Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements
			Page
Management's Report on Internal Control Over Financial Reporting			62
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42)			63
Consolidated Balance Sheets			66
Consolidated Statements of Earnings (Loss)			67
Consolidated Statements of Comprehensive Income (Loss)			68
Consolidated Statements of Shareholders' Equity and Mezzanine Equity			69
Consolidated Statements of Cash Flows			70
Notes to Consolidated Financial Statements			71

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, 2022. 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. Based on the evaluation, management concluded that as of June 30, 2022, 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, 2022. 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, 2022 and 2021, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and mezzanine equity and cash flows for each of the three years in the period ended June 30, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, 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, 2022, 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 29, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

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

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

Critical Audit Matter

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

Accounting for commercial agreement
Description of the Matter			As described in Note 12 to the consolidated financial statements, the Company entered into a commercial agreement and received advance payments to fund the purchase of plant and equipment for the production of certain engineered materials products within the Compound Semiconductors segment. The Company determined that it has a substantive right to substitute alternative assets throughout the period of use, and therefore a lease does not exist within the commercial agreement. Auditing the Company’s accounting for the commercial agreement was complex due to the judgment required to determine whether the contract is a lease or contains a lease, which included an evaluation of whether the contractual rights and obligations in the commercial agreement provide the Company with the ability to substitute alternative assets throughout the period of use and whether the right of substitution is substantive.
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 commercial agreement. For example, we tested controls related to management’s review of the relevant rights and obligations in the contract and related assessment as to whether the contract is a lease or contains a lease. To test the Company’s accounting for the commercial agreement, our audit procedures included, among others, evaluating the reasonableness of the Company’s interpretation of the rights and obligations in the contract by reading the commercial agreement, performing inquiries of and obtaining written representations from management.

/s/ Ernst & Young LLP

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

Pittsburgh, Pennsylvania

August 29, 2022

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, 2022, 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, 2022, based on the COSO criteria.

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, 2022 and 2021, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and mezzanine equity and cash flows for each of the three years in the period ended June 30, 2022, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated August 29, 2022 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 29, 2022

II-VI Incorporated and Subsidiaries

Consolidated Balance Sheets

($000)

June 30,						2022						2021
Assets
Current Assets
Cash, cash equivalents, and restricted cash						$	2,582,371					$	1,591,892
Accounts receivable - less allowance for doubtful accounts of $4,206 at June 30, 2022 and $924 at June 30, 2021						700,331						658,962
Inventories						902,559						695,828
Prepaid and refundable income taxes						19,585						13,095
Prepaid and other current assets						100,346						67,617
Total Current Assets						4,305,192						3,027,394
Property, plant & equipment, net						1,363,195						1,242,906
Goodwill						1,285,759						1,296,727
Other intangible assets, net						635,404						718,460
Deferred income taxes						31,714						33,498
Other assets						223,582						193,665
Total Assets						$	7,844,846					$	6,512,650
Liabilities. Mezzanine Equity and Shareholders' Equity
Current Liabilities
Current portion of long-term debt						$	403,212					$	62,050
Accounts payable						434,917						294,486
Accrued compensation and benefits						172,109						181,491
Operating lease current liabilities						27,574						25,358
Accrued income taxes payable						29,317						20,295
Other accrued liabilities						199,830						145,909
Total Current Liabilities						1,266,959						729,589
Long-term debt						1,897,214						1,313,091
Deferred income taxes						77,259						73,962
Operating lease liabilities						110,214						125,541
Other liabilities						109,922						138,119
Total Liabilities						3,461,568						2,380,302
Mezzanine Equity
Series B redeemable convertible preferred stock, no par value, 5% cumulative; issued - 75,000 shares at June 30, 2022 and June 30, 2021, redemption value - $798,181 and 759,583 as of June 30, 2022 and June 30, 2021, respectively						766,803						726,178
Shareholders' Equity
Series A preferred stock, no par value, 6% cumulative; issued - 2,300,000 shares at June 30, 2022 and June 30, 2021						445,319						445,319
Common stock, no par value; authorized - 300,000,000 shares; issued - 120,923,171 shares at June 30, 2022; issued - 119,126,585 shares at June 30, 2021						2,064,552						2,028,273
Accumulated other comprehensive income (loss)						(2,167)						14,267
Retained earnings						1,348,125						1,136,777
						3,855,829						3,624,636
Treasury stock, at cost - 13,972,758 shares at June 30, 2022 and 13,640,555 shares at June 30, 2021						(239,354)						(218,466)
Total Shareholders' Equity						3,616,475						3,406,170
Total Liabilities, Mezzanine Equity and Shareholders' Equity						$	7,844,846					$	6,512,650

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Earnings (Loss)

Year Ended June 30,						2022						2021						2020
($000, except per share data)
Revenues						$	3,316,616					$	3,105,891					$	2,380,071
Costs, Expenses and Other Expense (Income)
Cost of goods sold						2,051,120						1,928,432						1,588,890
Internal research and development						377,106						330,105						339,073
Selling, general and administrative						474,096						445,235						412,629
Interest expense						121,254						59,899						89,409
Other expense (income), net						11,233						(10,370)						13,998
Total Costs, Expenses and Other Expense (Income)						3,034,809						2,753,301						2,443,999
Earnings (Loss) Before Income Taxes						281,807						352,590						(63,928)
Income Tax Expense						47,048						55,038						3,101
Net Earnings (Loss)						$	234,759					$	297,552					$	(67,029)
Less: Dividends on Preferred Stock						$	68,225					$	37,231					$	—
Net Earnings (Loss) available to the Common Shareholder						$	166,534					$	260,321					$	(67,029)
Basic Earnings (Loss) Per Share						$	1.57					$	2.50					$	(0.79)
Diluted Earnings (Loss) Per Share						$	1.45					$	2.37					$	(0.79)

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Year Ended June 30,						2022						2021						2020
($000)
Net earnings (loss)						$	234,759					$	297,552					$	(67,029)
Other comprehensive income (loss):
Foreign currency translation adjustments						(89,967)						86,991						(15,969)
Change in fair value of interest rate swap, net of taxes of $11,901, $3,372, and $0 for the years ended June 30, 2022, 2021, and 2020, respectively						43,508						12,312						(44,085)
Change in fair value of interest rate cap, net of taxes of $3,818 for the year ended June 30, 2022						14,306						—						—
Pension adjustment, net of taxes of $3,856, $576 and ($851) for the years ended June 30, 2022, 2021, and 2020, respectively						15,719						2,347						(3,108)
Other comprehensive income (loss)						(16,434)						101,650						(63,162)
Comprehensive income (loss)						$	218,325					$	399,202					$	(130,191)

