II-VI INC (Form: 10-Q, Received: 02/09/2021 09:01:01)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2020


☐			Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to .

Commission File Number: 001-39375

________________________________________________________________

II-VI INCORPORATED

(Exact name of registrant as specified in its charter)

________________________________________________________________


PENNSYLVANIA		25-1214948
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

375 Saxonburg Boulevard		16056
Saxonburg,	PA	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: 724-352-4455

N/A

(Former name, former address and former fiscal year, if changed since last report)

________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	IIVI	Nasdaq Global Select Market
Series A Mandatory Convertible Preferred Stock, no par value	IIVIP	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At February 4, 2021, 104,762,037 shares of Common Stock, no par value, of the registrant were outstanding.

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II-VI INCORPORATED

INDEX


		Page No.

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets – December 31, 2020 and June 30, 2020 (Unaudited)	3
	Condensed Consolidated Statements of Earnings (Loss) – Three and six months ended December 31, 2020 and 2019 (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended December 31, 2020 and 2019 (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows – Six months ended December 31, 2020 and 2019 (Unaudited)	7
	Condensed Consolidated Statements of Shareholders’ Equity – Three and six months ended December 31, 2020 and 2019	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Issuer Purchases of Equity Securities	32
Item 6.	Exhibits	33

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)


	December 31, 2020		June 30, 2020
Assets
Current Assets
Cash and cash equivalents	$	834,540	$	493,046
Accounts receivable - less allowance for doubtful accounts of $1,248 at December 31, 2020 and $1,698 at June 30, 2020	570,985		598,124
Inventories	656,993		619,810
Prepaid and refundable income taxes	12,122		12,279
Prepaid and other current assets	63,083		65,710
Total Current Assets	2,137,723		1,788,969
Property, plant & equipment, net	1,250,480		1,214,772
Goodwill	1,292,384		1,239,009
Other intangible assets, net	761,195		758,368

Deferred income taxes	34,061		22,938
Other assets	170,720		210,658
Total Assets	$	5,646,563	$	5,234,714
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt	$	62,050	$	69,250
Accounts payable	250,740		268,773
Accrued compensation and benefits	143,592		157,557
Operating lease current liabilities	24,998		24,634
Accrued income taxes payable	42,550		33,341
Other accrued liabilities	140,544		119,338
Total Current Liabilities	664,474		672,893
Long-term debt	1,408,790		2,186,092
Deferred income taxes	64,313		45,551
Operating lease liabilities	108,594		94,701
Other liabilities	163,579		158,674
Total Liabilities	2,409,750		3,157,911
Shareholders' Equity
Preferred stock, no par value, 6% cumulative; authorized - 5,000,000; issued - 2,300,000 shares at December 31, 2020	445,319		—
Common stock, no par value; authorized - 300,000,000 shares; issued - 118,043,133 shares at December 31, 2020; 105,916,068 shares at June 30, 2020	1,985,833		1,486,947
Accumulated other comprehensive income (loss)	14,507		(87,383)
Retained earnings	997,283		876,552
	3,442,942		2,276,116
Treasury stock, at cost; 13,486,364 shares at December 31, 2020 and 13,356,447 shares at June 30, 2020	(206,129)		(199,313)
Total Shareholders' Equity	3,236,813		2,076,803
Total Liabilities and Shareholders' Equity	$	5,646,563	$	5,234,714

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)

($000, except per share data)


	Three Months Ended December 31,
	2020		2019
Revenues	$	786,569	$	666,331

Costs, Expenses, and Other Expense (Income)
Cost of goods sold	464,103		517,991
Internal research and development	84,858		107,700
Selling, general and administrative	118,893		119,218
Interest expense	15,585		28,390
Other expense (income), net	(3,153)		487
Total Costs, Expenses, & Other Expense (Income)	680,286		773,786

Earnings (Loss) Before Income Taxes	106,283		(107,455)

Income Tax Expense (Benefit)	18,383		(9,242)

Net Earnings (Loss)	$	87,900	$	(98,213)

Series A Mandatory Convertible Preferred Stock Dividends	6,900		—
Net Earnings (Loss) available to the Common Shareholders	$	81,000	$	(98,213)

Basic Earnings (Loss) Per Share	$	0.78	$	(1.08)

Diluted Earnings (Loss) Per Share	$	0.73	$	(1.08)

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)

($000, except per share data)


	Six Months Ended December 31,
	2020		2019
Revenues	$	1,514,653	$	1,006,740

Costs, Expenses, and Other Expense (Income)
Cost of goods sold	905,623		735,260
Internal research and development	163,106		143,820
Selling, general and administrative	226,079		224,713
Interest expense	32,799		35,358
Other expense (income), net	21,186		5,566
Total Costs, Expenses, & Other Expense (Income)	1,348,793		1,144,717

Earnings (Loss) Before Income Taxes	165,860		(137,977)

Income Tax Expense (Benefit)	31,694		(13,766)

Net Earnings (Loss)	$	134,166	$	(124,211)

Series A Mandatory Convertible Preferred Stock Dividends	13,340		—
Net Earnings (Loss) available to the Common Shareholders	$	120,826	$	(124,211)

Basic Earnings (Loss) Per Share	$	1.17	$	(1.58)

Diluted Earnings (Loss) Per Share	$	1.12	$	(1.58)

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

($000)


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2019		2020		2019
Net earnings (loss)	$	87,900	$	(98,213)	$	134,166	$	(124,211)
Other comprehensive income (loss):
Foreign currency translation adjustments	64,067		24,590		99,591		11,571
Change in fair value of interest rate swap, net of taxes of $782 and $630 for the three and six months ended December 31, 2020, respectively, and $989 for both the three and six months ended December 31, 2019	2,854		3,609		2,299		3,609
Pension adjustment, net of taxes of ($92) and ($69) for the three and six months ended December 31, 2019	—		(251)		—		(167)
Comprehensive income (loss)	$	154,821	$	(70,265)	$	236,056	$	(109,198)

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)


