease) in cash and cash equivalents						1,098,846						288,174						(42,166)
Cash and Cash Equivalents at Beginning of Period						493,046						204,872						247,038
Cash and Cash Equivalents at End of Period						$	1,591,892					$	493,046					$	204,872
Non cash transactions:
Additions to property, plant & equipment included in accounts payable						$	32,028					$	21,801					$	10,986

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Notes to the Consolidated Financial Statements

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

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

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

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and world. The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business including the impact to our suppliers and customers as well as the impact to the countries and markets in which II-VI operates. At the onset of the COVID-19 outbreak, the Company began focusing intensely on mitigating the adverse impacts of COVID-19 on foreign and domestic operations starting by protecting its employees, suppliers and customers.

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

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

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

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

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

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

Property, Plant and Equipment. Property, plant and equipment are carried at cost or fair value upon acquisition. Major improvements are capitalized, while maintenance and repairs are generally expensed as incurred. The Company reviews its

property, plant and equipment and other long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. Depreciation on property, plant and equipment and amortization on finance lease right-of-use assets for financial reporting purposes is computed primarily by the straight-line method over the estimated useful lives for building, building improvements and land improvements of 10 to 20 years and 3 to 20 years for machinery and equipment.

Leases. Leases are recognized under Accounting Standards Codification 842, Leases. The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments, unless the implicit rate is readily determinable. If lease terms include options to extend or terminate the lease, the ROU asset and lease liability are measured based on the reasonably certain decision. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all classes of leased assets for which the Company is the lessee. Additionally, for certain equipment leases, the portfolio approach is applied to account for the operating lease ROU assets and lease liabilities. In the Consolidated Statements of Earnings (Loss), lease expense for operating lease payments is recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the ROU asset is amortized over the lease term. Some leasing arrangements require variable payments that are dependent upon usage or output, or may vary for other reasons, such as insurance or tax payments. Variable lease payments are recognized as incurred and are not presented as part of the ROU asset or lease liability. See Note 13 for additional information.

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

On August 20, 2020, the Company acquired all of the outstanding shares of Ascatron AB ("Ascatron"), located in Sweden and on October 1, 2020, the Company acquired the remaining 6.1% interest in INNOViON Corporation ("Innovion"). Refer to Note 4 Acquisitions for further information regarding the Innovion and Ascatron acquisitions.

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

The Company has the option to perform a qualitative assessment of goodwill prior to completing the quantitative assessment described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the quantitative assessment. Otherwise, the Company will forego the quantitative assessment and does not need to perform any further testing. As of April 1 of fiscal years 2021 and 2020, the Company completed its annual impairment tests of its reporting units using the quantitative assessment. Based on the results of these analyses the Company’s goodwill was not impaired.

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

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

The Company generally accounts for investments it makes in VIEs in which it has determined that it does not have a controlling financial interest but has significant influence over or holds at least a 20% ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for under ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. If an entity fails to meet the characteristics of a VIE, management then evaluates such entity under the voting model. Under the voting model, management consolidates the entity if they determine that the Company, directly or indirectly, has greater than 50% of the voting shares and determines that other equity holders do not have substantive participating rights.

Series A Mandatory Convertible Preferred Stock. The II-VI Series A Mandatory Convertible Preferred Stock is initially measured at fair value, less underwriting discounts and commissions and offering expenses paid by the Company. The Preferred Stock’s dividends are cumulative, at 6% per annum.

Series B Convertible Preferred Stock. The II-VI Series B-1 Convertible Preferred Stock is initially measured at fair value less issuance costs, accreted to its redemption value over a ten-year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings Available to the Common Shareholder.

Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Such accruals are adjusted as further information develops or circumstances change. Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. If we are unable to correct defects or other problems, we could experience, among other things, loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, failure to attract new customers or achieve market acceptance, diversion of development and engineering resources, or legal action by our customers. The Company had no material loss contingency liabilities at June 30, 2021 related to commitments and contingencies.

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

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

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

For contracts with commercial customers, which comprise the majority of the Company’s performance obligations, ownership of the goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a product to the

customer or receipt of the product by the customer and without significant judgments. The majority of contracts typically require payment within 30 to 90 days after transfer of ownership to the customer.

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

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

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

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

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

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

The Company believes that disaggregating revenue by end market provides the most relevant information regarding the nature, amount, timing, and uncertainty of revenues and cash flows. See Note 5. Revenue from Contracts with Customers.

Research and Development. Research and development expenses include salaries, contractor and consultant fees, supplies and materials, as well as costs related to other overhead such as depreciation, facilities, utilities and other departmental expenses. The costs we incur with respect to internally developed technology, including allocations of our wafer fabrication and other manufacturing facilities and resources utilized to support R&D programs, are included in research and development expenses as incurred.

Share-Based Compensation. Share-based compensation arrangements require the recognition in net earnings (loss) of the grant date fair value of stock compensation (for equity-classified awards). The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period, net of forfeitures. The estimated annualized forfeitures are based on the Company’s historical experience of pre-vesting cancellations. The Company will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future periods if the actual forfeitures are higher than estimated.

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

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

Note 2. Recently Issued Financial Accounting Standards

Financial Instruments - Credit Losses

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13*,* Financial Instruments - Credit Losses (Topic 326), which modifies the measurement of expected credit losses on certain types of financial instruments, including trade receivables. The Company adopted this standard on July 1, 2020. The adoption did not have a material impact on the Company's consolidated financial statements.

Pronouncements Currently Under Evaluation

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). The update simplifies the accounting for convertible instruments by eliminating two accounting models (i.e., the cash conversion model and beneficial conversion feature model) and reducing the number of embedded conversion features that could be recognized separately from the host contract. ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. ASC 2020-06 is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. We plan to adopt this ASU as of July 1, 2021. We estimate the impact of adopting ASU 2020-06 will result in an increase in net debt of $15 million, a decrease in the deferred tax liability of $3 million, a decrease in common stock of $56 million, and an increase in retained earnings of $45 million. The adoption will result in a decrease of interest expense of approximately $12 million in fiscal year 2022.

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

Note 3. Pending Coherent Acquisition

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

Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each share of common stock of Coherent, par value $0.01 per share (the “Coherent Common Stock”), issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”):

(A) $220.00 in cash, without interest (the “Cash Consideration”), and

(B) 0.91 of a validly issued, fully paid and nonassessable share of common stock of II-VI, no par value per share (“II-VI Common Stock”)

Pursuant to the terms of the Merger Agreement, each Coherent restricted stock unit award (a “Coherent RSU”), other than Director RSUs (as defined below), outstanding immediately prior to the Effective Time will be automatically converted into

time-based restricted stock units denominated in shares of II-VI Common Stock entitling the holder to receive, upon settlement, a number of shares of II-VI Common Stock equal to the number of shares of Coherent Common Stock subject to the Coherent RSU multiplied by the sum of (A) 0.91, and (B) the quotient obtained by dividing the Cash Consideration by the volume weighted average price of a share of II-VI Common Stock for a 10 trading day period ending prior to the closing of the Merger (the “Closing”). For Coherent RSUs subject to performance-based vesting conditions and metrics, the number of shares of II-VI Common Stock subject to the converted Coherent RSUs will be determined after giving effect to the Coherent Board of Directors’ determination of the number of Coherent RSUs earned, based on the greater of the target or actual level of achievement of such goals or metrics immediately prior to the Effective Time.