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity and Mezzanine 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, 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						—						—
Net loss						—						—						—						—						—						(67,029)						—						—						(67,029)						—						—
Purchases of treasury stock						—						—						—						—						—						—						(50)						(1,625)						(1,625)						—						—
Shares issued related to Finisar Acquisition						26,713						987,707						—						—						—						—						—						—						987,707						—						—
Foreign currency translation adjustments						—						—						—						—						(15,969)						—						—						—						(15,969)						—						—
Change in fair value of interest rate swap						—						—						—						—						(44,085)						—						—						—						(44,085)						—						—
Pension adjustment, net of taxes of ($851)						—						—						—						—						(3,108)						—						—						—						(3,108)						—						—
Balance - June 30, 2020						105,916						$	1,486,947					—						$	—					$	(87,383)					$	876,552					(13,356)						$	(199,313)					$	2,076,803					—						$	—
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						—						—
Series B shares issued in March 2021						—						—						—						—						—						—						—						—						—						75						716,087
Net earnings						—						—						—						—						—						297,552						—						—						297,552						—						—
Accretion to redemption value of Series B share 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
Share-based and deferred compensation activities						1,796						92,667						—						—						—						—						(333)						(20,888)						71,779						—						—
Net earnings						—						—						—						—						—						234,759						—						—						234,759						—						—
Foreign currency translation adjustments						—						—						—						—						(89,967)						—						—						—						(89,967)						—						—
Change in fair value of interest rate swap, net of taxes of $11,901						—						—						—						—						43,508						—						—						—						43,508						—						—
Change in fair value of interest rate cap, net of taxes of $3,818						—						—						—						—						14,306						—						—						—						14,306						—						—
Pension adjustment, net of taxes of $3,856						—						—						—						—						15,719						—						—						—						15,719						—						—
Dividends and deemed dividends						—						—						—						—						—						(68,327)						—						—						(68,327)						—						40,625
Adjustments for ASU 2020-06						—						(56,388)						—						—						—						44,916						—						—						(11,472)						—						—
Balance - June 30, 2022						120,923						$	2,064,552					2,300						$	445,319					$	(2,167)					$	1,348,125					(13,973)						$	(239,354)					$	3,616,475					75						$	766,803

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

Year Ended June 30,						2022						2021						2020
($000)
Cash Flows from Operating Activities
Net earnings (loss)						$	234,759					$	297,552					$	(67,029)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation						207,132						187,803						156,690
Amortization						79,647						82,266						64,192
Share-based compensation expense						73,214						70,953						68,480
Amortization of discount on convertible debt and debt issuance costs						18,807						20,732						22,150
Debt extinguishment expense						—						24,747						3,960
Losses (gains) on disposals of property, plant and equipment						617						2,537						(1,461)
Unrealized losses on foreign currency remeasurements and transactions						1,167						5,545						14,442
Earnings from equity investments						(2,190)						(14,246)						(2,775)
Deferred income taxes						(8,154)						(371)						(42,454)
Impairment of investment						—						—						4,980
Increase (decrease) in cash from changes in (net of effects of acquisitions):
Accounts receivable						(55,193)						(51,697)						(91,981)
Inventories						(230,882)						(44,645)						112,572
Accounts payable						97,053						2,266						45,026
Income taxes						17,961						(18,086)						40,061
Accrued compensation and benefits						(9,382)						23,934						—
Other operating net assets (liabilities)						(11,224)						(14,937)						(29,561)
Net cash provided by operating activities						413,332						574,353						297,292
Cash Flows from Investing Activities
Additions to property, plant & equipment						(314,332)						(146,337)						(136,877)
Purchases of businesses, net of cash acquired						—						(34,394)						(1,036,609)
Other investing activities						(5,750)						7,774						(5,804)
Net cash used in investing activities						(320,082)						(172,957)						(1,179,290)
Cash Flows from Financing Activities
Proceeds from issuance of Senior Notes						990,000						—						—
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
Payment of Finisar Notes						(14,888)						—						(560,112)
Payments on borrowings under prior Term Loan, Credit Facility, and other loans						—						—						(176,618)
Payments on borrowings under Term A Facility						(62,050)						(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						(10,197)						—						(63,510)
Equity issuance costs						—						(58,596)						—
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan						17,858						32,360						13,467
Common stock repurchases						—						—						(1,625)
Payments in satisfaction of employees' minimum tax obligations						(21,249)						(19,701)						(28,700)
Payment of dividends						(34,508)						(20,319)						—
Other financing activities						(2,013)						(2,367)						(2,339)
Net cash provided by financing activities						862,953						675,727						1,173,625
Effect of exchange rate changes on cash, cash equivalents, and restricted cash						34,276						21,723						(3,453)
Net increase in cash and cash equivalents, and restricted cash						990,479						1,098,846						288,174
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period						1,591,892						493,046						204,872
Cash, Cash Equivalents, and Restricted Cash at End of Period						$	2,582,371					$	1,591,892					$	493,046
Cash paid for interest						$	57,314					$	37,266					$	62,190
Cash paid for income taxes						$	50,000					$	60,393					$	39,521
Non cash transactions:
Additions to property, plant & equipment included in accounts payable						$	84,890					$	32,028					$	21,801

See Notes to Consolidated Financial Statements.

II-VI Incorporated and Subsidiaries

Notes to Consolidated Financial Statements

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

Nature of Business. II-VI Incorporated (“II-VI,” 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 material 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.

The Company is closely monitoring the ongoing impact of the COVID-19 pandemic and related factors on all aspects of our business, including the impact to our employees, suppliers and customers, as well as the impact to the countries and markets in which II-VI operates. In particular, the Company is continuing to focus intensely on mitigating any resulting adverse impacts on our foreign and domestic operations, starting by prioritizing the safety of our employees, suppliers and customers.

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

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, Cash Equivalents and Restricted Cash. The Company considers highly liquid investment instruments with an original maturity of three months or less to be cash equivalents.

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 12. Leases for additional information.

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

Goodwill. The excess purchase price over the fair value allocated to identifiable tangible and intangible net assets of businesses acquired is reported as goodwill in the accompanying Consolidated Balance Sheets. The Company tests goodwill for impairment at least annually as of April 1, or when events or changes in circumstances indicate that goodwill might be impaired. The evaluation of impairment involves comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill). The Company uses a discounted cash flow (“DCF”) model and/or a market analysis to determine the fair value of its reporting units. A number of assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical experience and all available information at the time the fair values of the reporting units are estimated. Goodwill impairment is 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 2022 and 2021, 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; the fair value is well in excess of the carrying value for each reporting unit.

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.

We previously classified intangible asset amortization expense within SG&A expenses in our Consolidated Statements of Earnings (Loss). Amortization expense on the developed technology intangible assets is now classified within Cost of goods sold, with amortization expense on customer lists and trade names remaining within SG&A expenses in our Consolidated Statements of Earnings (Loss). Prior period amounts have been conformed to the current period presentation, which resulted in an increase to Cost of goods sold and a decrease to SG&A expenses of $39 million and $28 million for the years ended June 30, 2021 and June 30, 2020, respectively.

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 ASC 321, Investments - Equity Securities. 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 (Loss) 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, 2022 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 4. 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

Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity's Own Equity

In August 2020, the FASB issued ASC Update No. 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. The Company adopted this standard as of July 1, 2021. The Company elected to use the modified retrospective method to report the effect of the changes. Adoption of the standard affected the Company's currently outstanding 0.25% Convertible Senior Notes due 2022 (the "II-VI Convertible Notes"). Refer to Note 8. Debt for the impact of the adoption on the II-VI Convertible Notes.

Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by removing certain exceptions and adding guidance to improve consistency for other areas of Topic 740. The Company adopted this standard effective July 1, 2021. The adoption did not have a material impact on the Company’s consolidated financial statements.

Pronouncements Currently Under Evaluation

Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

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.

Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

In October 2021, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASC 606 rather than adjust them to fair value at the acquisition date. We will adopt this accounting standard in the first quarter of fiscal 2023. Results of operations for quarterly periods prior to adoption remain unchanged as a result of the adoption of ASU No. 2021-08. The acquisition of Coherent, and all future acquisitions, will be accounted for in accordance with ASU 2021-08. Refer to Note 3. Coherent Acquisition for further information. The adoption of this standard did not have an impact on our Consolidated Financial Statements.