	Six Months Ended December 31,
	2020		2019
Cash Flows from Operating Activities
Net earnings (loss)	$	134,166	$	(124,211)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation	91,027		69,386
Amortization	40,859		39,714
Share-based compensation expense	38,018		34,380
Amortization of discount on convertible debt and debt issuance costs	10,376		9,639
Debt extinguishment costs	24,747		3,960
Losses on foreign currency remeasurements and transactions	12,178		4,575
Earnings from equity investments	(1,817)		(918)
Deferred income taxes	8,518		(42,076)
Increase (decrease) in cash from changes in (net of effect of acquisitions):
Accounts receivable	32,371		31,237
Inventories	(1,714)		78,065
Accounts payable	(23,262)		(1,963)

Income taxes	(12,013)		8,930
Accrued compensation and benefits	(13,965)		(9,642)
Other operating net assets (liabilities)	16,210		(44,816)
Net cash provided by operating activities	355,699		56,260
Cash Flows from Investing Activities
Additions to property, plant & equipment	(79,329)		(80,288)
Purchases of businesses, net of cash acquired	(34,431)		(1,036,609)
Other investing activities	—		(1,102)
Net cash used in investing activities	(113,760)		(1,117,999)
Cash Flows from Financing Activities
Proceeds from issuance of common shares	460,000		—
Proceeds from issuance of preferred shares	460,000		—
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
Payments on Finisar Notes	—		(560,112)
Payments on borrowings under prior Term Loan, Credit Facility and other loans	—		(176,596)
Payments on borrowings under Term A Facility	(31,025)		(15,513)
Payments on borrowings under Term B Facility	(714,600)		(1,800)
Payments on borrowings under Revolving Credit Facility	(74,000)		(66,000)
Debt issuance costs	—		(63,510)
Equity issuance costs	(36,092)		—
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan	22,355		3,077
Common stock repurchase	—		(1,626)
Payments in satisfaction of employees' minimum tax obligations	(6,941)		(15,031)
Payment of dividends	(6,519)		—
Other financing activities	(366)		(1,839)
Net cash provided by financing activities	72,812		1,232,050
Effect of exchange rate changes on cash and cash equivalents	26,743		1,657
Net increase in cash and cash equivalents	341,494		171,968
Cash and Cash Equivalents at Beginning of Period	493,046		204,872
Cash and Cash Equivalents at End of Period	$	834,540	$	376,840
Cash paid for interest	$	13,898	$	24,745
Cash paid for income taxes	$	24,227	$	25,087
Additions to property, plant & equipment included in accounts payable	$	10,497	$	12,502

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

($000, including share amounts)


	Common Stock			Preferred Stock			Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total
Three Months Ended December 31, 2020	Shares	Amount		Shares	Amount						Shares	Amount
Balance - September 30, 2020	117,189	$	1,942,300	2,300	$	445,319	$	(52,414)	$	916,283	(13,476)	$	(204,811)	$	3,046,677
Share-based and deferred compensation activities	854	43,533		—	—		—		—		(11)	(1,318)		42,215

Net earnings	—	—		—	—		—		87,900		—	—		87,900
Foreign currency translation adjustments	—	—		—	—		64,067		—		—	—		64,067
Change in fair value of interest rate swap, net of taxes of $782	—	—		—	—		2,854		—		—	—		2,854

Dividends	—	—		—	—		—		(6,900)		—	—		(6,900)
Balance - December 31, 2020	118,043	$	1,985,833	2,300	$	445,319	$	14,507	$	997,283	(13,487)	$	(206,129)	$	3,236,813


	Common Stock			Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total
Three Months Ended December 31, 2019	Shares	Amount						Shares	Amount
Balance - September 30, 2019	103,736	$	1,429,173	$	(37,156)	$	917,583	(12,855)	$	(178,406)	$	2,131,194
Share-based and deferred compensation activities	307	12,007		—		—		(175)	(5,614)		6,393
Common Stock Repurchase	—	—		—		—		(50)	(1,625)		(1,625)
Net loss	—	—		—		(98,213)		—	—		(98,213)
Foreign currency translation adjustments	—	—		24,590		—		—	—		24,590
Change in fair value of interest rate swap, net of taxes of $989	—	—		3,609		—		—	—		3,609
Pension adjustment, net of taxes of ($92)	—	—		(251)		—		—	—		(251)
Balance - December 31, 2019	104,043	$	1,441,180	$	(9,208)	$	819,370	(13,080)	$	(185,645)	$	2,065,697


	Common Stock			Preferred Stock			Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total
Six Months Ended December 31, 2020	Shares	Amount		Shares	Amount						Shares	Amount
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	1,429	60,297		—	—		—		—		(131)	(6,816)		53,481

Shares issued in July 2020 underwritten public offering	10,698	438,589		2,300	445,319		—		—		—	—		883,908
Net earnings	—	—		—	—		—		134,166		—	—		134,166
Foreign currency translation adjustments	—	—		—	—		99,591		—		—	—		99,591
Change in fair value of interest rate swap, net of taxes of $630	—	—		—	—		2,299		—		—	—		2,299

Dividends	—	—		—	—		—		(13,435)		—	—		(13,435)
Balance - December 31, 2020	118,043	$	1,985,833	2,300	$	445,319	$	14,507	$	997,283	(13,487)	$	(206,129)	$	3,236,813

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	Common Stock			Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total
Six Months Ended December 31, 2019	Shares	Amount						Shares	Amount
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	1,015	71,050		—		—		(426)	(15,446)		55,604
Common Stock Repurchase	—	—		—		—		(50)	(1,625)		(1,625)
Shares issued and related to Finisar acquisition	26,713	987,707		—		—		—	—		987,707
Net loss	—	—		—		(124,211)		—	—		(124,211)
Foreign currency translation adjustments	—	—		11,571		—		—	—		11,571
Change in fair value of interest rate swap, net of taxes of $989	—	—		3,609		—		—	—		3,609
Pension adjustment, net of taxes of ($69)	—	—		(167)		—		—	—		(167)
Balance - December 31, 2019	104,043	$	1,441,180	$	(9,208)	$	819,370	(13,080)	$	(185,645)	$	2,065,697

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

The condensed consolidated financial statements of II-VI Incorporated (“II-VI”, the “Company”, “we”, “us” or “our”) for the three and six months ended December 31, 2020 and 2019 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation for the periods presented have been included. All adjustments are of a normal recurring nature unless disclosed otherwise. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K dated August 26, 2020. The condensed consolidated results of operations for the three and six months ended December 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet information as of June 30, 2020 was derived from the Company’s audited consolidated financial statements.