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

(A) for any holder of Coherent RSUs who is a participant under Coherent’s Change of Control and Leadership Change Severance Plan (the “CIC Plan”), the acceleration benefits under the CIC Plan upon such participant’s involuntary termination of employment in accordance with the terms and conditions set forth therein; and

(B) for any holder who is not a participant in the CIC Plan, the following vesting acceleration benefits upon his or her termination of employment by Coherent, II-VI, or their respective subsidiaries without “cause” within the period beginning immediately following the date of the Closing and ending on the date that is 12 months following the date of the Closing (or, if earlier, December 31, 2022) (a “Qualifying Termination”), (1) if such holder’s Qualifying Termination occurs during calendar year 2021, the sum of: (x) 100% of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2021 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2021 (and reduced by the total number of converted Coherent RSUs that vested in calendar year 2021 prior to such Qualifying Termination) plus (y) 50% of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2022 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2022, or (2) if such holder’s Qualifying Termination occurs during calendar year 2022, 50% of the total number of converted Coherent RSUs that otherwise would have vested during calendar year 2022 under the applicable vesting schedule in effect on the Closing had such holder remained employed with Coherent, II-VI, or their respective subsidiaries through the last applicable vesting date for such award in calendar year 2022 (and reduced by the total number of converted Coherent RSUs that vested in calendar year 2022 prior to such Qualifying Termination).

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

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

The completion of the Merger is subject to the satisfaction or waiver of certain additional customary closing conditions, including review and approval of the Merger by the State Administration for Market Regulation in China. Subject to the satisfaction or waiver of each of the closing conditions, II-VI expects that the Merger will be completed by year-end 2021 or at the beginning of the first calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed at a different time or not at all.

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

financing ( the “Debt Financing”). The obligation of the Commitment Parties to provide the Debt Financing provided for in the Commitment Letter is subject to a number of customary conditions.

In connection with entering into the Merger Agreement, II-VI entered into an Amended and Restated Investment Agreement, dated as of March 30, 2021, (the “Investment Agreement”), with BCPE Watson (DE) SPV, LP, an affiliate of Bain Capital Private Equity, LP (the “Investor”). Pursuant to the terms of the Investment Agreement, on March 31, 2021, II-VI issued, sold, and delivered to the Investor 75,000 shares of a new Series B-1 Convertible Preferred Stock of the Company, no par value per share (“II-VI Series B-1 Convertible Preferred Stock”), for $10,000 per share (the “Equity Per Share Price”), resulting in an aggregate purchase price of $750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the Company would issue, sell and deliver to the Investor:

• 105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company, no par value per share (“II-VI Series B-2 Convertible Preferred Stock,” and together with the II-VI Series B-1 Convertible Preferred Stock, “New II-VI Convertible Preferred Stock”), for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.1 billion, immediately prior to Closing; and

• immediately prior to Closing, if elected by the Company and agreed by the Investor, up to an additional 35,000 shares of II-VI Series B-2 Convertible Preferred Stock (the "Upsize Shares") for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate maximum purchase price for the Upsize Shares of $350 million.

Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.2 billion.

The expenses associated with the pending acquisition for the year ended June 30, 2021, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other in Note 15, Segment and Geographic Reporting.

Note 4. Acquisitions

Acquisition of Ascatron AB

On August 20, 2020, the Company acquired all of the outstanding shares of Ascatron, located in Sweden. The acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform. Purchase price consideration totaled $37 million.

The Company utilized the widely accepted income-based approach (relief-from-royalty method) to perform the preliminary purchase price allocation.

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

			Previously Reported September 30, 2020						Measurement Period Adjustments (a)						As Adjusted
Assets
Developed technology			$	20,000					$	(3,622)					$	16,378
Goodwill			18,922						3,018						21,940
Other assets			2,511						683						3,194
Total assets acquired			$	41,433					$	79					$	41,512
Liabilities
Non-interest bearing liabilities			$	(203)					$	(1,101)					$	(1,304)
Deferred tax liability			(4,526)						1,022						(3,504)
Total liabilities assumed			(4,729)						(79)						(4,808)
Net assets acquired			$	36,704					$	—					$	36,704

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

The goodwill is recorded in the Compound Semiconductors segment and is attributed to the workforce acquired as part of the transaction. The goodwill is non-deductible for income tax purposes. Transaction expenses related to the acquisition totaled $2 million for the year ended June 30, 2021 and are included in Selling, General and Administrative expenses in the Consolidated Statements of Earnings (Loss). Technology is being amortized with a useful life of approximately 17 years.

The revenues and net loss from Ascatron included in the Company's Consolidated Statement of Earnings (Loss) for the year ended June 30, 2021 were $1 million and $3 million, respectively.

Certain data necessary to complete the purchase price allocation remains preliminary, including, but not limited to, finalization

of certain income tax computations and other assumed liabilities. The Company expects to complete the purchase price allocation within 12 months from the Closing Date, at which time the purchase price allocation set forth herein may be revised.

Purchase of Equity Investment in INNOViON Corporation

On October 1, 2020, II-VI acquired the remaining 6.1% interest in Innovion for $4 million. Innovion is a provider of ion implantation services supporting unique capabilities in semiconductor materials processing. This acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform.

Through the period ended December 31, 2020, the Company held a 93.9% investment in Innovion which was accounted for as an equity method investment. The Company accounted for the acquisition of the remaining equity of Innovion as a step acquisition, which required remeasurement of the Company's previous ownership interest to fair value prior to completing purchase accounting. Using step acquisition accounting the Company increased the value of its previously held equity investment to its fair value of $67 million, which resulted in a gain of approximately $7 million, recorded in other expense (income), net in the Consolidated Statements of Earnings (Loss) in the second quarter of fiscal year 2021.

The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocation and determine the fair value of the previously held equity method investment. Income-based valuation approaches included the use of the multi-period excess earnings and relief-from-royalty methods for certain acquired intangible assets.

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

			Previously Reported December 31, 2020						Measurement Period Adjustments (a)						As Adjusted
Assets
Developed technology			$	15,000					$	(240)					$	14,760
Customer lists			10,000						(1,003)						8,997
Goodwill			29,478						3,216						32,694
Property, plant, & equipment			16,556						(1,832)						14,724
ROU Asset			10,644						1,893						12,537
Other assets			12,450						(643)						11,807
Total assets acquired			$	94,128					$	1,391					$	95,519
Liabilities
Non-interest bearing liabilities			$	(14,050)					$	(1,788)					$	(15,838)
Interest bearing liabilities			(3,430)						—						(3,430)
Deferred tax liabilities			(5,743)						397						(5,346)
Total liabilities assumed			$	(23,223)					$	(1,391)					$	(24,614)
Net assets acquired			$	70,905					$	—					$	70,905

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

The goodwill is recorded in the Compound Semiconductor segment and is attributed to the workforce acquired as part of the transaction. The goodwill is non-deductible for income tax purposes. Technology is being amortized with a useful life of approximately 16 years. Customer lists are being amortized with a useful life of approximately 14 years. Transaction expenses for the year ended June 30, 2021 were insignificant.

The revenues from Innovion included in the Company's Consolidated Statement of Earnings for the year ended June 30, 2021 was $21 million. The net income for the same period was $1 million.