Note 3. Coherent Acquisition

On July 1, 2022, the Company completed its acquisition of all of the outstanding equity interests in Coherent, Inc. (the “Merger”), a global provider of lasers and laser-based technology for scientific, commercial, and industrial customers, in a combined cash and stock transaction in accordance with the Agreement and Plan of Merger dated March 25, 2021 (the “Merger Agreement”). The Merger was consummated with the goal of creating a uniquely strategic global leader capable of delivering to our customers the most attractive combination of photonic solutions, compound semiconductors, as well as laser technology and systems. The results of the Merger will be included in the Company’s consolidated operating results beginning on July 1, 2022.

Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, each share of common stock of Coherent, par value $0.01 per share (the “Coherent Common Stock”), issued and outstanding immediately prior to July 1, 2022, was canceled and extinguished and automatically converted into the right to receive $220.00 in cash and 0.91 of a share of II-VI Common Stock. In order to complete the funding of the Merger, the Company had a net cash outflow of $2.1 billion on July 1, 2022. Estimated expenses, comprised of success-based transaction costs and estimated severance costs relating to the consummation of the Merger are approximately $87 million and will be recognized as expense in the Condensed Consolidated Statement of Earnings for the first quarter of fiscal year 2023. A total of 23 million shares were issued in conjunction with the closing of the Merger. Estimated Merger consideration is approximately $7.1 billion, including replacement equity awards attributable to pre-combination service for certain Coherent restricted stock units.

The Company will account for the acquisition as a business combination and will recognize the assets acquired and liabilities assumed at their fair values as of July 1, 2022. A significant portion of the purchase price is expected to be allocated to intangible assets and goodwill. Due to the timing of the Merger being after our fiscal year-end, and the amount of assets acquired and liabilities assumed, our initial accounting is incomplete and therefore we have not provided the other disclosures set forth in ASC 805, Business Combinations. Such information will be disclosed in our condensed consolidated financial statements for the fiscal quarter ending September 30, 2022. The calculation of estimated expenses and estimated Merger consideration set forth herein is preliminary and will be revised as additional information becomes available during the measurement period, which could be up to 12 months from the acquisition date. Any such revisions or changes may be material.

The expenses associated with the Merger for the year ended June 30, 2022, have not been allocated to an operating segment, and are presented in the Unallocated and Other in Note 14. Segment and Geographic Reporting. The total expense for the years ended June 30, 2022 and 2021 was $36 million and $27 million, respectively and is recorded in SG&A in our Consolidated Statement of Earnings (Loss).

Note 4. Revenue from Contracts with Customers

The following table summarizes disaggregated revenue by market for the years ended June 30, 2022, 2021 and 2020 ($000):

						Year Ended June 30, 2022
						Photonic Solutions						Compound Semiconductors												Total
Industrial						$	71,027					$	340,079											$	411,106
Communications						2,078,288						124,843												2,203,131
Aerospace & Defense						—						184,635												184,635
Consumer						9,255						221,002												230,257
Semiconductor						13,841						137,182												151,023
Other						53,785						82,679												136,464
Total Revenues						$	2,226,196					$	1,090,420											$	3,316,616

			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
Semiconductor			9,778						107,374												117,152
Other			51,490						70,402												121,892
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
Semiconductor			7,971						102,203						—						110,174
Other			34,016						51,701						—						85,717
Total Revenues			$	1,536,790					$	821,230					$	22,051					$	2,380,071

"Other" revenue included in the tables above include revenue from the life science/medical 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, 2022, the Company recognized revenue of $13 million related to customer payments that were included in the Consolidated Balance Sheets as of June 30, 2021. As of June 30, 2022 and June 30, 2021, the Company had $69 million and $40 million, respectively, of contract liabilities recorded in the Consolidated Balance Sheets.

Note 5. Inventories

The components of inventories were as follows:

June 30,						2022						2021
($000)
Raw materials						$	318,758					$	211,890
Work in progress						408,405						336,391
Finished goods						175,396						147,547
Total Inventories						$	902,559					$	695,828

Note 6. Property, Plant & Equipment

Property, plant & equipment consists of the following:

June 30,						2022						2021
($000)
Land and land improvements						$	19,368					$	20,454
Buildings and improvements						415,530						419,157
Machinery and equipment						1,651,762						1,483,183
Construction in progress						271,605						136,544
Finance lease right-of-use asset						25,000						25,000
						2,383,265						2,084,338
Less accumulated depreciation						(1,020,070)						(841,432)
Property, plant, and equipment, net						$	1,363,195					$	1,242,906

Included in the table above is a building acquired under a finance lease. As of June 30, 2022 and June 30, 2021, the accumulated depreciation of the finance lease ROU asset was $9 million and $7 million, respectively.

Note 7. 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, 2022																		Year Ended June 30, 2021
						Photonic Solutions						Compound Semiconductors												Total						Photonic Solutions						Compound Semiconductors						Total
Balance-beginning of period						$	1,053,028					$	243,699											$	1,296,727					$	1,052,494					$	186,515					$	1,239,009
Goodwill acquired						—						—												—						—						54,634						54,634
Finisar measurement period adjustments						—						—												—						(4,901)						—						(4,901)
Foreign currency translation						(4,285)						(6,683)												(10,968)						5,435						2,550						7,985
Balance-end of period						$	1,048,743					$	237,016											$	1,285,759					$	1,053,028					$	243,699					$	1,296,727

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2022 and 2021 were as follows ($000):

						June 30, 2022																		June 30, 2021
						Gross Carrying Amount						Accumulated Amortization						Net Book Value						Gross Carrying Amount						Accumulated Amortization						Net Book Value
Technology						$	473,845					$	(144,409)					$	329,436					$	476,200					$	(106,802)					$	369,398
Trade Names						22,536						(7,454)						15,082						22,660						(6,233)						16,427
Customer Lists						464,880						(173,994)						290,886						469,154						(136,519)						332,635
Other						1,563						(1,563)						—						1,576						(1,576)						—
Total						$	962,824					$	(327,420)					$	635,404					$	969,590					$	(251,130)					$	718,460

Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2022, 2021 and 2020 was $80 million, $82 million, and $64 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 153 months and the amortization is recorded in cost of goods sold in our Consolidated Statements of Earnings (Loss). The customer lists are being amortized over 60 to 240 months with a weighted-average remaining life of approximately 135 months and the amortization is recorded in SG&A in our Consolidated Statements of Earnings (Loss).