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

Note 2. Recently Issued Financial Accounting Standards

Financial Instruments - Credit Losses

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

Note 3. Acquisitions and Investments

Acquisition of Ascatron AB

On August 20, 2020, the Company acquired all of the outstanding shares of Ascatron AB, located in Sweden. The acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform. Purchase price consideration totaled $36.7 million.

preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):


	Previously Reported September 30, 2020		Measurement Period Adjustments (a)		As Adjusted (preliminary)


Assets
Developed technology	$	20,000	$	(3,622)	$	16,378
Goodwill	18,922		2,815		21,738
Other assets	2,511		33		2,543
Total assets acquired	$	41,433	$	(774)	$	40,659

Liabilities
Non-interest bearing liabilities	$	(203)	$	(247)	$	(450)
Deferred tax liability	(4,526)		1,021		(3,505)
Total liabilities assumed	(4,729)		774		(3,955)
Net assets acquired	$	36,704	$	—	$	36,704

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

The goodwill is recorded in the Compound Semiconductors segment and is attributed to the workforce acquired as part of the transaction. The goodwill is non-deductible for income tax purposes. Transaction expenses related to the acquisition totaled $2.0 million for six months ended December 31, 2020 and are included in Selling, General and Administrative expenses in the Condensed Consolidated Statements of Earnings. Technology is being amortized with a weighted average remaining life of approximately 17 years.

The amount of revenues and net earnings from the acquisition included in the Company’s Condensed Consolidated Statements of Earnings for the three and six months ended December 31, 2020 were insignificant.

Purchase of Equity Investment in INNOViON Corporation

On October 1, 2020, II-VI acquired the remaining 6.1% interest in INNOViON Corporation ("Innovion") for $4.4 million. Innovion is a provider of ion implantation services supporting unique capabilities in semiconductor materials processing. This acquisition will add essential elements to the Company's vertically integrated silicon carbide technology platform.

Through the period ended September 30, 2020, the Company held a 93.9% investment in Innovion which was accounted for as an equity method investment. The Company accounted for the acquisition of the remaining equity of Innovion as a step acquisition, which required remeasurement of the Company's previous ownership interest to fair value prior to completing purchase accounting. Using step acquisition accounting the Company increased the value of its previously held equity investment to its fair value of $66.6 million, which resulted in a gain of approximately $7.0 million, recorded in other expense (income), net in the Condensed Consolidated Statement of Operations.

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

Due to the timing of the acquisition, the Company is in the process of measuring the fair value of assets acquired and liabilities assumed, including tangible and intangible assets and related deferred income taxes. The following table presents a preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition ($000):


Assets
Developed technology	$	15,000
Customer lists	10,000
Goodwill	29,478
Property, plant, & equipment	16,556
Right of use asset	10,644
Other assets	12,450
Total assets acquired	$	94,128

Liabilities
Non-interest bearing liabilities	$	(14,050)
Interest bearing liabilities	(3,430)
Deferred tax liabilities	(5,743)
Total liabilities assumed	(23,223)
Net assets acquired	$	70,905

The goodwill is recorded in the Compound Semiconductor segment and is attributed to the workforce acquired as part of the transaction. The goodwill is non-deductible for income tax purposes. Technology is being amortized with a weighted average

remaining life of approximately 16 years. Customer lists are being amortized with a weighted average remaining life of approximately 14 years. Transaction expenses for the six months ended December 31, 2020 were insignificant.

The revenues and net loss from Innovion included in the Company’s Consolidated Statement of Earnings for the three months ended December 31, 2020 was $7.2 million and $1.8 million, respectively.

Note 4. Revenue from Contracts with Customers

The following tables summarize disaggregated revenue by revenue market and product for the three and six months ended December 31, 2020 and 2019 ($000):


	Three Months Ended December 31, 2020
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Commercial
Direct Ship Parts	$	478,887	$	257,187	$	—	$	736,074
Services	3,992		5,078		—		9,070
U.S. Government
Direct Ship Parts	—		35,447		—		35,447
Services	—		5,978		—		5,978
Total Revenues	$	482,879	$	303,690	$	—	$	786,569


	Three Months Ended December 31, 2019
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Commercial
Direct Ship Parts	$	459,253	$	157,848	$	—	$	617,101
Services	1,140		3,297		—		4,437
U.S. Government
Direct Ship Parts	—		40,165		—		40,165
Services	—		4,628		—		4,628
Total Revenues	$	460,393	$	205,938	$	—	$	666,331


	Six Months Ended December 31, 2020
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Commercial
Direct Ship Parts	$	972,816	$	438,102	$	—	$	1,410,917
Services	7,790		9,155		—		16,946
U.S. Government
Direct Ship Parts	—		71,935		—		71,935
Services	—		14,855		—		14,855
Total Revenues	$	980,606	$	534,047	$	—	$	1,514,653


	Six Months Ended December 31, 2019
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Commercial
Direct Ship Parts	$	599,598	$	288,036	$	22,051	$	909,685
Services	2,151		8,989		—		11,140
U.S. Government
Direct Ship Parts	—		77,247		—		77,247
Services	—		8,668		—		8,668
Total Revenues	$	601,749	$	382,940	$	22,051	$	1,006,740

Contracts with the United States (“U.S.”) government disclosed above are through its prime contractors.

Contract Liabilities

Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the six months ended December 31, 2020, the Company recognized revenue of $9.7 million related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2020. The Company had $44.6 million of contract liabilities recorded in the Condensed Consolidated Balance Sheets as of December 31, 2020.