Note 5. Revenue from Contracts with Customers

The following table summarizes disaggregated revenue by market for the years ended June 30, 2021, 2020 and 2019 ($000):

						Year Ended June 30, 2021
						Photonic Solutions						Compound Semiconductors									Total
Industrial						$	50,181					$	275,698								$	325,879
Communications						1,917,697						134,969									2,052,666
Aerospace & Defense						—						201,845									201,845
Consumer						9,138						277,319									286,457
Other						61,268						177,776									239,044
Total Revenues						$	2,038,284					$	1,067,607								$	3,105,891

			Year Ended June 30, 2020
			Photonic Solutions						Compound Semiconductors						Unallocated & Other						Total
Industrial			$	52,806					$	240,475					$	—					$	293,281
Communications			1,437,377						125,527						21,557						1,584,461
Aerospace & Defense			—						175,097						—						175,097
Consumer			4,620						126,227						494						131,341
Other			41,987						153,904						—						195,891
Total Revenues			$	1,536,790					$	821,230					$	22,051					$	2,380,071

			Year Ended June 30, 2019
			Photonic Solutions						Compound Semiconductors						Total
Industrial			$	58,621					$	283,422					$	342,043
Communications			526,420						92,812						619,232
Aerospace & Defense			—						152,702						152,702
Consumer			2,300						46,826						49,126
Other			51,548						147,845						199,393
Total Revenues			$	638,889					$	723,607					$	1,362,496

"Other" revenue included in the tables above include revenue from the life science/medical, semiconductor and automotive end markets.

Contract Liabilities

Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contracts. Contract liabilities are recognized as revenue when performance obligations have been performed. During the year ended June 30, 2021, the Company recognized revenue of $4 million related to customer payments that were included in the consolidated balance sheet as of June 30, 2020. As of June 30, 2021 and June 30, 2020, the Company had $40 million and $39 million, respectively, of contract liabilities recorded in the consolidated balance sheet.

Note 6. Inventories

The components of inventories were as follows:

June 30,						2021						2020
($000)
Raw materials						$	211,890					$	190,237
Work in progress						336,391						298,577
Finished goods						147,547						130,996
Total Inventories						$	695,828					$	619,810

Note 7. Property, Plant & Equipment

Property, plant & equipment consists of the following:

June 30,						2021						2020
($000)
Land and land improvements						$	20,454					$	18,396
Buildings and improvements						419,157						345,736
Machinery and equipment						1,483,183						1,352,835
Construction in progress						136,544						111,394
Finance lease right-of-use asset						25,000						25,000
						2,084,338						1,853,361
Less accumulated depreciation						(841,432)						(638,589)
Property, plant, and equipment, net						$	1,242,906					$	1,214,772

Included in the table above is a building acquired under a finance lease. As of June 30, 2021 and June 30, 2020, the accumulated depreciation of the finance lease ROU asset was $7 million and $6 million, respectively.

Note 8. Goodwill and Other Intangible Assets

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

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

						Year Ended June 30, 2021																		Year Ended June 30, 2020
						Photonic Solutions						Compound Semiconductors						Total						Photonic Solutions						Compound Semiconductors						Total
Balance-beginning of period						$	1,052,494					$	186,515					$	1,239,009					$	134,057					$	185,721					$	319,778
Goodwill acquired						—						54,634						54,634						919,192						—						919,192
Finisar measurement period adjustments						(4,901)						—						(4,901)						—						—						—
Foreign currency translation						5,435						2,550						7,985						(755)						794						39
Balance-end of period						$	1,053,028					$	243,699					$	1,296,727					$	1,052,494					186,515						1,239,009

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2021 and 2020 were as follows ($000):

						June 30, 2021																		June 30, 2020
						Gross Carrying Amount						Accumulated Amortization						Net Book Value						Gross Carrying Amount						Accumulated Amortization						Net Book Value
Technology						$	476,200					$	(106,802)					$	369,398					$	444,315					$	(68,048)					$	376,267
Trade Names						22,660						(6,233)						16,427						22,369						(3,669)						18,700
Customer Lists						469,154						(136,519)						332,635						456,223						(92,822)						363,401
Other						1,576						(1,576)						—						1,570						(1,570)						—
Total						$	969,590					$	(251,130)					$	718,460					$	924,477					$	(166,109)					$	758,368

Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2021, 2020 and 2019 was $82 million, $64 million, and $17 million, respectively. The technology intangible assets are being amortized over a range of 60 to 240 months with a weighted-average remaining life of approximately 147 months. The customer lists are being amortized over 60 to 240 months with a weighted-average remaining life of approximately 135 months.

In connection with past acquisitions, the Company acquired trade names with indefinite lives. The carrying amount of these trade names of $14 million as of June 30, 2021 is not amortized but tested annually for impairment. The Company completed its impairment test of these trade names with indefinite lives in the fourth quarter of fiscal years 2021 and 2020. Based on the results of these tests, the trade names were not impaired.

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

Year Ending June 30,
2022			$	83,463
2023			82,558
2024			80,684
2025			79,196
2026			73,466

Note 9. Debt

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

			June 30, 2021						June 30, 2020
Term A Facility, interest at LIBOR, as defined, plus 1.38%			$	1,057,412					$	1,194,463
Revolving Credit Facility, interest at LIBOR, as defined, plus 1.38%			—						74,000
Debt issuance costs, Term A Facility and Revolving Credit Facility			(25,191)						(32,174)
Term B Facility, interest at LIBOR, as defined, plus 3.50%			—						714,600
Debt issuance costs, Term B Facility			—						(24,747)
0.50% convertible senior notes, assumed in the Finisar acquisition			14,888						14,888
0.25% convertible senior notes			344,969						345,000
0.25% convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount			(16,937)						(30,688)
Total debt			1,375,141						2,255,342
Current portion of long-term debt			(62,050)						(69,250)
Long-term debt, less current portion			$	1,313,091					$	2,186,092

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

						Year Ending
						June 30,
2022						$	62,050
2023						407,019
2024						62,050
2025						871,263
2026						—
Thereafter						14,888
Total						$	1,417,270

Senior Credit Facilities

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

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

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

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

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

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.

Note 10. Income Taxes

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

Year Ended June 30,						2021						2020						2019
($000)
U.S. income (loss)						$	21,692					$	(302,027)					$	(34,241)
Non-U.S. income						330,898						238,099						163,054
Earnings (loss) before income taxes						$	352,590					$	(63,928)					$	128,813

The components of income tax expense were as follows:

Year Ended June 30,						2021						2020						2019
($000)
Current:
Federal						$	415					$	7					$	1,755
State						1,632						496						472
Foreign						53,362						45,052						29,531
Total Current						$	55,409					$	45,555					$	31,758
Deferred:
Federal						$	13,744					$	(43,955)					$	(3,764)
State						(431)						1,007						(2,010)
Foreign						(13,684)						494						(4,688)
Total Deferred						$	(371)					$	(42,454)					$	(10,462)
Total Income Tax Expense						$	55,038					$	3,101					$	21,296

Principal items comprising deferred income taxes were as follows:

June 30,						2021						2020
($000)
Deferred income tax assets
Inventory capitalization						$	20,753					$	19,372
Interest rate swap						6,347						9,847
Non-deductible accruals						7,437						9,325
Accrued employee benefits						14,025						11,095
Net-operating loss and credit carryforwards						163,717						182,625
Share-based compensation expense						8,400						8,110
Other						8,956						9,736
Right of use asset						33,341						31,573
Valuation allowances						(53,765)						(54,559)
Total deferred income tax assets						$	209,211					$	227,124
Deferred income tax liabilities
Tax over book accumulated depreciation						$	(32,692)					$	(25,926)
Intangible assets						(153,582)						(160,577)
Tax on unremitted earnings						(21,569)						(21,785)
Convertible debt						(3,321)						(6,006)
Lease liability						(32,053)						(29,768)
Other						(6,458)						(5,676)
Total deferred income tax liabilities						$	(249,675)					$	(249,738)
Net deferred income taxes						$	(40,464)					$	(22,614)

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

Year Ended June 30,						2021						%						2020						%						2019						%
($000)
Taxes at statutory rate						$	74,044					21						$	(13,425)					21						$	27,051					21
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit						1,246						—						1,194						(2)						(1,212)						(1)
Taxes on non U.S. earnings						(26,557)						(7)						(915)						1						(5,857)						(5)
Valuation allowance						(3,720)						(1)						(9,365)						15						(6,703)						(5)
Research and manufacturing incentive deductions and credits						(22,968)						(6)						(15,836)						25						(11,756)						(9)
Stock compensation						(2,500)						(1)						4,334						(7)						(1,914)						(1)
Repatriation tax						—						—						—						—						14,108						11
GILTI and FDII						27,369						8						36,067						(56)						6,437						5
Other						8,124						2						1,047						(2)						1,142						1
						$	55,038					16						$	3,101					(5)						$	21,296					17

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes changes to the U.S. statutory federal tax rate and puts into effect the migration from a worldwide system of taxation to a territorial system, among other things. The Tax Act includes certain changes such as introducing a new category of income, referred to as global intangible low tax income (“GILTI”), related to earnings taxed at a low rate of foreign entities without a significant fixed asset base, and imposes additional limitations on the deductibility of interest and officer compensation. The Company made a final accounting policy election to treat taxes due from future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.