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, 2022 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 2022 and 2021. 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,
2023			$	77,480
2024			75,607
2025			74,119
2026			72,265
2027			70,495

Note 8. Debt

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

			June 30, 2022						June 30, 2021
Term A Facility, interest at LIBOR, as defined, plus 1.375%			$	995,363					$	1,057,412
Debt issuance costs, Term A Facility and Revolving Credit Facility			(18,396)						(25,191)
5.000% Senior Notes			990,000						—
Debt issuance costs and discount, Senior Notes			(7,703)						—
0.50% Convertible Senior Notes, assumed in the Finisar acquisition			—						14,888
0.25% Convertible Senior Notes			341,501						344,969
Debt issuance costs and discount, 0.25% Convertible Senior Notes			(339)						(16,937)
Total debt			2,300,426						1,375,141
Current portion of long-term debt			(403,212)						(62,050)
Long-term debt, less current portion			$	1,897,214					$	1,313,091

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

						Year Ending
						June 30,
2023						$	403,551
2024						62,050
2025						871,263
2026						—
2027						—
Thereafter						990,000
Total						$	2,326,864

Senior Credit Facilities

Through June 30, 2022, the Company had 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 $2.425 billion in the aggregate, consisting of

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

(ii)Aggregate principal amount of $720 million for a seven-year senior secured term B loan facility (the “Term B Facility” and together with the Term A Facility, the “Term Loan Facilities”), 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 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 "Closing Date"). The Company is obligated to repay the outstanding

principal amount of the Revolving Credit Facility, if any, on the fifth anniversary of the Closing Date. Notwithstanding the foregoing, all amounts outstanding under the Senior Credit Facilities will become due and payable 120 days prior to the maturity of the II-VI Convertible Notes if (i) the II-VI Convertible Notes remain outstanding and (ii) the Company has insufficient cash and borrowing availability under the Revolving Credit Facility to repay the principal amount of the II-VI Convertible Notes. The II-VI Convertible Notes are included in the current portion of long-term debt. The Company has sufficient cash to repay the principal amount of the II-VI Convertible Notes, therefore the Senior Credit Facilities remain classified as long-term obligations in the Consolidated Balance Sheets.

The Company’s obligations under the Senior Credit Facilities are guaranteed by each of the Company’s material existing or future direct and indirect domestic subsidiaries, including Finisar Corporation ("Finisar") and its domestic subsidiaries (collectively, the “Guarantors”), subject to certain exceptions. Borrowings under the Senior Credit Facilities are secured by a first priority lien in substantially all of the assets of the Company and the Guarantors, subject to certain exceptions, including that no real property secures the Senior Credit Facilities.

Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances relating to events of default. The Company has entered into an interest rate swap contract to hedge its exposure to interest rate risk on its variable rate borrowings under the Senior Credit Facilities. Refer to Note 15. Fair Value of Financial Instruments 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 Closing Date, commencing with the first full fiscal quarter after the Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of June 30, 2022, the Company was in compliance with all financial covenants under the Credit Agreement.

On July 1, 2022, the Credit Agreement was terminated, and amounts borrowed under the Term A Facility were repaid in full using proceeds from the New Term Facilities (defined below).

New Senior Credit Facilities

In connection with entering into the Merger Agreement, II-VI obtained a fully underwritten financing commitment pursuant to a commitment letter, dated as of March 25, 2021, as further amended and restated on April 21, 2021 and October 25, 2021 (the “Amended and Restated Commitment Letter”), with JP Morgan 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 committed to provide up to $5.0 billion in debt financing.

On July 1, 2022, II-VI entered into a Credit Agreement by and among the Company, the lenders, and other parties thereto, and JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, which provides for senior secured financing of $4.0 billion, consisting of a new term loan A credit facility (the "New Term A Facility") in an aggregate principal amount of $850 million, a new term loan B credit facility (the "New Term B Facility") and, together with the New Term A Facility, the “New Term Facilities”) in an aggregate principal amount of $2,800 million, and a new revolving credit facility (the “New Revolving Credit Facility”) in an aggregate principal amount of $350 million, including a letter of credit sub-facility of up to $50 million, in each case as contemplated under the Amended and Restated Commitment Letter. The New Term A Facility and the New Revolving Credit Facility will each bear interest at LIBOR subject to a 0.00% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The New Term A Facility and the New Revolving Credit Facility borrowings are initially expected to bear interest at LIBOR plus 2.00%. The New Term B Facility will bear interest at LIBOR (subject to a 0.50% floor) plus 2.75%. In relation to the New Term B Facility, the Company incurred expense of $34 million in the year ended June 30, 2022, which is included in interest expense in the Consolidated Statements of Earnings (Loss).

Proceeds of the loans borrowed under the New Term Facilities on July 1, 2022, together with other financing sources (including the Senior Notes) and cash on hand, were used to fund the cash portion of Merger consideration, the repayment of certain indebtedness (including the repayment in full of the Credit Agreement), and certain fees and expenses in connection with the Merger and otherwise for general corporate purposes.

The Company capitalized approximately $17 million of debt issuance costs during the year ended June 30, 2022. These capitalized costs are presented within the prepaid and other current assets and other assets in the Consolidated Balance Sheets. Amortization of debt issuance costs related to the New Term Facilities for the year ended June 30, 2022 totaled $5 million and is included in interest expense in the Consolidated Statements of Earnings (Loss).

5.000% Senior Notes due 2029

On December 10, 2021, the Company issued $990 million aggregate principal amount of 5.000% Senior Notes due 2029 (the "Senior Notes") pursuant to the indenture, dated as of December 10, 2021 (the "Indenture"), between the Company and U.S. Bank National Association, as trustee (the "Trustee"). The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), or to persons outside the United States under Regulation S of the Securities Act. The Senior Notes are guaranteed by each of the Company’s domestic subsidiaries that guarantee its obligations under the Senior Credit Facilities. Interest on the Senior Notes will be payable on December 15 and June 15 of each year, commencing on June 15, 2022, at a rate of 5.000% per annum. The Senior Notes will mature on December 15, 2029*.*

If (i) the Merger had not been consummated on or prior to 11:59 p.m., Eastern Time, on December 15, 2022 or (ii) the Company informed the Trustee, in writing or otherwise announced in writing that the Merger was no longer being pursued and/or the Merger Agreement had been terminated, the Company would have been required to redeem all of the outstanding Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date (the "Special Mandatory Redemption Date"). Pursuant to the terms of the Indenture, prior to the earlier of (i) the date of the consummation of the Merger and (ii) the Special Mandatory Redemption Date, the gross proceeds from the Senior Notes could not be used for any purpose, and therefore $990 million of restricted cash was classified within cash, cash equivalents, and restricted cash on the Consolidated Balance Sheets at June 30, 2022.

On or after December 15, 2024, the Company may redeem the Senior Notes, in whole at any time or in part from time to time, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time prior to December 15, 2024, the Company may redeem the Senior Notes, at its option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus a “make-whole” premium set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Notwithstanding the foregoing, at any time and from time to time prior to December 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes using the proceeds of certain equity offerings as set forth in the Indenture, at a redemption price equal to 105.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

The Indenture contains customary covenants and events of default, including default relating to among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. As of June 30, 2022, the Company was in compliance with all covenants under the Indenture.

Bridge Loan Commitment

Subject to the terms of the Amended and Restated Commitment Letter, the commitment parties thereto committed to provide, in addition to the New Term Facilities and the New Revolving Credit Facilities, a senior unsecured bridge loan facility in an aggregate principal amount of $990 million (the "Bridge Loan Commitment"). As a result of the issuance of the Senior Notes, the Bridge Loan Commitment was terminated. During the year ended June 30, 2022, the Company incurred expenses of $3 million related to the Bridge Loan Commitment, which is included in interest expense in the Consolidated Statements of Earnings (Loss).

0.50% Finisar Convertible Notes

On November 1, 2021, Finisar delivered to holders of all outstanding 0.50% Convertible Senior Notes due 2036 issued by Finisar (the "Finisar Notes") a notice of redemption pursuant to which Finisar provided notice that it would redeem on December 22, 2021 all of the Finisar Notes that were not repurchased by Finisar on December 15, 2021 pursuant to the terms of the Finisar Notes and that remained outstanding on December 22, 2021. On December 15, 2021, Finisar repurchased $15 million aggregate principal amount of Finisar Notes that were tendered for repurchase by holders of Finisar Notes. Each holder of Finisar Notes that remained outstanding after the repurchase on December 15, 2021 had the option to elect to receive

(i) a redemption price equal to 100% of the principal amount of the redeemed Finisar Notes, plus accrued and unpaid interest on the redeemed Finisar Notes or (ii) to convert all or any portion of the Finisar Notes held by such holder in accordance with the terms of the Finisar Notes until the close of business on December 21, 2021. Based on the elections of such holders, the Company issued 45 shares of common stock and paid approximately $0.3 million in the aggregate on December 22, 2021 to settle the conversion of the Finisar Notes that were converted and to redeem all remaining outstanding Finisar Notes.