Note 5. Inventories

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


	December 31, 2020		June 30, 2020
Raw materials	$	195,550	$	190,237
Work in progress	326,653		298,577
Finished goods	134,790		130,996
	$	656,993	$	619,810

Note 6. Property, Plant and Equipment

Property, plant and equipment consists of the following ($000):


	December 31, 2020		June 30, 2020
Land and improvements	$	20,381	$	18,396
Buildings and improvements	412,958		345,736
Machinery and equipment	1,432,604		1,352,835
Construction in progress	112,350		111,394
Finance lease right-of-use asset	25,000		25,000
	2,003,293		1,853,361
Less accumulated depreciation	(752,813)		(638,589)
	$	1,250,480	$	1,214,772

Note 7. Goodwill and Other Intangible Assets

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

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	Six Months Ended December 31, 2020
	Photonic Solutions		Compound Semiconductors		Total
Balance-beginning of period	$	1,052,494	$	186,515	$	1,239,009
Goodwill acquired	—		51,216		51,216
Finisar measurement period adjustments	(4,901)		—		(4,901)
Foreign currency translation	4,239		2,821		7,060
Balance-end of period	$	1,051,832	$	240,552	$	1,292,384

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of December 31, 2020 and June 30, 2020 were as follows ($000):


	December 31, 2020						June 30, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Technology	$	477,021	$	(87,401)	$	389,620	$	444,315	$	(68,048)	$	376,267
Trade Names	22,627		(4,963)		17,664		22,369		(3,669)		18,700
Customer Lists	469,155		(115,244)		353,911		456,223		(92,822)		363,401
Other	1,579		(1,579)		—		1,570		(1,570)		—
Total	$	970,382	$	(209,187)	$	761,195	$	924,477	$	(166,109)	$	758,368

Note 8. Debt

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


	December 31, 2020		June 30, 2020
Term A Facility, interest at LIBOR, as defined, plus 1.50%	$	1,163,438	$	1,194,463
Revolving Credit Facility, interest at LIBOR, as defined, plus 1.50%	—		74,000
Debt issuance costs, Term A Facility and Revolving Credit Facility	(28,651)		(32,174)
Term B Facility, interest at LIBOR, as defined, plus 3.50%	—		714,600
Debt issuance costs, Term B Facility	—		(24,747)
0.50% convertible senior notes, assumed in the Finisar acquisition	14,888		14,888
0.25% convertible senior notes	345,000		345,000
0.25% convertible senior notes unamortized discount attributable to cash conversion option and debt issuance costs including initial purchaser discount	(23,835)		(30,688)

Total debt	1,470,840		2,255,342
Current portion of long-term debt	(62,050)		(69,250)
Long-term debt, less current portion	$	1,408,790	$	2,186,092

Senior Credit Facilities

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

The Credit Agreement 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

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

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

The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. In conjunction with the repayment, the Company paid $0.6 million in associated interest and expensed $24.7 million of debt issuance costs related to the Term B Facility.

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

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

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

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

The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company will be obligated to maintain a consolidated interest coverage ratio (as calculated in accordance with the terms of the Credit Agreement) as of the end of each fiscal quarter of not less than 3.00 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 December 31, 2020, the Company was in compliance with all financial covenants under the Credit Agreement.

0.50% Finisar Convertible Notes

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

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

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

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

Holders of approximately $560.1 million in aggregate principal amount of Finisar Notes exercised the repurchase right. The Company repurchased those Finisar Notes on October 23, 2019 for an aggregate consideration of approximately $561.1 million in cash, including accrued interest. No holders of Finisar Notes exercised the related conversion right. The Company borrowed $561.0 million under a delayed draw on its Term Loan A to fund the payment to the holders of Finisar Notes that exercised the repurchase right. As of December 31, 2020, approximately $14.9 million in aggregate principal amount of Finisar Notes remain outstanding.

0.25% Convertible Senior Notes

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

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

The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The initial conversion rate is 21.25 shares of common stock per $1,000 principal amount of II-VI Notes, which is equivalent to an initial conversion price of $47.06 per share of common stock. Throughout the term of the II-VI Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Notes amounted to $556.9 million as of December 31, 2020 and $346.2 million as of June 30, 2020 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended).

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

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

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

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

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

Because the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended December 31, 2020 was equal to or

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greater than 130% of the applicable conversion price on each applicable trading day, the II-VI Notes are convertible at the option of the holders thereof during the fiscal quarter ending March 31, 2021.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.

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

The following tables set forth total interest expense recognized related to the II-VI Notes for the three and six months ended December 31, 2020 and December 31, 2019 ($000):


	Three Months Ended				Six Months Ended
December 31,	2020		2019		2020		2019
0.25% contractual coupon	$	220	$	221	$	441	$	441
Amortization of debt discount and debt issuance costs including initial purchaser discount	3,446		3,291		6,852		6,546
Interest expense	$	3,666	$	3,512	$	7,293	6,987

The effective interest rate on the liability component for both periods presented was 4.5%. The unamortized discount amounted

to $20.8 million as of December 31, 2020 and is being amortized over three years.

Aggregate Availability

The Company had aggregate availability of $448.6 million under its line of credit as of December 31, 2020.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 1.7% and 3.8% for the six months ended December 31, 2020 and 2019, respectively.

Note 9. Income Taxes

The Company’s year-to-date effective income tax rate at December 31, 2020 was 19.1% compared to an effective tax benefit of 10.0% for the same period in 2019. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were primarily due to the impact of the U.S. enacted tax legislation partially offset by research and development incentives in certain jurisdictions and foreign tax credits.

U.S. GAAP prescribes the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements which includes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2020 and June 30, 2020, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $42.3 million and $42.8 million, respectively. The Company has classified $7.4 million of uncertain tax positions as current income tax liabilities and the remaining uncertain tax positions of $34.9 million as noncurrent income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, $38.2 million of the gross unrecognized tax benefits at December 31, 2020 would impact the effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision in the Condensed Consolidated Statements of Earnings (Loss). The amount of accrued interest and penalties included in the gross unrecognized income tax benefit was $4.0 million and $3.8 million at December 31, 2020 and June 30, 2020, respectively. Fiscal years 2017 to 2021 remain open to examination by the U.S. Internal Revenue Service, fiscal years 2015 to 2021 remain open to examination by certain state jurisdictions, and fiscal years 2010 to 2021 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination for certain subsidiary companies in the Philippines for the year 2017; Germany for the years 2012 through 2015; Australia for the years 2011 through 2014; and India for the year 2016. The Company believes its income tax reserves for these tax matters are adequate.

Note 10. Leases

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, the Company considers 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. The Company accounts for non-lease components, such as common area maintenance, as a component of the lease, and includes it in the initial measurement of leased 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 II-VI will exercise that option.