The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As a result of the Act, among other things, the Company determined it will repatriate earnings for all non-U.S. subsidiaries with cash in excess of working capital needs. Such distributions could potentially be subject to U.S. state tax in certain states and foreign withholding taxes. Foreign currency gains/losses related to the translation of previously taxed earnings from functional currency to U.S. dollars could also be subject to U.S. tax when distributed. The Company has estimated the associated withholding tax to be $22 million.

During the fiscal years ended June 30, 2021, 2020, and 2019, net cash paid by the Company for income taxes was $60 million, $40 million, and $26 million, respectively.

Our foreign subsidiaries in various tax jurisdictions operate under tax holiday arrangements. The impact of the tax holidays on our effective rate is a reduction in the rate of 3.22%, (8.91)% and 0.25% for the fiscal years ended June 30, 2021, 2020 and 2019, respectively, and the impact of the tax holidays on diluted earnings per share is $0.10, $0.07, and $0.00 for the fiscal years ended June 30, 2021, 2020, and 2019, respectively. The holiday related to II-VI Malaysia Advanced Manufacturing Center Sdn. Bhd will end during the fiscal year ended June 30, 2026, the holiday related to certain II-VI Laser Enterprise Philippines, Inc.'s business lines will end during the fiscal year ended June 30, 2022, and the holiday related to II-VI Vietnam Co., Ltd will end during the fiscal year ended June 30, 2024.

The Company has the following gross operating loss carryforwards and tax credit carryforwards as of June 30, 2021:

Type						Amount						Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits						$	79,211					June 2022-June 2041
Foreign tax credits						20,493						June 2022-June 2031
State tax credits						15,434						June 2022-June 2036
State tax credits (indefinite)						39,125						Indefinite
Operating loss carryforwards:
Loss carryforwards - federal						$	47,755					June 2022-June 2036
Loss carryforwards - state						136,454						June 2022-June 2041
Loss carryforwards - state (indefinite)						13,076						Indefinite
Loss carryforwards - foreign						17,375						June 2021-June 2040
Loss carryforwards - foreign (indefinite)						48,884						Indefinite

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

Changes in the liability for unrecognized tax benefits for the fiscal years ended June 30, 2021, 2020 and 2019 were as follows:

						2021						2020						2019
($000)
Beginning balance						$	42,803					$	11,520					$	9,892
Increases in current year tax positions						3,940						1,506						191
Increases in prior year tax positions						—						—						376
Acquired business						5,341						31,791						6,036
Settlements						(7,514)						—						—
Expiration of statute of limitations						(6,545)						(2,014)						(4,975)
Ending balance						$	38,025					$	42,803					$	11,520

The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2021, 2020 and 2019, there was $0.3 million, $0.6 million and $(0.1) million of interest and penalties within income tax expense, respectively. The Company had $3 million, $4 million and $1 million of interest and penalties accrued at June 30, 2021, 2020 and 2019, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the amounts are not expected to be paid within one year. Including tax positions for which the Company determined that the tax position would not meet the more likely than not recognition threshold upon examination by the tax authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized, would affect our effective tax rate, was approximately $26 million, $24 million and $6 million at June 30, 2021, 2020 and 2019, respectively. The Company expects a decrease of $2 million of unrecognized tax benefits during the next 12 months due to the expiration of statutes of limitation.

Fiscal years 2018 to 2021 remain open to examination by the Internal Revenue Service, fiscal years 2016 to 2021 remain open to examination by certain state jurisdictions, and fiscal years 2010 to 2021 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination in New York for the years ended June 30, 2018 though June 30, 2019 and under examination for certain subsidiary companies in India for the year ended March 31, 2016; Philippines for the year ended June 30, 2019; and Germany for the years ended June 30, 2012 through June 30, 2018. The Company believes its income tax reserves for these tax matters are adequate.

Note 11. Equity and Redeemable Preferred Stock

Mandatory Convertible Preferred Stock

On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 2,000,000 shares of 6.00% Series A Mandatory Convertible Preferred, no par value per share (“Mandatory Convertible Preferred Stock”), resulting in gross proceeds to II-VI from the offering of $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by the Company (the “Preferred Stock Offering”). In addition, the underwriters had a 30-day option to purchase up to an additional 300,000 shares of Series A Mandatory Convertible Preferred Stock at the applicable public offering price, less underwriting discounts and commissions and solely to cover over-allotments with respect to the preferred stock offering. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Preferred Stock Offering, including the issuance and sale of 2 million shares of Mandatory Convertible Preferred Stock.

Upon conversion on the mandatory conversion date, July 1, 2023, as determined in accordance with the terms of the Mandatory Convertible Preferred Stock, each outstanding share of the Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a number of shares of II-VI Common Stock equal to not more than 4.6512 shares of II-VI Common Stock and not less than 3.8760 shares of II-VI Common Stock (the “Minimum Conversion Rate”), depending on the applicable market value of the II-VI Common Stock, determined in accordance with the terms of the Mandatory Convertible Preferred Stock and subject to certain anti-dilution adjustments.

Other than in the event of one of certain fundamental changes, a holder of Mandatory Convertible Preferred Stock may, at any time prior to July 1, 2023, elect to convert such holder’s shares of Mandatory Convertible Preferred Stock, in whole or in part (but in no event less than one share of Mandatory Convertible Preferred Stock), at the Minimum Conversion Rate per share of Mandatory Convertible Preferred Stock, subject to certain anti-dilution adjustments.

If one of certain fundamental changes occurs on or prior to July 1, 2023, holders of the Mandatory Convertible Preferred Stock will have the right to convert their shares of Mandatory Convertible Preferred Stock, in whole or in part (but in no event less than one share of the Mandatory Convertible Preferred Stock), into shares of II-VI Common Stock at the conversion rate determined in accordance with the terms of the Mandatory Convertible Preferred Stock during the period beginning on, and including, the effective date of such change and ending on, and including, the date that is 20 calendar days after the effective date of such fundamental change (or, if later, the date that is 20 calendar days after holders receive notice of such fundamental change, but in no event later than July 1, 2023). Holders who convert their shares of the Mandatory Convertible Preferred Stock during that period will also receive a dividend make-whole amount and, to the extent there is any, the accumulated dividend amount, in each case as calculated in accordance with the terms of the Mandatory Convertible Preferred Stock.