0.25% Convertible Senior Notes

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

Originally, the Company had separately accounted for the value of the conversion option as an equity component, and the resulting debt discount was amortized as additional non-cash interest expense.

With the adoption of ASU 2020-06 on July 1, 2021, the Company reversed that accounting, electing to use the modified retrospective method. The adoption resulted in an increase of $15 million to the current portion of long-term debt, a decrease of $3 million to deferred income taxes, and a decrease of $11 million to shareholders' equity. If the Company had not adopted ASU 2020-06, additional interest expense included in the Consolidated Statements of Earnings would have been $13 million, and the impact of the change on basic and diluted earnings per share is a decrease of $0.09 and $0.02, respectively.

The initial conversion rate is 21.25 shares of II-VI Common Stock per $1,000 principal amount of II-VI Convertible 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 Convertible Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Convertible Notes amounted to $370 million as of June 30, 2022 and $532 million as of June 30, 2021 (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 II-VI Convertible Notes were 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 II-VI Convertible 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 September 1, 2022 (the "Maturity Date"), holders may convert their II-VI Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion occurring prior to June 1, 2022, the Company will pay or delivered, 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, to settle conversions. For conversions occurring on or after June 1, 2022, the Company will deliver shares of II-VI Common Stock to settle conversions.

Holders of the II-VI Convertible Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Convertible Note, other than as provided in the governing indenture. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited, other than as provided in the governing indenture. Notes were convertible during three quarters in the year ended June 30, 2022. 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 year ended June 30, 2022 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the II-VI Convertible Notes were convertible at the option of the holders thereof during the fiscal period ranging from April 1, 2022 to May 31, 2022. As of June 1, 2022, the II-VI Convertible Notes become convertible regardless of compliance with any other conversion trigger until the close of business on the business day immediately preceding the Maturity Date. For the year ended June 30, 2022, conversions totaled $3 million of aggregate principal amount, resulting in the issuance of 74 thousand shares of II-VI Common Stock.

The following table sets forth total interest expense recognized related to the II-VI Convertible Notes for the years ended June 30, 2022, 2021 and 2020 ($000):

						Year Ended June 30, 2022						Year Ended June 30, 2021						Year Ended June 30, 2020
0.25% contractual coupon						$	875					$	874					$	876
Amortization of debt discount and debt issuance costs including initial purchaser discount						1,947						13,748						13,172
Interest expense						$	2,822					$	14,622					$	14,048

The effective interest rate on the liability component was 1% for the year ended June 30, 2022, and 5% for the years ended June 30, 2021 and 2020.

Aggregate Availability

The Company had aggregate availability of $450 million under its Revolving Credit Facility as of June 30, 2022.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 2% and 1% for the years ended June 30, 2022 and 2021, respectively

Note 9. Income Taxes

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

Year Ended June 30,						2022						2021						2020
($000)
U.S. income (loss)						$	(62,721)					$	21,692					$	(302,027)
Non-U.S. income						344,528						330,898						238,099
Earnings (loss) before income taxes						$	281,807					$	352,590					$	(63,928)

The components of income tax expense were as follows:

Year Ended June 30,						2022						2021						2020
($000)
Current:
Federal						$	1,569					$	415					$	7
State						768						1,632						496
Foreign						52,865						53,362						45,052
Total Current						$	55,202					$	55,409					$	45,555
Deferred:
Federal						$	(7,185)					$	13,744					$	(43,955)
State						(1,215)						(431)						1,007
Foreign						246						(13,684)						494
Total Deferred						$	(8,154)					$	(371)					$	(42,454)
Total Income Tax Expense						$	47,048					$	55,038					$	3,101

Principal items comprising deferred income taxes were as follows:

June 30,						2022						2021
($000)
Deferred income tax assets
Inventory capitalization						$	20,562					$	20,753
Interest rate swap						—						6,347
Non-deductible accruals						8,403						7,437
Accrued employee benefits						11,320						14,025
Net-operating loss and credit carryforwards						149,949						163,717
Share-based compensation expense						10,125						8,400
Other						3,565						1,832
Deferred revenue						12,416						7,124
Right of use asset						29,817						33,341
Valuation allowances						(55,420)						(53,765)
Total deferred income tax assets						$	190,737					$	209,211
Deferred income tax liabilities
Tax over book accumulated depreciation						$	(28,701)					$	(32,692)
Intangible assets						(134,972)						(153,582)
Interest rate swap						(6,105)						—
Interest rate cap						(4,102)						—
Tax on unremitted earnings						(26,383)						(21,569)
Convertible debt						—						(3,321)
Lease liability						(28,983)						(32,053)
Other						(7,036)						(6,458)
Total deferred income tax liabilities						$	(236,282)					$	(249,675)
Net deferred income taxes						$	(45,545)					$	(40,464)

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,						2022						%						2021						%						2020						%
($000)
Taxes at statutory rate						$	59,179					21						$	74,044					21						$	(13,425)					21
Increase (decrease) in taxes resulting from:
State income taxes-net of federal benefit						(339)						—						1,246						—						1,194						(2)
Taxes on non U.S. earnings						(2,704)						(1)						(26,557)						(7)						(915)						1
Valuation allowance						(1,513)						(1)						(3,720)						(1)						(9,365)						15
Research and manufacturing incentive deductions and credits						(24,341)						(9)						(22,968)						(6)						(15,836)						25
Stock compensation						2,095						1						(2,500)						(1)						4,334						(7)
GILTI and FDII						4,866						2						27,369						8						36,067						(56)
Other						9,805						4						8,124						2						1,047						(2)
						$	47,048					17						$	55,038					16						$	3,101					(5)

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 Tax Cuts and Jobs Act (the “Tax 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 $26 million.

Additionally, the Tax Act introduced a new category of income, referred to as global intangible low tax income (“GILTI”), which requires a current year inclusion of earnings of controlled foreign corporations taxed at a low rate and without a significant fixed asset base. 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.