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

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


	Three Months Ended December 31, 2020			Six Months Ended December 31, 2020
Finance Lease Cost
Amortization of right-of-use assets	$	417		$	833
Interest on lease liabilities	319			642
Total finance lease cost	$	736		$	1,475
Operating lease cost	9,547			18,600
Sublease income	368			735
Total lease cost	$	9,915		$	19,340

Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases	$	319		$	642
Operating cash flows from operating leases	9,229			17,692
Financing cash flows from finance leases	278			551

Weighted-Average Remaining Lease Term (in Years)
Finance leases	11.0
Operating leases	7.2

Weighted-Average Discount Rate
Finance leases	5.6		%
Operating leases	6.7		%


	Three Months Ended December 31, 2019		Six Months Ended December 31, 2019
Finance Lease Cost
Amortization of right-of-use assets	$	417	$	833
Interest on lease liabilities	334		671
Total finance lease cost	751		1,504
Operating lease cost	11,073		17,180

Total lease cost	$	11,824	$	18,684

Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases	$	334	$	671
Operating cash flows from operating leases	10,731		16,671
Financing cash flows from finance leases	247		490

Note 11. Equity

Mandatory Convertible Preferred Stock

On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 2,000,000 shares of 6.00% Series A Mandatory Convertible Preferred, no par value per share (“Mandatory Convertible Preferred Stock”), resulting in gross proceeds to II-VI from the offering of $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by the Company (the "Preferred Stock Offering"). In addition, the underwriters had a 30-day option to purchase up to an additional 300,000 shares of Series A Mandatory Convertible Preferred Stock at the applicable public offering price, less underwriting discounts and commissions and solely to cover over-allotments with respect to the preferred stock offering. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Preferred Stock Offering, including the issuance and sale of 2.3 million shares of Mandatory Convertible Preferred Stock.

Upon conversion on the mandatory conversion date, as determined in accordance with the terms of the Mandatory Convertible Preferred Stock, each outstanding share of the Mandatory Convertible Preferred Stock, unless previously converted, will automatically convert into a number of shares of the Company's common stock equal to not more than 4.6512 shares of common stock and not less than 3.8760 shares of common stock (the “Minimum Conversion Rate”), depending on the applicable market value of the 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 the Company's 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 fundamental 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.

The Company recognized $6.9 million of accrued preferred stock dividends during the second quarter of fiscal year 2021, which were presented as other accrued liabilities on the Condensed Consolidated Balance Sheet as of December 31, 2020.

The following table presents dividends per share and dividends recognized for the three and six months ended December 31, 2020:


	Three Months Ended December 31, 2020		Six Months Ended December 31, 2020
Dividends per share	$	3.00	$	5.80
Series A Mandatory Convertible Preferred Stock dividends ($000)	$	6,900	$	13,340

Common Stock Offering

On July 2, 2020, II-VI announced the pricing of an underwritten public offering of 9,302,235 shares of its common stock at a public offering price of $43.00 per share, resulting in gross proceeds to II-VI from the offering of approximately $400 million, before deducting the underwriting discounts and commissions and offering expenses payable by II-VI (the “Common Stock Offering”). In addition, the underwriters had a 30-day option to purchase up to an additional 1,395,335 shares of its common stock at the applicable public offering price, less underwriting discounts and commissions. On July 2, 2020, the underwriters exercised the option in full, raising an additional approximately $60 million in gross proceeds. On July 7, 2020, the Company closed the Common Stock Offering, including the issuance and sale of approximately 10.7 million shares of Common Stock.

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Note 12. Earnings Per Share

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

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 three and six months ended December 31, 2020, 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, as well as the shares of the Company's common stock issuable upon conversion of outstanding convertible debt.

Potentially dilutive shares whose effect would have been antidilutive are excluded from the computation of diluted earnings (loss) per common share. For the three and six months ended December 31, 2020, diluted earnings (loss) per share excluded the potentially dilutive effect of the Mandatory Convertible Preferred Stock (under the If-Converted method), as its effect was anti-dilutive.

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):


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2019			2020		2019
Numerator
Net earnings (loss)	$	87,900	$	(98,213)		$	134,166	$	(124,211)
Series A Mandatory Convertible Preferred Stock dividends	(6,900)		—			(13,340)		—
Basic earnings (loss) available to common shareholders	$	81,000	$	(98,213)		$	120,826	$	(124,211)

Effect of dilutive securities:
Add back interest on Convertible Senior Notes Due 2022	$	3,066	$	—		$	6,132	$	—

Diluted earnings (loss) available to common shareholders	$	84,066	$	(98,213)		$	126,958	$	(124,211)

Denominator
Weighted average shares	104,092		90,886			103,450		78,428
Effect of dilutive securities:
Common stock equivalents	3,630		—			3,034		—
0.25% Convertible Senior Notes due 2022	7,331		—			7,331		—

Diluted weighted average common shares	115,053		90,886			113,815		78,428

Basic earnings (loss) per common share	$	0.78	$	(1.08)		$	1.17	$	(1.58)

Diluted earnings (loss) per common share	$	0.73	$	(1.08)		$	1.12	$	(1.58)

The following table presents potential shares of the Company's common stock excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive (000):

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	Three Months Ended December 31,		Six Months Ended December 31,
	2020	2019	2020	2019
Series A Mandatory Convertible Preferred Stock	8,915	—	8,922	—
0.25% Convertible Senior Notes due 2022	—	7,331	—	7,331
Common stock equivalents	21	3,392	225	2,714
0.50% Finisar Convertible Notes	—	391	—	502
Total anti-dilutive shares	8,936	11,114	9,147	10,547

Note 13. Segment 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 financial performance.

The Company reports its financial results in the following two segments: (i) Compound Semiconductors, and (ii) Photonic Solutions, 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 segments are managed separately due to the market, production requirements and facilities unique to each segment.

Both the acquisitions of Ascatron and Innovion are presented within the Compound Semiconductors segment since the dates of their acquisitions.

The accounting policies are consistent across each segment. To the extent possible, the Company’s corporate expenses and assets are allocated to the segments. Unallocated and Other includes eliminating inter-segment sales and transfers, the results of Finisar since the acquisition date through September 30, 2019, and transaction costs related to the Finisar transaction.