Upon issuance of the Mandatory Convertible Preferred Stock, the Company used a Monte Carlo simulation model to estimate the future market value of the II-VI Common Stock on the mandatory conversion date, based on the following inputs:

Expected Volatility			50% - 55%
Cost of Equity			14% - 17%
Dividend Yield			none

Expected volatility is based on the historical volatility of II-VI Common Stock, taking into consideration the mean-reverting tendency of volatility and the expected term of the Mandatory Convertible Preferred Stock, as well as traded option contracts for II-VI Common Stock. The cost of equity was calculated over a three-year term, assuming a risk-free interest rate of 0.2% derived from the average U.S. Treasury Note rate during the period. The dividend yield of zero is based on the fact that the Company has never paid cash dividends on II-VI Common Stock and has no current intention to pay cash dividends on II-VI Common Stock in the future.

The Company declared $27 million of preferred stock dividends during fiscal year 2021 associated with the Mandatory Convertible Preferred Stock. Dividends from the quarter ended June 30, 2021 were $7 million and were presented as other accrued liabilities on the Consolidated Balance Sheet.

The following table presents dividends per share and dividends recognized for the year ended June 30, 2021:

									Year Ended June 30, 2021
Dividends per share									11.80
Series A Mandatory Convertible Preferred Stock dividends ($000)									27,140

Redeemable Convertible Preferred Stock

The Company issued 75,000 shares of II-VI Series B-1 Convertible Preferred Stock in the year ended June 30, 2021. Refer to Note 3. Pending Coherent Acquisition for additional information.

In connection with the execution of the Investment Agreement, on March 30, 2021, the Company filed a Statement with Respect to Shares (the “Statement”) with the Pennsylvania Department of State Corporation Bureau to establish the designation, rights and preferences of the II-VI Series B-1 Convertible Preferred Stock. The Statement became effective on March 30, 2021.

The shares of II-VI Series B-1 Convertible Preferred Stock accrue dividends at 5.00% per annum, subject to increase if II-VI defaults on payment obligations with respect to the New II-VI Convertible Preferred Stock, not to exceed 14% per annum. Until the fourth anniversary of March 31, 2021 (the “Initial Issue Date”), dividends are payable solely in-kind. After the fourth anniversary of the Initial Issue Date, dividends are payable on the applicable series, at the Company’s option, in cash, in-kind, or as a combination of both.

The shares of II-VI Series B-1 Convertible Preferred Stock are convertible into shares of II-VI Common Stock as follows:

• at any time after their issuance, at the election of the holder, each share of II-VI Series B-1 Convertible Preferred Stock may be converted into shares of II-VI Common Stock at a conversion price of $85.00 per share (“Conversion Price”), except that the shares of II-VI Series B-1 Convertible Preferred Stock will be so convertible only after the earliest to occur of (i) the issuance of shares of II-VI Series B-2 Convertible Preferred Stock upon the Closing, (ii) the termination of the Merger Agreement or (iii) the delivery by II-VI to the Investor of an offer to repurchase the II-VI Series B-1 Convertible Preferred Stock upon the occurrence of a Fundamental Change (as defined in the Statement); and

• at any time following the third anniversary of Initial Issue Date, at the election of II-VI, each share of II-VI Series B-1 Convertible Preferred Stock may be converted into shares of II-VI Common Stock at the then-applicable Conversion Price if the volume-weighted average price of II-VI Common Stock exceeds 150% of the then- applicable Conversion Price for 20 trading days out of any 30 consecutive trading days.

The II-VI Series B-1 Convertible Preferred Stock have voting rights, voting as one class with the II-VI Common Stock, on an as-converted basis, subject to limited exceptions.

On or at any time after the tenth anniversary of the Initial Issue Date:

• each holder has the right to require the Company to redeem all of their II-VI Series B-1 Convertible Preferred Stock, for cash, at a redemption price per share equal to the sum of the Stated Value for such shares (as defined in the Statement) plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value (such price the “Redemption Price,” and such right the “Put Right”), and

• the Company has the right to redeem, in whole or in part, on a pro rata basis from all holders based on the aggregate number of shares of II-VI Series B-1 Convertible Preferred Stock outstanding, for cash, at the Redemption Price.

In connection with any Fundamental Change, and subject to the procedures set forth in the Statement, the Company must, or will cause the survivor of a Fundamental Change (such survivor of a Fundamental Change, the “Acquirer”) to, make an offer to repurchase, at the option and election of the holder thereof, each share of II-VI Series B-1 Convertible Preferred Stock then-outstanding (the “Fundamental Change Repurchase Offer”) at a purchase price per share in cash equal to (i) the Stated Value for such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value as of the date of repurchase plus (ii) if prior to the fifth anniversary of the Initial Issue Date, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through the fifth anniversary of the Initial Issue Date.

The II-VI Series B-1 Convertible Preferred Stock is redeemable for cash outside of the control of the Company upon the exercise of the Put Rights, and upon a Fundamental Change, and is therefore classified as mezzanine equity.

The Company recognized $10 million of preferred stock dividends during the fiscal year ended 2021, which were presented as a reduction to retained earnings on the Consolidated Balance Sheet as of June 30, 2021. The Company incurred $27 million of transaction costs associated with the II-VI Series B-1 Convertible Preferred Stock, of which, $23 million were capitalized, and $4 million were expensed in the Selling, General, and Administrative expenses in the Consolidated Statements of Earnings (Loss) for the fiscal year ended June 30, 2021.

The following table presents dividends per share and dividends recognized for the year ended June 30, 2021:

									Year Ended June 30, 2021
Dividends per share									$	134.55
Dividends ($000)									9,583
Deemed dividends ($000)									508

The obligation to issue the shares of II-VI Series B-2 Convertible Preferred Stock is an embedded feature within the II-VI Series B-1 Convertible Preferred Stock that does not require bifurcation for separate accounting.

Common Stock Offering

On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 9,302,235 shares of II-VI Common Stock at a public offering price of $43.00 per share, resulting in gross proceeds to II-VI from the offering of approximately $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “Common Stock Offering”). In addition, the underwriters had a 30-day option to purchase up to an additional 1,395,335 shares of II-VI Common Stock at the applicable public offering price, less underwriting discounts and commissions. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Common Stock Offering, including the issuance and sale of approximately 11 million shares II-VI Common Stock.

Note 12. Earnings Per Share

Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period.

The diluted earnings (loss) per common share is computed by dividing the diluted earnings (loss) available to common shareholders by the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. The dilutive effect of equity awards is calculated based on the average stock price for each fiscal period, using the treasury method. For the fiscal years ended 2021, 2020 and 2019, diluted shares outstanding include the

dilutive effect of the potential shares of the Company's common stock issuable from stock options, performance and restricted shares. For fiscal year ended 2021, the diluted shares outstanding also include the dilutive effect of the potential shares of the Company's Common Stock issuable upon conversion of outstanding convertible debt

The following is a reconciliation of the numerators and denominators of the basis and diluted earnings (loss) per share computations for the periods presented ($000):

Year Ended June 30,						2021						2020						2019
($000 except per share)
Numerator
Net earnings (loss)						$	297,552					$	(67,029)					$	107,517
Deduct Series A preferred stock dividends						(27,140)						—						—
Deduct Series B redeemable preferred stock dividends						(9,583)						—						—
Deduct Series B redeemable preferred stock deemed dividends						(508)						—						—
Basic earnings (loss) available to common shareholders						$	260,321					$	(67,029)					$	107,517
Effect of dilutive securities:
Add back interest on II-VI Notes Due 2022						$	12,264					$	—					$	—
Diluted earnings (loss) available to common shareholders						$	272,585					$	(67,029)					$	107,517
Denominator
Weighted average shares						104,151						84,828						63,584
Effect of dilutive securities
Stock options, performance and restricted shares						3,552						—						2,220
II-VI Notes due 2022						7,331						—						—
Diluted weighted average common shares						115,034						84,828						65,804
Basic earnings (loss) per common share						$	2.50					$	(0.79)					$	1.69
Diluted earnings (loss) per common share						$	2.37					$	(0.79)					$	1.63

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

Year Ended June 30,						2021						2020						2019
Series A Mandatory Convertible Preferred Stock						8,915						—						—
Series B Redeemable Preferred Stock						2,230						—						—
II-VI Notes due 2022						—						7,331						7,331
Stock options, performance and restricted shares						118						2,345						115
0.50% Finisar Convertible Notes						—						289						—
Total anti-dilutive shares						11,263						9,965						7,446

Note 13. Leases

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

Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life. Finance leases are recorded in property, plant and equipment, net, and finance lease liabilities within other current and other non-current liabilities on our Consolidated Balance Sheet. Finance lease assets are amortized in operating expenses on a

straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component for lease liabilities included in interest expense and recognized using the effective interest method over the lease term.