During the fiscal years ended June 30, 2022, 2021, and 2020, cash paid by the Company for income taxes was $50 million, $60 million, and $40 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 1.60%, 3.22% and (8.91)% for the fiscal years ended June 30, 2022, 2021 and 2020, respectively, and the impact of the tax holidays on diluted earnings per share is $0.04, $0.10, and $0.07 for the fiscal years ended June 30, 2022, 2021, and 2020, respectively. The tax holiday related to II-VI Malaysia Advanced Manufacturing Center Sdn. Bhd will end during the fiscal year ended June 30, 2026, the tax holiday related to certain II-VI Laser Enterprise Philippines, Inc.'s business lines will end during the fiscal year ended June 30, 2026, and the tax 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, 2022:

Type						Amount						Expiration Date
($000)
Tax credit carryforwards:
Federal research and development credits						$	83,063					June 2023-June 2042
Foreign tax credits						3,540						June 2030-June 2032
State tax credits						15,632						June 2023-June 2037
State tax credits (indefinite)						39,243						Indefinite
Operating loss carryforwards:
Loss carryforwards - federal						$	42,012					June 2023-June 2036
Loss carryforwards - state						182,178						June 2023-June 2042
Loss carryforwards - state (indefinite)						25,899						Indefinite
Loss carryforwards - foreign						15,608						June 2023-June 2032
Loss carryforwards - foreign (indefinite)						38,600						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, 2022, 2021 and 2020 were as follows:

						2022						2021						2020
($000)
Beginning balance						$	38,025					$	42,803					$	11,520
Increases in current year tax positions						1,803						3,940						1,506
Acquired business						—						5,341						31,791
Settlements						—						(7,514)						—
Expiration of statute of limitations						(2,417)						(6,545)						(2,014)
Ending balance						$	37,411					$	38,025					$	42,803

The Company classifies all estimated and actual interest and penalties as income tax expense. During fiscal years 2022, 2021 and 2020, there was $0.4 million, $0.3 million and $0.6 million of interest and penalties within income tax expense, respectively. The Company had $3 million, $3 million and $4 million of interest and penalties accrued at June 30, 2022, 2021 and 2020, 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 $25 million, $26 million and $24 million at June 30, 2022, 2021 and 2020, 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 2019 to 2022 remain open to examination by the Internal Revenue Service, fiscal years 2018 to 2022 remain open to examination by certain state jurisdictions, and fiscal years 2010 to 2022 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for certain subsidiary companies in India for the year ended March 31, 2016; Philippines for the years ended June 2018 and 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 10. Equity and Redeemable Preferred Stock

The Company has 5 million shares of preferred stock authorized, of which 2.3 million shares have been designated and issued as Series A Mandatory Convertible Preferred Stock, no par value per share, and 215,000 shares have been designated as Series B Convertible Preferred Stock, no par value per share, of which 75,000 shares were issued at June 30, 2022 and 2021.

Mandatory Convertible Preferred Stock

In July 2020, the Company issued of 2,300,000 shares of 6.00% Series A Mandatory Convertible Preferred, no par value per share (“Mandatory Convertible Preferred Stock”).

Unless previously converted, each outstanding share of Mandatory Convertible Preferred Stock will automatically convert on the Mandatory Conversion Date (as defined in the Statement with Respect to Shares establishing the Mandatory Convertible Preferred Stock) 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 recognized $28 million and $27 million of preferred stock dividends during fiscal years 2022 and 2021, respectively, associated with the Mandatory Convertible Preferred Stock, which were presented as a reduction to retained earnings on the Consolidated Balance Sheet as of June 30, 2022.

The following table presents dividends per share and dividends recognized for the years ended June 30, 2022, and June 30, 2021:

									Year Ended June 30, 2022						Year Ended June 30, 2021
Dividends per share									12.00						11.80
Series A Mandatory Convertible Preferred Stock dividends ($000)									27,600						27,140

Redeemable Convertible Preferred Stock

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.

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 the election of the holder, at a conversion price of $85.00 per share (“Conversion Price”), after the earliest to occur of (i) the issuance of shares of II-VI Series B-2 Convertible Preferred Stock upon the closing of the Coherent acquistion, (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 the election of the Company, any time following March 31, 2024, 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 issued shares of 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 March 31, 2031:

• 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 with Respect to Shares establishing the new II-VI Convertible Preferred Stock, the Company must, or will cause the survivor of a Fundamental Change 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 March 31, 2026, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through March 31, 2026.

If the Company defaults on a payment obligation with respect to the II-VI Series B-1 Convertible Preferred Stock and such default is not cured within 30 days, the dividend rate will increase to 8% per annum and will be increased by an additional 2% per annum each quarter the Company remains in default, not to exceed 14% per annum.

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 Right, and upon a Fundamental Change, and is therefore classified as mezzanine equity.

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 10-year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings (Loss) available to Common Shareholders.

The Company recognized $41 million of preferred stock dividends during the fiscal year ended June 30, 2022, which were presented as a reduction to retained earnings on the Consolidated Balance Sheets as of June 30, 2022.

The following table presents dividends per share and dividends recognized for the years ended June 30, 2022, and June 30, 2021:

									Year Ended June 30, 2022						Year Ended June 30, 2021
Dividends per share									541.66						134.55
Dividends ($000)									38,598						9,583
Deemed dividends ($000)									2,027						508

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 $1.05 billion, immediately prior to closing of the Coherent acquisition; and

• immediately prior to the closing of the Coherent acquisition, 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 of the Coherent acquisition, increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.15 billion.

On July 1, 2022, II-VI issued and sold 140,000 shares of II-VI Series B-2 Convertible Preferred Stock, for $10,000 per share and an aggregate purchase price of $1.4 billion.

Note 11. 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 stock method. For the fiscal years ended June 30, 2022 and June 30, 2021, 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 the fiscal year ended June 30, 2022 and June 30, 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 basic and diluted earnings (loss) per share computations for the periods presented ($000):

Year Ended June 30,						2022						2021						2020
($000 except per share)
Numerator
Net earnings (loss)						$	234,759					$	297,552					$	(67,029)
Deduct Series A preferred stock dividends						(27,600)						(27,140)						—
Deduct Series B dividends and deemed dividends						(40,625)						(10,091)						—
Basic earnings (loss) available to common shareholders						$	166,534					$	260,321					$	(67,029)
Effect of dilutive securities:
Add back interest on II-VI Convertible Notes (net of tax)						$	2,229					$	12,264					$	—
Diluted earnings (loss) available to common shareholders						$	168,763					$	272,585					$	(67,029)
Denominator
Weighted average shares						106,189						104,151						84,828
Effect of dilutive securities
Common stock equivalents						3,012						3,552						—
II-VI Convertible Notes						7,312						7,331						—
Diluted weighted average common shares						116,513						115,034						84,828
Basic earnings (loss) per common share						$	1.57					$	2.50					$	(0.79)
Diluted earnings (loss) per common share						$	1.45					$	2.37					$	(0.79)

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,						2022						2021						2020
Series A Mandatory Convertible Preferred Stock						8,915						8,915						—
Series B Redeemable Preferred Stock						9,162						2,230						—
II-VI Convertible Notes due 2022						—						—						7,331
Common stock equivalents						9,611						118						2,345
Total anti-dilutive shares						27,688						11,263						9,676

Note 12. Leases

We determine if an arrangement is a lease at inception for arrangements with an initial term of more than 12 months, 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 assets are recorded in property, plant and equipment, net, and finance lease liabilities within other accrued liabilities and other liabilities on our Consolidated Balance Sheets. 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 Sheets. 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 leases for arrangements with an initial term of more than 12 months, lease term, and discount rates ($000):

						Year Ended June 30, 2022						Year Ended June 30, 2021						Year Ended June 30, 2020
Finance Lease Cost
Amortization of right-of-use assets						$	1,671					$	1,667					$	1,667
Interest on lease liabilities						1,200						1,268						1,328
Total finance lease cost						2,871						2,935						2,995
Operating lease cost						36,716						37,361						32,466
Sublease income						507						1,471						368
Total lease cost						$	39,080					$	38,825					$	35,093
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases						1,200						1,268						1,328
Operating cash flows from operating leases						35,481						35,641						30,816
Financing cash flows from finance leases						1,290						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						18,161						52,839						29,458
Total assets obtained in exchange for new operating lease liabilities						18,161						66,230						58,705
Weighted-Average Remaining Lease Term (in Years)
Finance leases						9.5						10.5						11.5
Operating leases						6.6						7.0						7.2
Weighted-Average Discount Rate
Finance leases						5.6		%				5.6		%				5.6		%
Operating leases						5.7		%				6.1		%				7.3		%