The following tables summarize selected financial information of the Company’s operations by segment ($000):


	Three Months Ended December 31, 2020
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	482,879	$	303,690	$	—	$	786,569
Inter-segment revenues	8,441		64,812		(73,253)		—
Operating income	48,439		70,277		—		118,716
Interest expense	—		—		—		(15,585)
Other income, net	—		—		—		3,153
Income taxes	—		—		—		(18,383)
Net earnings	—		—		—		87,900
Depreciation and amortization	39,764		27,437		—		67,200
Expenditures for property, plant & equipment	24,853		20,684		—		45,537
Segment assets	3,700,184		1,946,379		—		5,646,563
Goodwill	1,051,832		240,552		—		1,292,384

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	Three Months Ended December 31, 2019
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	460,393	$	205,938	$	—	$	666,331
Inter-segment revenues	22,190		66,123		(88,313)		—
Operating income (loss)	(60,937)		(8,835)		(8,808)		(78,580)
Interest expense	—		—		—		(28,390)
Other expense, net	—		—		—		(487)
Income taxes	—		—		—		9,242
Net loss	—		—		—		(98,213)
Depreciation and amortization	55,174		26,978		—		82,152
Expenditures for property, plant & equipment	21,313		33,339		—		54,652


	Six Months Ended December 31, 2020
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	980,606	$	534,047	$	—	$	1,514,653
Inter-segment revenues	15,657		131,899		(147,556)		—
Operating income (loss)	98,873		120,972		—		219,845
Interest expense	—		—		—		(32,799)
Other expense, net	—		—		—		(21,186)
Income taxes	—		—		—		(31,694)
Net earnings	—		—		—		134,166
Depreciation and amortization	78,451		53,435		—		131,886
Expenditures for property, plant & equipment	46,087		33,242		—		79,329


	Six Months Ended December 31, 2019
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	601,749	$	382,940	$	22,051	$	1,006,740
Inter-segment revenues	24,840		80,056		(104,896)		—
Operating income (loss)	(47,913)		17,686		(66,827)		(97,054)
Interest expense	—		—		—		(35,358)
Other expense, net	—		—		—		(5,566)
Income taxes	—		—		—		13,766
Net loss	—		—		—		(124,211)
Depreciation and amortization	61,990		43,367		3,743		109,100
Expenditures for property, plant & equipment	30,702		46,822		2,764		80,288

Note 14. Share-Based Compensation

The Company’s Board of Directors adopted the II-VI Incorporated 2018 Omnibus Incentive Plan (the “Plan”), which was approved by the Company’s shareholders. The Plan provides for the grant of performance-based cash incentive awards, non-qualified stock options, stock appreciation rights, restricted share awards, restricted share units, deferred share awards, performance share awards and performance share units to employees, officers and directors of the Company. The maximum number of shares of the Company’s Common Stock authorized for issuance under the Plan is limited to 3,550,000 shares of Common Stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, which requires the recognition of grant-date fair value of share-based compensation in net earnings (loss) and over the requisite service period of the individual grantees, which generally equals the vesting period. The Company accounts for cash-based stock appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as liability awards, in accordance with applicable accounting standards.

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Share-based compensation expense for the periods indicated was as follows ($000):


	Three Months Ended				Six Months Ended
December 31,	2020		2019		2020		2019
Stock options and cash-based stock appreciation rights	$	5,414	$	2,989	$	7,334	$	4,659
Restricted share awards and cash-based restricted share unit awards	15,773		12,871		25,883		25,602
Performance share awards and cash-based performance share unit awards	6,892		3,400		10,364		5,159
	$	28,079	$	19,260	$	43,581	$	35,420

Note 15. Fair Value of Financial Instruments

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

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

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

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

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

The Company entered into an interest rate swap with a notional amount of $1,075 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate of 1.52%. The Company receives payments with a floor of 0.00%. The interest rate swap agreement has an effective date of November 24, 2019, with an expiration date of September 24, 2024. The initial notional amount of the interest rate swap is scheduled to decrease to $825 million in June 2022 and will remain at that amount through the expiration date. The Company designated this instrument as a cash flow hedge and deemed the hedge relationship effective at inception of the contract. The fair value of the interest rate swap of $41.8 million is recognized in the Condensed Consolidated Balance Sheet within other liabilities as of December 31, 2020. Changes in fair value are recorded within accumulated other comprehensive income (loss) on the Condensed Consolidated Balance Sheet and reclassified into the Condensed Consolidated Statement 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 Condensed Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations. The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The interest rate swap is classified as a Level 2 item within the fair value hierarchy.

The Company estimated the fair value of the II-VI Notes and Finisar Notes based on quoted market prices as of the last trading day prior to December 31, 2020; however, the II-VI Notes and Finisar Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the II-VI Notes and Finisar Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the II-VI Notes and Finisar Notes is net of unamortized discount and issuance costs. See Note 8. Debt for details on the Company’s debt facilities.

The fair value and carrying value of the II-VI Notes and Finisar Notes were as follows at December 31, 2020 ($000):

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	Fair Value		Carrying Value
II-VI Notes	$	575,481	$	321,165
Finisar Notes	14,665		14,888

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

Note 16. 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 quarter ended December 31, 2020. Through December 31, 2020, the Company has cumulatively purchased 1,416,587 shares of its Common Stock pursuant to the Program for approximately $22.3 million.

Note 17. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) (“AOCI”) by component, net of tax, for the six months ended December 31, 2020 were as follows ($000):


	Foreign Currency Translation Adjustment		Interest Rate Swap		Defined Benefit Pension Plan		Total Accumulated Other Comprehensive Income (Loss)
AOCI - June 30, 2020	$	(31,596)	$	(44,085)	$	(11,702)	$	(87,383)
Other comprehensive income before reclassifications	99,591		(5,083)		—		94,508
Amounts reclassified from AOCI	—		7,382		—		7,382
Net current-period other comprehensive income	99,591		2,299		—		101,890
AOCI - December 31, 2020	$	67,995	$	(41,786)	$	(11,702)	$	14,507

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

Although our management considers the expectations and assumptions on which the forward-looking statements in this Quarterly Report on Form 10-Q are based to have a reasonable basis, there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct. In addition to general industry and global economic conditions, factors that could cause actual results to differ materially from those discussed in the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to: (i) the failure of any one or more of the expectations or assumptions on which such forward-looking statements are based to prove to be correct; and (ii) the risks relating to forward-looking statements and other “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 and in the Company's other reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or developments, or otherwise.