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

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

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

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

						Year Ended June 30, 2021						Year Ended June 30, 2020
Finance Lease Cost
Amortization of right-of-use assets						$	1,667					$	1,667
Interest on lease liabilities						1,268						1,328
Total finance lease cost						2,935						2,995
Operating lease cost						37,361						32,466
Sublease income						1,471						368
Total lease cost						$	38,825					$	35,093
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases						1,268						1,328
Operating cash flows from operating leases						35,641						30,816
Financing cash flows from finance leases						1,152						1,026
Assets Obtained in Exchange for Lease Liabilities
Right-of-use assets obtained in acquisitions						13,391						29,247
Right-of-use assets obtained in exchange for new operating lease liabilities						52,839						29,458
Total assets obtained in exchange for new operating lease liabilities						66,230						58,705
Weighted-Average Remaining Lease Term (in Years)
Finance leases						10.5						11.5
Operating leases						7.0						7.2
Weighted-Average Discount Rate
Finance leases						5.6 %						5.6		%
Operating leases						6.1 %						7.3		%

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

Future Years			Operating Leases						Finance Leases						Total
Year 1			$	34,076					$	2,486					$	36,562
Year 2			31,121						2,554						33,675
Year 3			27,276						2,624						29,900
Year 4			23,332						2,697						26,029
Year 5			18,632						2,771						21,403
Thereafter			58,590						16,648						75,238
Total minimum lease payments			$	193,027					$	29,780					$	222,807
Less: amounts representing interest			42,128						7,484						49,612
Present value of total lease liabilities			$	150,899					$	22,296					$	173,195

Note 14. Share-Based Compensation

The Company’s Board of Directors amended the II-VI Incorporated 2018 Omnibus Incentive Plan, which was approved by the shareholders at the Annual Meeting in November 2018. The Amended Omnibus Plan (the “Plan”) was approved at the annual meeting in November 2020. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to employees, officers and directors of the Company. The maximum number of shares of the Company’s common stock authorized for issuance under the Plan is limited to 9,550,000 shares of common stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability of the grantee.

As of June 30, 2021, there were approximately 8 million shares available to be issued under the Plan, including forfeited shares from predecessor plans.

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

Share-based compensation expense for the fiscal years ended June 30, 2021, 2020 and 2019 is as follows $000:

Year Ended June 30,						2021						2020						2019
Stock Options and Cash-Based Stock Appreciation Rights						$	10,626					$	11,893					$	6,801
Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Units						47,060						49,957						9,242
Performance Share Units and Cash Based Performance Share Units						16,640						11,977						8,920
						$	74,326					$	73,827					$	24,963

Stock Options and Cash-Based Stock Appreciation Rights:

The Company utilized the Black-Scholes valuation model for estimating the fair value of stock options and cash-based stock appreciation rights. During the fiscal year ended June 30, 2021, no stock options were issued. During fiscal years ended June 30, 2020 and 2019, the weighted-average fair value of options granted under the Plan was $14.79 and $20.66, respectively, per option using the following assumptions:

Year Ended June 30,												2020						2019
Risk-free interest rate												1.50		%				2.80		%
Expected volatility												39		%				37		%
Expected life of options												6.91 years						6.96 years
Dividend yield												None						None

The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect at the time of grant related to the expected life of the options. The risk-free interest rate shown above is the weighted average rate for all options granted during the fiscal year. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no current intention to pay cash dividends in the future.

Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2021 was as follows:

						Stock Options												Cash-Based Stock Appreciation Rights
						Number of Shares						Weighted Average Exercise Price						Number of Rights						Weighted Average Exercise Price
Outstanding - July 1, 2020						3,721,801						$	26.99					230,374						$	32.13
Exercised						(1,047,216)						$	21.04					(76,880)						$	28.75
Forfeited and Expired						(31,951)						$	33.86					(8,160)						$	34.14
Outstanding - June 30, 2021						2,642,634						$	29.26					145,334						$	33.80
Exercisable - June 30, 2021						1,805,735						$	25.31					63,209						$	27.36

As of June 30, 2021, 2020 and 2019, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $88 million, $80 million and $56 million, respectively. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2021. This amount varies based on the fair market value of the Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years ended June 30, 2021, 2020, and 2019 was $49 million, $20 million, and $15 million, respectively. As of June 30, 2021, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $9 million. This cost is expected to be recognized over a weighted-average period of approximately two years.

Outstanding and exercisable stock options at June 30, 2021 were as follows:

						Stock Options and Cash-Based Stock Appreciation Rights Outstanding																		Stock Options and Cash-Based Stock Appreciation Rights Exercisable
						Number of						Weighted Average Remaining						Weighted Average						Number of						Weighted Average Remaining						Weighted Average
Range of						Shares or						Contractual Term						Exercise						Shares or						Contractual Term						Exercise
Exercise Prices						Rights						(Years)						Price						Rights						(Years)						Price
$13.34 - $18.07						574,264						3.55						$	16.18					574,264						3.55						$	16.18
$18.07 - $24.35						685,719						4.01						$	20.83					674,952						3.94						$	20.70
$24.35 - $35.39						542,224						6.79						$	33.21					291,734						6.18						$	34.20
$35.39 - $36.90						573,384						8.21						$	36.47					126,567						8.16						$	36.43
$36.90 - $49.90						412,377						7.08						$	47.85					201,427						6.96						$	47.60
						2,787,968						5.78						$	29.49					1,868,944						4.78						$	25.38

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

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

Restricted share award, restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30, 2021, was as follows:

						Restricted Share Awards												Restricted Share Units															Cash-Based Restricted Share Units
						Number of Shares						Weighted Average Grant Date Fair Value						Number of Units									Weighted Average Grant Date Fair Value						Number of Units						Weighted Average Grant Date Fair Value
Nonvested - June 30, 2020						50,527						$	35.92					2,242,412									$	39.46					82,003						$	38.31
Granted						—						$	—					1,277,460									$	45.74					5,194						$	44.30
Vested						(49,525)						$	35.47					(996,955)									$	37.91					(38,943)						$	38.57
Forfeited						(1,002)						$	18.42					(196,745)									$	38.36					(2,381)						$	38.91
Nonvested - June 30, 2021						—						$	—					2,326,172									$	43.67					45,873						$	38.75

As of June 30, 2021, total unrecognized compensation cost related to non-vested, restricted share unit and cash-based restricted share units was $68 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The restricted share award and restricted share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based restricted share unit compensation expense was calculated based on the number of units expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. The total fair value of the restricted share awards, restricted share units, and cash-based restricted share units granted during the years ended June 30, 2021, 2020 and 2019, was $59 million, $11 million and $10 million, respectively. The total fair value of restricted share awards, restricted share units and cash-based restricted share units vested was $69 million, $75 million and $20 million during fiscal years 2021, 2020 and 2019, respectively.