The following table presents future minimum lease payments, which includes leases for arrangements with an initial term of more than 12 months ($000):

Future Years			Operating Leases						Finance Leases						Total
Year 1			$	34,062					$	2,554					$	36,616
Year 2			29,923						2,624						32,547
Year 3			24,830						2,697						27,527
Year 4			19,816						2,771						22,587
Year 5			15,532						2,847						18,379
Thereafter			47,284						13,801						61,085
Total minimum lease payments			$	171,447					$	27,294					$	198,741
Less: amounts representing interest			33,659						6,284						39,943
Present value of total lease liabilities			$	137,788					$	21,010					$	158,798

From time-to-time, the Company enters into commercial agreements with our customers that include advance payments from our customers, the cash flow from which the Company uses to fund our capital expansion. The Company determines at the inception or modification of the contract if the arrangement is, or contains, a lease, which exists when the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. In determining if a contract contains a lease, the Company evaluates whether the contract, either explicitly or implicitly, is for the use of an identified asset and whether the customer has the right to direct the use of, and obtain substantially all of the economic benefit from, the identified asset.

The Company entered into a commercial agreement with one of our customers to produce certain engineered materials products within the Compound Semiconductors segment. We received payments of $23 million and $8 million during the years ended June 30, 2022 and 2021, respectively, which the Company used to partially fund the purchase of plant and equipment, which is recorded as a contract liability. See Note 4. Revenue from Contracts with Customers. We determined the contractual rights and obligations in the commercial agreement provide us with the substantive right to substitute alternative assets throughout the period of use and therefore the commercial agreement does not contain a lease under ASC 842.

Note 13. 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, 2022, there were approximately 7 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, 2022, 2021 and 2020 is as follows $000:

Year Ended June 30,						2022						2021						2020
Stock Options and Cash-Based Stock Appreciation Rights						$	3,218					$	10,626					$	11,893
Restricted Share Awards, Restricted Share Units, and Cash-Based Restricted Share Units						56,365						47,060						49,957
Performance Share Units and Cash Based Performance Share Units						10,077						16,640						11,977
						$	69,660					$	74,326					$	73,827

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 years ended June 30, 2022 and June 30, 2021, no stock options were issued. During fiscal year ended June 30, 2020, the weighted-average fair value of options granted under the Plan was $14.79 per option, using the following assumptions:

Year Ended June 30,																								2020
Risk-free interest rate																								1.50		%
Expected volatility																								39		%
Expected life of options																								6.91 years
Dividend yield																								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, 2022 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, 2021						2,642,634						$	29.26					145,334						$	33.80
Exercised						(188,015)						$	26.78					(14,054)						$	37.00
Forfeited and Expired						(21,729)						$	30.78					(3,718)						$	35.80
Outstanding - June 30, 2022						2,432,890						$	29.41					127,562						$	33.39
Exercisable - June 30, 2022						1,990,721						$	27.61					86,211						$	30.86

As of June 30, 2022, 2021 and 2020, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $48 million, $88 million and $80 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, 2022. 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, 2022, 2021, and 2020 was $8 million, $49 million, and $20 million, respectively. As of June 30, 2022, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $3 million. This cost is expected to be recognized over a weighted-average period of approximately 1 year.

Outstanding and exercisable stock options at June 30, 2022 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						549,192						2.62						$	16.14					549,192						2.62						$	16.14
$18.07 - $24.35						596,310						3.23						$	20.96					590,046						3.19						$	20.87
$24.35 - $35.39						490,512						5.72						$	33.29					401,104						5.33						$	34.10
$35.39 - $36.90						541,065						7.19						$	36.46					254,550						7.14						$	36.45
$36.90 - $49.90						383,373						6.08						$	47.94					282,040						6.02						$	47.85
						2,560,452						4.84						$	29.60					2,076,932						4.32						$	27.74

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. There were no restricted share awards issued in the fiscal year ending June 30, 2022, and all previous restricted share awards have been amortized in full.

Restricted share unit, and cash-based restricted share unit activity during the fiscal year ended June 30, 2022, was as follows:

												Restricted Share Units															Cash-Based Restricted Share Units
																		Number of Units									Weighted Average Grant Date Fair Value						Number of Units						Weighted Average Grant Date Fair Value
Nonvested - July 1, 2021																		2,326,172									$	43.67					45,873						$	38.75
Granted																		849,467									$	63.63					3,538						$	63.60
Vested																		(1,117,600)									$	40.67					(26,589)						$	40.48
Forfeited																		(159,861)									$	44.87					(2,344)						$	45.29
Nonvested - June 30, 2022																		1,898,178									$	54.24					20,478						$	40.05

As of June 30, 2022, total unrecognized compensation cost related to non-vested, restricted share unit and cash-based restricted share units was $58 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The 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, 2022, 2021 and 2020, was $54 million, $59 million and $11 million, respectively. The total fair value of restricted share awards, restricted share units and cash-based restricted share units vested was $67 million, $69 million and $75 million during fiscal years 2022, 2021 and 2020, 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, 2022, 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, 2022, 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 - July 1, 2021						518,309						$	45.28					27,724						$	39.43
Granted						167,764						$	83.03					—						$	—
Vested						(200,611)						$	62.69					(23,514)						$	49.90
Forfeited						(16,407)						$	53.49					—						$	—
Performance Adjustments						122,530						$	—					13,914						$	49.90
Nonvested - June 30, 2022						591,585						$	40.48					18,124						$	33.88

As of June 30, 2022, total unrecognized compensation cost related to non-vested performance share units and cash-based performance share units was $10 million. This cost is expected to be recognized over a weighted-average period of approximately 1.75 years. The total fair value of the performance share units and cash-based performance share units granted during the fiscal years ended June 30, 2022, 2021 and 2020 was $14 million, $14 million and $15 million, respectively. The total fair value of performance share units and cash-based performance share units vested during the fiscal years ended June 30, 2022, 2021 and 2020 was $11 million, $9 million and $6 million, respectively. The performance adjustments relate to grants that exceeded the performance targets when vested during FY22, 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 14. Segment and Geographic Reporting

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

The Company reports its financial results in 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.

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 Coherent acquisition in the fiscal years ended June 30, 2022 and 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)
2022
Revenues						$	2,226,196					$	1,090,420											$	—					$	3,316,616
Inter-segment revenues						36,898						329,342												(366,240)						—
Operating income (loss)						230,094						220,070												(35,870)						414,294
Interest expense						—						—												—						(121,254)
Other income, net						—						—												—						(11,233)
Income taxes						—						—												—						(47,048)
Net earnings						—						—												—						234,759
Depreciation and amortization						172,851						113,928												—						286,779
Expenditures for property, plant & equipment						89,818						224,514												—						314,332
Segment assets						4,875,053						2,969,793												—						7,844,846
Goodwill						1,048,743						237,016												—						1,285,759

						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 loss						—						—						—						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						49,930						62,279						(72,730)						39,479
Interest expense						—						—						—						(89,409)
Other income, net						—						—						—						(13,998)
Income taxes						—						—						—						(3,101)
Net earnings						—						—						—						(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

Geographic information for revenues by location of the customer's headquarters, were as follows:

						Revenues
Year Ended June 30,						2022						2021						2020
($000)
North America						$	1,771,385					$	1,560,254					$	1,085,146
Europe						623,157						567,703						437,908
China						614,393						680,479						483,393
Japan						196,512						203,655						183,587
Rest of World						111,169						93,800						190,038
Total						$	3,316,616					$	3,105,891					$	2,380,071