Performance Share Units and Cash-Based Performance Share Units:

The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees performance share units and cash-based performance share units under the Plan. As of June 30, 2021, the Company had outstanding grants covering performance periods ranging from 12 to 36 months. These grants are intended to provide continuing emphasis on specified financial performance goals that the Company considers important contributors to the creation of long-term shareholder value. These grants are payable only if the Company achieves specified levels of financial performance during the performance periods.

For our relative Total Shareholder Return (“TSR”) performance-based units, which are based on market performance of our stock as compared to the S&P Composite 1500 – Electronic Equipment, Instruments & Components Index, the compensation cost is recognized over the performance period on a straight-line basis, because the grants vest only at the end of the measurement period and the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate the fair value of the TSR performance-based units using the Monte-Carlo simulation model.

The performance share unit compensation expense was calculated based on the number of shares expected to be earned, multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation expense was calculated based on the number of units expected to be earned, multiplied by the stock price at the period-end date, and is being recognized over the vesting period. Performance share unit and cash-based performance share unit activity relating to the Plan during the year ended June 30, 2021, was as follows:

						Performance Share Units												Cash-Based Performance Share Units
						Number of Units						Weighted Average Grant Date Fair Value						Number of Units						Weighted Average Grant Date Fair Value
Nonvested - June 30, 2020						409,246						$	40.96					35,188						$	38.54
Granted						209,639						$	52.04					—						$	—
Vested						(187,410)						$	30.03					(14,928)						$	35.25
Forfeited						(5,344)						$	37.66					—						$	—
Performance Adjustments						92,178						$	17.52					7,464						$	35.25
Nonvested - June 30, 2021						518,309						$	45.28					27,724						$	39.43

As of June 30, 2021, total unrecognized compensation cost related to non-vested performance share units and cash-based performance share units was $12 million. This cost is expected to be recognized over a weighted-average period of approximately 1.65 years. The total fair value of the performance share units and cash-based performance share units granted during the fiscal years ended June 30, 2021, 2020 and 2019 was $14 million, $15 million and $10 million, respectively. The total fair value of performance share units and cash-based performance share units vested during the fiscal years ended June 30, 2021, 2020 and 2019 was $9 million, $6 million and $11 million, respectively. The performance adjustments relate to grants that exceeded the performance targets when vested during FY21, including the final number of shares issued, which were 200% of the target units based on actual results during the three-year performance period.

Note 15. Segment and Geographic Reporting

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

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

The Compound Semiconductors segment has locations in the United States, Singapore, China, Germany, Switzerland, Japan, Belgium, the United Kingdom, Italy, South Korea, the Philippines, Vietnam, Sweden, and Taiwan. This segment address all of II-VI's seven end markets, namely: communications, industrial, aerospace & defense, consumer electronics, semiconductor capital equipment, life sciences and automotive. This segment designs, manufactures and markets the following products: (i) optical and electro-optical components and materials used primarily in CO2 lasers, fiber-lasers and direct diode lasers for materials processing applications; (ii) infrared optical components and high-precision optical assemblies for aerospace and defense, medical and commercial laser imaging applications; (iii) semiconductor lasers and detectors for optical interconnects and sensing applications; (iv) engineered materials for thermoelectric, ceramics and silicon carbide for a wide range of applications; and (v) compound semiconductor epitaxial wafers for applications in optical and wireless communication.

The Photonic Solutions segment has locations in the United States, China, Vietnam, Germany, Japan, the United Kingdom, Italy, Malaysia, Australia, and Hong Kong. This segment manufactures (i) transceivers for data centers and telecom optical networks; (ii) pump lasers, optical amplifiers, wavelength selective switches and advanced components for telecom networks; (iii) crystal materials, optics, lasers and optoelectronic modules for a wide range of applications, including in optical communications, life sciences, and consumer electronics markets.

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

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

acquisition in the fiscal year ended June 30, 2021. In the fiscal year ended June 30, 2020, it included transaction costs related to the Finisar acquisition.

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

						Photonic Solutions						Compound Semiconductors						Unallocated & Other						Total
($000)
2021
Revenues						$	2,038,284					$	1,067,607					$	—					$	3,105,891
Inter-segment revenues						35,358						244,407						(279,765)						—
Operating income (loss)						207,652						221,239						(26,772)						402,119
Interest expense						—						—						—						(59,899)
Other income, net						—						—						—						10,370
Income taxes						—						—						—						(55,038)
Net earnings						—						—						—						297,552
Depreciation and amortization						161,208						108,861						—						270,069
Expenditures for property, plant & equipment						87,304						59,033						—						146,337
Segment assets						4,231,289						2,281,361						—						6,512,650
Goodwill						1,053,028						243,699						—						1,296,727

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

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

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

						Revenues
Year Ended June 30,						2021						2020						2019
($000)
United States						$	2,017,152					$	1,432,195					$	405,404
Non-United States
Hong Kong						356,356						299,359						319,601
China						343,483						292,139						290,287
Japan						132,015						146,325						109,670
Germany						153,548						124,934						155,000
Vietnam						38,799						22,152						22,322
Switzerland						24,462						35,895						32,770
Korea						12,406						8,537						11,674
Taiwan						11,385						3,743						2,005
Singapore						5,103						5,791						6,868
Philippines						4,974						4,479						4,179
United Kingdom						4,560						4,226						2,712
Other						1,648						296						4
Total Non-United States						$	1,088,739					$	947,876					$	957,092
						$	3,105,891					$	2,380,071					$	1,362,496

						Long-Lived Assets
June 30,						2021						2020
($000)
United States						$	737,151					$	754,815
Non-United States
China						402,987						369,544
United Kingdom						60,090						55,028
Malaysia						53,187						46,162
Switzerland						37,121						37,129
Sweden						27,374						24,270
Germany						16,703						18,631
Australia						13,627						12,321
Vietnam						10,246						11,140
Philippines						7,890						7,607
Taiwan						6,532						—
Korea						4,595						3,438
Hong Kong						2,104						2,870
Other						1,916						1,965
Total Non-United States						$	644,372					$	590,105
						$	1,381,523					$	1,344,920

Note 16. Fair Value of Financial Instruments

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

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

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

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

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

The Company entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate of 1.52%. The Company receives payments with a floor of 0.00%. The interest rate swap agreement has an effective date of November 24, 2019, with an expiration date of September 24, 2024. The initial notional amount of the interest rate swap is scheduled to decrease to $825 million in June 2022 and will remain at that amount through the expiration date. The Company designated this instrument as a cash flow hedge and deemed the hedge relationship effective at inception of the contract. The fair value of the interest rate swap of $29 million is recognized in the Consolidated Balance Sheet within other accrued liabilities (current) and other liabilities (non-current). Changes in fair value are recorded within accumulated other comprehensive income (loss) on the Consolidated Balance Sheet and reclassified into the Consolidated Statements of Earnings (Loss) as interest expense in the period in which the underlying transaction affects earnings. Cash flows from hedging activities are reported in the Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations. The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs,

including interest rate curves. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The interest rate swap is classified as a Level 2 item within the fair value hierarchy.

The Company estimated the fair value of the II-VI Notes and Finisar Notes based on quoted market prices as of the last trading day prior to June 30, 2021; however, the II-VI Notes and Finisar Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the II-VI Notes and Finisar Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the II-VI Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 9. Debt for details on the Company’s debt facilities.

The fair value and carrying value of the II-VI Notes and Finisar Notes were as follows at June 30, 2021 ($000):

						Fair Value						Carrying Value
II-VI Notes						$	549,580					$	328,032
Finisar Notes						$	14,889					$	14,888

The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings including its lease obligations, excluding the 0.25% Convertible Notes and the 0.50% Finisar convertible notes, are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value.

By entering into the Investment Agreement as described in Note 3 on March 25, 2021, the Company entered into a commitment to issue shares of II-VI Series B-1 Convertible Preferred Stock on the Initial Closing Date for a fixed price (such commitment the "Forward Sale Commitment"). The Forward Sale Commitment comprises a financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics: (i) embodies an obligation to repurchase the Company's equity shares and (ii) requires or may require the Company to settle the obligation by transferring assets. Under ASC 480, Distinguishing Liabilities from Equity, it is required to be initially measured and subsequently remeasured, at fair value as an asset or liability with changes in fair value recognized in earnings. An option pricing model was utilized to calculate the fair value of the Forward Sale Commitment. The Company recognized $11 million of realized gains within Other Expense (Income), Net in the Consolidated Statements of Earnings (Loss) for the year ended June 30, 2021, related to the Forward Sale Commitment due to changes in its fair value from March 25, 2021 to its settlement on March 31, 2021.

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

Note 17. Employee Benefit Plans

Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at the discretion of the Company’s board of directors and were $2 million, $6 million, and $5 million for the years ended June 30, 2021, 2020 and 2019, respectively.

On August 18, 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“2018 Plan”) for full time U.S. employees who have completed two years of continuous employment with the Company, and the 2018 Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders in November 2018. The employee may purchase the Company’s common stock for the lesser of 90% of the fair market value of the shares (i) on the first trading day of the offering period, or (ii) on the purchase date. Offering periods will run from August through January and from February through July each year. The number of shares which may be bought by an employee during each fiscal year is limited to 15% of the employee’s base pay. The 2018 Plan limits the number of shares of common stock available for purchase to 2,000,000 shares. As of June 30, 2021, there have been 361,834 shares purchased on behalf of the employees under the 2018 Plan.

Switzerland Defined Benefit Plan

The Company maintains a pension plan covering employees of our Swiss subsidiary (the “Swiss Plan”). Employer and employee contributions are made to the Swiss Plan based on various percentages of salary and wages that vary according to

employee age and other factors. Employer contributions to the Swiss Plan for years ended June 30, 2021 and 2020 were $4 million and $3 million, respectively. Net periodic pension cost is not material for any year presented.

The underfunded pension liability was $25 million and $27 million as of June 30, 2021 and 2020, respectively. The pension adjustment amount recognized in accumulated other comprehensive income was $2 million decrease and $3 million increase for the fiscal years ended June 30, 2021 and 2020, respectively. The accumulated benefit obligation was $90 million as of June 30, 2021, compared to $85 million as of June 30, 2020.

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

Year Ending June 30,
($000)
2022			$	5,500
2023			4,700
2024			4,900
2025			6,100
2026			7,500
Next five years			35,800

Note 18. Other Accrued Liabilities

The components of other accrued liabilities were as follows:

June 30,						2021						2020
($000)
Contract liabilities						$	13,926					$	17,328
Warranty reserves						21,868						27,620
Other accrued liabilities						110,115						74,390
						$	145,909					$	119,338

Note 19. Commitments and Contingencies

The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early termination. The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred under these commitments based upon historical experience and current expectations. The Company also has contingent obligations relating to earnout arrangements on its acquisitions of $1 million. Total future purchase commitments held by II-VI as of June 30, 2021, were $352 million in fiscal 2022, and $35 million thereafter.

Note 20. Share Repurchase Programs

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

year ended June 30, 2020 the Company purchased 50,000 shares of its common stock for $2 million

under this program. As of June 30, 2021, the Company has cumulatively purchased 1,416,587 shares of II-VI common stock pursuant to the Program for approximately $22 million.

Note 21. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the years ended June 30, 2021, 2020, and 2019 were as follows ($000):

						Foreign Currency Translation Adjustment						Interest Rate Swap						Defined Benefit Pension Plan						Total Accumulated Other Comprehensive Income (Loss)
AOCI - June 30, 2018						$	(1,308)					$	—					$	(2,472)					$	(3,780)
Other comprehensive income (loss) before reclassifications						(14,319)						—						(6,307)						(20,626)
Amounts reclassified from AOCI						—						—						185						185
Net current-period other comprehensive income						(14,319)						—						(6,122)						(20,441)
AOCI - June 30, 2019						$	(15,627)					$	—					$	(8,594)					$	(24,221)
Other comprehensive income (loss) before reclassifications						(15,969)						(46,067)						(3,528)						(65,564)
Amounts reclassified from AOCI						—						1,982						420						2,402
Net current-period other comprehensive income						(15,969)						(44,085)						(3,108)						(63,162)
AOCI - June 30, 2020						$	(31,596)					$	(44,085)					$	(11,702)					$	(87,383)
Other comprehensive income (loss) before reclassifications						86,991						(2,687)						1,709						86,013
Amounts reclassified from AOCI						—						14,999						638						15,637
Net current-period other comprehensive income						86,991						12,312						2,347						101,650
AOCI - June 30, 2021						$	55,395					$	(31,773)					$	(9,355)					$	14,267

Quarterly Financial Data (unaudited)

Fiscal Year 2021

Quarter Ended						June 30, 2021						March 31, 2021						December 31, 2020						September 30, 2020
($000, except per share)
2021
Net revenues						$	808,006					$	783,232					$	786,569					$	728,084
Cost of goods sold						500,379						483,676						464,103						441,520
Internal research and development						83,768						83,231						84,858						78,248
Selling, general and administrative						126,666						131,244						118,893						107,186
Interest expense						14,066						13,034						15,585						17,214
Other expense (income) - net						(10,124)						(21,432)						(3,153)						24,339
Earnings (loss) before income taxes						93,251						93,479						106,283						59,577
Income taxes						10,957						12,387						18,383						13,311
Net Earnings (Loss)						$	82,294					$	81,092					$	87,900					$	46,266
Basic earnings (loss) per share						$	0.62					$	0.71					$	0.78					$	0.39
Diluted earnings (loss) per share						$	0.59					$	0.66					$	0.73					$	0.38

Fiscal Year 2020

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

SCHEDULE II

II-VI INCORPORATED AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JUNE 30, 2021, 2020, AND 2019

(IN THOUSANDS OF DOLLARS)

			Balance at Beginning of Year			Charged to Expense			Charged to Other Accounts						Deduction from Reserves						Balance at End of Year
YEAR ENDED JUNE 30, 2021:
Allowance for doubtful accounts			$	1,698		$	301		$	—					$	(1,075)		(3)			$	924
Warranty reserves			$	27,620		$	2,134		$	—					$	(7,886)					$	21,868
Deferred tax asset valuation allowance			$	54,559		$	(2,545)		$	1,751		(2)			$	—					$	53,765
YEAR ENDED JUNE 30, 2020:
Allowance for doubtful accounts			$	1,292		$	956		$	—					$	(550)		(3)			$	1,698
Warranty reserves			$	4,478		$	11,507		$	37,453		(1)			$	(25,818)					$	27,620
Deferred tax asset valuation allowance			$	20,190		$	(2,186)		$	36,555		(1)			$	—					$	54,559
YEAR ENDED JUNE 30, 2019:
Allowance for doubtful accounts			$	837		$	548		$	—					$	(93)		(3)			$	1,292
Warranty reserves			$	4,679		$	4,185		$	—					$	(4,386)					$	4,478
Deferred tax asset valuation allowance			$	21,797		$	(1,607)		$	—					$	—					$	20,190

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

(2) Primarily related to currency translation adjustments.

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