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

						Long-Lived Assets
June 30,						2022						2021
($000)
United States						$	902,163					$	737,151
Non-United States
China						394,056						402,987
United Kingdom						63,898						60,090
Malaysia						64,807						53,187
Switzerland						40,540						37,121
Sweden						28,030						27,374
Germany						14,521						16,703
Australia						10,478						13,627
Vietnam						16,844						10,246
Philippines						7,375						7,890
Taiwan						7,025						6,532
Korea						4,325						4,595
Hong Kong						1,645						2,104
Other						2,350						1,916
Total Non-United States						$	655,894					$	644,372
						$	1,558,057					$	1,381,523

Note 15. Fair Value of Financial Instruments

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

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

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

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

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

The Company entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate of 1.52%. The Company receives payments with a floor of 0.00%. The interest rate swap agreement has an effective date of November 24, 2019, with an expiration date of September 24, 2024. The initial notional amount of the interest rate swap decreased 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 $27 million is recognized in the Consolidated Balance Sheets within prepaid and other current assets and other assets as of June 30, 2022. Changes in fair value are recorded within accumulated other comprehensive income (loss) on the Consolidated Balance Sheets 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.

On February 23, 2022, the Company entered into an interest rate cap ("the Cap") with an effective date of July 1, 2023. The Cap manages the Company's exposure to interest rate movements on a portion of the Company's floating rate debt. The Cap provides the Company with the right to receive payment if one-month LIBOR exceeds 1.85%. Beginning in July 2023, the Company will begin to pay a fixed monthly premium based on an annual rate of 0.853% for the Cap. The Cap will carry a notional amount ranging from $500 million to $1,500 million. The fair value of the interest rate cap of $18 million is recognized in the Consolidated Balance Sheets within other assets as of June 30, 2022.

The Cap is designed to mirror the terms of the Company's Credit Agreement as of the effective date, or its direct replacement. The Company designated the Cap as a cash flow hedge of the variability of the LIBOR-based interest payments on the Term Loans. Every period over the life of the hedging relationship, the entire change in fair value related to the hedging instrument will first be recorded within accumulated other comprehensive income (loss). Amounts accumulated in accumulated other comprehensive income (loss) will be reclassified into interest expense in the same period or periods in which interest expense is recognized on the Credit Agreement, or its direct replacement. The fair value of the Cap is determined using widely accepted valuation techniques and reflects the contractual terms of the Cap 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 Cap is classified as a Level 2 item within the fair value hierarchy.

The Company estimated the fair value of the II-VI Convertible Notes based on quoted market prices as of the last trading day prior to June 30, 2022; however, the II-VI Convertible Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the II-VI Convertible 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 Convertible Notes is net of unamortized discount and issuance costs. See Note 8. Debt for details on the Company’s debt facilities.

The Company estimated the fair value of the Senior Notes based on quoted market prices as of the last trading day prior to June 30, 2022; however, the Senior Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the Senior 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 Senior Notes is net of unamortized discount and issuance costs. See Note 8. Debt for details on the Company’s debt facilities.

The fair value and carrying value of the II-VI Convertible Notes and Senior Notes were as follows at June 30, 2022 ($000):

						Fair Value						Carrying Value
II-VI Convertible Notes						$	382,601					$	341,162
Senior Notes						$	865,527					$	982,297

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 and the Senior Notes, excluding the II-VI Convertible Notes are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value.

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. At June 30, 2022, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts. Realized losses related to these contracts for the year ended June 30, 2022 were $27 million, and were included in other expense (income), net in the Consolidated Statements of Earnings (Loss). For the years ended June 30, 2021 and June 30, 2020, the realized losses related to foreign currency forward contracts were not material.

Note 16. Employee Benefit Plans

Eligible U.S. employees of the Company participate in a profit sharing retirement plan. Contributions accrued for the plan are made at the discretion of the Company’s board of directors and were $2 million, $2 million, and $6 million for the years ended June 30, 2022, 2021 and 2020, respectively.

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, 2022 and 2021 were $2 million and $4 million, respectively. Net periodic pension cost is not material for any year presented.

The underfunded pension liability was $4 million and $25 million as of June 30, 2022 and 2021, respectively. The pension adjustment amount recognized in accumulated other comprehensive income (loss) was a $16 million increase and a $2 million increase for the fiscal years ended June 30, 2022 and 2021, respectively. The accumulated benefit obligation was $81 million as of June 30, 2022, compared to $90 million as of June 30, 2021.

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

Year Ending June 30,
($000)
2023			$	6,700
2024			5,300
2025			6,700
2026			8,900
2027			4,600
Next five years			41,200

Note 17. Other Accrued Liabilities

The components of other accrued liabilities were as follows:

June 30,						2022						2021
($000)
Contract liabilities						$	22,960					$	13,926
Warranty reserves						17,738						21,868
Accrued interest						38,872						428
Other accrued liabilities						120,260						109,687
						$	199,830					$	145,909

Note 18. Commitments and Contingencies

The Company has purchase commitments for materials and supplies as part of the ordinary conduct of business. A portion of the commitments are long-term and are based on minimum purchase requirements. Certain short-term raw material purchase commitments have a variable price component which is based on market pricing at the time of purchase. Due to the proprietary nature of some of the Company’s materials and processes, certain contracts may contain liquidated damage provisions for early termination. The Company does not believe that a significant amount of liquidated damages are reasonably likely to be incurred under these commitments based upon historical experience and current expectations. Total future purchase commitments held by II-VI as of June 30, 2022 were $491 million in fiscal 2023 and $213 million thereafter.

Note 19. Share Repurchase Programs

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase any shares pursuant to this Program during the fiscal years ended June 30, 2022 or June 30, 2021. As of June 30, 2022, the Company has cumulatively purchased 1,416,587 shares of II-VI common stock pursuant to the Program for approximately $22 million.

Note 20. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) (“AOCI”) by component, net of tax, for the years ended June 30, 2022, 2021, and 2020 were as follows ($000):

						Foreign Currency Translation Adjustment						Interest Rate Swap						Interest Rate Cap						Defined Benefit Pension Plan						Total Accumulated Other Comprehensive Income (Loss)
AOCI - June 30, 2019						$	(15,627)					$	—					$	—					$	(8,594)					$	(24,221)
Other comprehensive 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 loss						(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
Other comprehensive income (loss) before reclassifications						(89,967)						29,711						14,306						15,300						(30,650)
Amounts reclassified from AOCI						—						13,797						—						419						14,216
Net current-period other comprehensive income (loss)						(89,967)						43,508						14,306						15,719						(16,434)
AOCI - June 30, 2022						$	(34,572)					$	11,735					$	14,306					$	6,364					$	(2,167)

SCHEDULE II

II-VI INCORPORATED AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED JUNE 30, 2022, 2021, AND 2020

(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, 2022:
Allowance for doubtful accounts			$	924		$	3,292		$	—					$	(10)		(3)			$	4,206
Warranty reserves			$	21,868		$	7,718		$	—					$	(11,848)					$	17,738
Deferred tax asset valuation allowance			$	53,765		$	2,157		$	(502)		(2)			$	—					$	55,420
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		(1)			$	—					$	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					$	(25,818)					$	27,620
Deferred tax asset valuation allowance			$	20,190		$	(2,186)		$	36,555					$	—					$	54,559

(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.