In addition, we operate in a highly competitive and rapidly changing environment; new risk factors can arise, and it is not possible for management to anticipate all such risk factors, or to assess the impact of all such risk factors on our business or the

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extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. The forward-looking statements included in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date of this Report. We do not assume any obligation, and do not intend to, update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by the securities laws. Investors should, however, consult any further disclosures of a forward-looking nature that the Company may make in its subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or other disclosures filed with or furnished to the SEC.

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

Overview

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

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

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

On July 7, 2020, the Company closed its underwritten public offering and sale of 2.3 million shares of Series A Mandatory Convertible Preferred Stock, as well as its underwritten public offering and sale of approximately 10.7 million shares of its common stock. See Note 11. Equity, to our Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for further details.

As we grow, we are focused on scaling our company and deriving the continued benefits of vertical integration as we strive to be a best in class competitor in all of our highly competitive markets. The Company may elect to change the way in which the Company operates or is organized in the future to enable the most efficient implementation of our strategy. Within this quarterly report on Form 10-Q for the three and six months ended December 31, 2020, the results of Innovion and Ascatron have been allocated to the Compound Semiconductors Segment.

Critical Accounting Estimates

The preparation of financial statements and related disclosures are in conformity with accounting principles generally accepted in the United States of America and the Company’s discussion and analysis of its financial condition and results of operations require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K dated August 26, 2020 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.

New Accounting Standards

See Note 2. Recent Accounting Pronouncements to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

COVID-19 Update

On March 11, 2020, the World Health Organization designated the novel coronavirus known as COVID-19 as a global pandemic. In response to the global spread of COVID-19, governments at various levels have implemented unprecedented response measures. Overall, the COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. Certain of the measures taken in response to the COVID-19

pandemic have adversely affected, and could in the future materially adversely impact, our business, results of operations, financial condition and stock price.

In particular, the COVID-19 pandemic is having a significant impact on global markets due to resulting supply chain and production disruptions, workforce and travel restrictions, quarantines and shelter-in-place orders, reduced spending and other similar measures implemented by many companies and other factors. Following the initial outbreak of COVID-19, we experienced temporary disruptions to our operations in China. While these operations have returned to active service, most of our administrative facilities continue working remotely.

Our focus has been on the protection of the health and safety of our employees and business partners. In our facilities, we have deployed new safety measures, including use of protective equipment, social distancing, mandatory COVID-19 testing, contact tracing, cleaning protocols for high touch areas, foot traffic flow, air filtering and flow, guidance to employees on matters such as effective hygiene and disinfection, limited and remote access working where feasible, and strict restrictions on non-essential employees from entering our facilities. We also are prioritizing efforts to understand and support the changing business needs of our customers and suppliers in light of restrictions that are applicable to them.

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

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

For additional information regarding the risks that we face as a result of the COVID-19 pandemic, please see Item 1A, Risk Factors, in the Annual Report on Form 10-K for the year ended June 30, 2020. Further, to the extent the COVID-19 pandemic adversely affects our business and financial results, it also may have the effect of heightening many of the other risks described in the risk factors included in the Annual Report on Form 10-K for the year ended June 30, 2020 and in our subsequent filings with the Securities and Exchange Commission.

Results of Operations ($ in millions, except per share data)

The following tables set forth select items from our Condensed Consolidated Statements of Earnings (Loss) for the three and six months ended December 31, 2020 and 2019:


	Three Months Ended December 31, 2020				Three Months Ended December 31, 2019
			% of Revenues				% of Revenues
Total revenues	$	786.6	100.0	%	$	666.3	100.0	%
Cost of goods sold	464.1		59.0		518.0		77.7
Gross margin	322.5		41.0		148.3		22.3
Operating expenses:
Internal research and development	84.9		10.8		107.7		16.2
Selling, general and administrative	118.9		15.1		119.2		17.9
Interest and other, net	12.4		1.6		28.9		4.3
Earnings (loss) before income taxes	106.3		13.5		(107.5)		(16.1)
Income taxes	18.4		2.3		(9.2)		(1.4)
Net earnings (loss)	$	87.9	11.2	%	$	(98.2)	(14.7)	%

Diluted earnings (loss) per share	$	0.73			$	(1.08)


	Six Months Ended December 31, 2020				Six Months Ended December 31, 2019
			% of Revenues				% of Revenues
Total revenues	$	1,514.7	100.0	%	$	1,006.7	100.0	%
Cost of goods sold	905.6		59.8		735.3		73.0
Gross margin	609.1		40.2		271.4		27.0
Operating expenses:
Internal research and development	163.1		10.8		143.8		14.3
Selling, general and administrative	226.1		14.9		224.7		22.3
Interest and other, net	54.0		3.6		40.9		4.1
Earnings (loss) before income taxes	165.9		11.0		(138.0)		(13.7)
Income taxes	31.7		2.1		(13.8)		(1.4)
Net earnings (loss)	$	134.2	8.9	%	$	(124.2)	(12.3)	%

Diluted earnings (loss) per share	$	1.12			$	(1.58)

Consolidated

Revenues. Revenues for the three months ended December 31, 2020 increased 18% to $786.6 million, compared to $666.3 million for the same period last fiscal year. Revenues for the six months ended December 31, 2020 increased 50% to $1,514.7 million, compared to $1,006.7 million for the same period last fiscal year. During the three and six months ended December 31, 2020, Finisar Corporation ("Finisar") operations contributed $368.0 million and $705.6 million, respectively, in revenues, as compared to $306.6 million and $328.8 million in the same periods of the prior fiscal year. In addition to revenue contributed by Finisar, the Company realized increased revenues within its product lines for consumer electronics and communications.

Gross margin. Gross margin for the three months ended December 31, 2020 was $322.5 million, or 41.0% of total revenues, compared to $148.3 million, or 22.3% of total revenues, for the same period last fiscal year. Gross margin for the six months ended December 31, 2020 was $609.1 million, or 40.2% of total revenues, compared to $271.4 million, or 27.0% of total revenues, for the same period last fiscal year. The improvement in the gross margin of 1,870 and 1,320 basis points for the three and six months ended December 31, 2020 compared to the same period last year was driven by $80.6 million and $87.7 million of additional cost of goods sold related to the fair value adjustment of the acquired Finisar inventory recorded in the three and six months ended December 31, 2019, respectively, in addition to favorable product mix in the Compound Semiconductors segment driven by higher margins on the Company's products for consumer electronics.

Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended December 31, 2020 were $84.9 million, or 10.8% of revenues, compared to $107.7 million, or 16.2% of revenues, for the same period last fiscal year. IR&D expenses for the six months ended December 31, 2020 were $163.1 million, or 10.8% of revenue, compared to $143.8 million, or 14.3% of revenues, for the same period last fiscal year. Decrease in IR&D as a percentage of revenue over prior year were the result of qualification of the Company's Sherman, Texas wafer fabrication facility.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2020 were $118.9 million, or 15.1% of revenues, compared to $119.2 million, or 17.9% of revenues, for the same period last fiscal year. SG&A expenses for the six months ended December 31, 2020 were $226.1 million, or 14.9% of revenues, as compared to $224.7 million, or 22.3% of revenues, for the same period last fiscal year. The decrease in SG&A as a percentage of revenue for the three and six-month periods compared to the same periods last fiscal year was primarily the result of transaction costs incurred in the prior year due to the Finisar acquisition. During the six months ended December 31, 2020, the Company incurred $7.6 million of transaction related expenses, compared to $40.2 million of transaction related expenses incurred in the six months ended December 31, 2019.

Interest and other, net. Interest and other, net for the three months ended December 31, 2020 was expense of $12.4 million, compared to expense of $28.9 million for the same period last fiscal year. Interest and other, net for the six months ended December 31, 2020 was expense of $54.0 million, compared to expense of $40.9 million for the same period last fiscal year. Included in interest and other, net, were interest expense on borrowings, equity earnings from unconsolidated investments, foreign currency gains and losses, expense of debt issuance costs, and interest income on excess cash balances. For the three months ended December 31, 2020, interest expense decreased by $16.5 million in comparison to the same period last fiscal year, driven by lower levels of debt outstanding subsequent to the payment of the Term B facility in the first quarter of 2021. For the six months ended December 31, 2020 interest and other, net increased by $13.1 million compared to the same period last fiscal year, driven by $24.7 million of debt issuance costs recognized in conjunction with the repayment of the Company's Term B Facility.

There were foreign currency losses of $12.2 million for the current six-month period due to the volatility in the foreign exchange market, compared to $4.6 million of losses for the six months ended December 31, 2019. In addition, within interest and other, net, the Company recognized a gain of $7.0 million in the second quarter of fiscal year 2021 in association with the acquisition of Innovion.

Income taxes. The Company’s year-to-date effective income tax rate at December 31, 2020 was 19.1%, compared to an effective tax benefit of 10% for the same period last fiscal year. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were primarily due to the impact of the U.S. enacted tax legislation, partially offset by research and development incentives in certain jurisdictions and foreign tax credits.

Segment Reporting

Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from net earnings (loss) in that operating income excludes certain operational expenses included in other expense (income) – net as reported. Management believes operating income to be a useful measure for investors, as it reflects the results of segment performance over which management has direct control and is used by management in its evaluation of segment performance. See Note 13. Segment Reporting, to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s reportable segments and for the reconciliation of the Company’s operating income to net earnings (loss), which is incorporated herein by reference.

Photonic Solutions ($ in millions)


	Three Months Ended December 31,				% Increase	Six Months Ended December 31,				% Increase
	2020		2019			2020		2019
Revenues	$	482.9	$	460.4	5%	$	980.6	$	601.7	63%
Operating income (loss)	$	48.4	$	(60.9)	179%	$	98.9	$	(47.9)	306%

Revenues for the three months ended December 31, 2020 increased 5% to $482.9 million, compared to $460.4 million for the same period last fiscal year. Revenues for the six months ended December 31, 2020 increased 63% to $980.6 million, compared to $601.7 million for the same period last fiscal year. The increase in revenue during the three months ended December 31, 2020, was primarily due to sustained demand for products in communications. The increase in revenues during the six months ended December 31, 2020 was primarily due to the acquisition of Finisar, which contributed $319.2 million in incremental revenue for the six months ended December 31, 2020, as compared to prior year, in addition to the sustained demand for products in communications.

Operating income for the three months ended December 31, 2020 increased 179% to income of $48.4 million, compared to an operating loss of $(60.9) million for the same period last fiscal year. Operating income for the six months ended December 31, 2020 increased 306% to income of $98.9 million, compared to an operating loss of $(47.9) million for the same period last fiscal year. The increase in operating income during the current six-month period compared to the same period last fiscal year was primarily driven by the incremental margin realized from the increased revenues during the current year, product mix towards higher margin profiles, and the realization of synergies and plant efficiency associated with the Finisar acquisition. Additionally, the six months ended December 31, 2019 included acquisition related expenses of $80.7 million related to the fair market value step-up of inventory.

Compound Semiconductors ($ in millions)


	Three Months Ended December 31,				% Increase	Six Months Ended December 31,				% Increase
	2020		2019			2020		2019
Revenues	$	303.7	$	205.9	47%	$	534.0	$	382.9	39%
Operating income (loss)	$	70.3	$	(8.8)	895%	$	121.0	$	17.7	584%

Revenues for the three months ended December 31, 2020 for Compound Semiconductors increased 47% to $303.7 million, compared to revenues of $205.9 million for the same period last fiscal year. Revenues for the six months ended December 31, 2020 for Compound Semiconductors increased 39% to $534.0 million, compared to $382.9 million for the same period last fiscal year. The increase in revenues during the three and six months ended December 31, 2020 primarily related to the sharp increase in product shipments addressing the consumer market.

Operating income for the three months ended December 31, 2020 increased 895% to $70.3 million, compared to an operating loss of $(8.8) million for the same period last fiscal year. Operating income for the six months ended December 31, 2020 increased 584% to $121.0 million, compared to $17.7 million for the same period last fiscal year. The increase in operating income during the three and six months ended December 31, 2020, compared to the same period last fiscal year was primarily driven by a sharp increase in product shipments addressing the consumer market. In addition, the prior year three and six months ended, included unabsorbed operating costs incurred at the segment's Sherman, Texas wafer fabrication facility during its qualification phase.

Liquidity and Capital Resources

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

Sources (uses) of Cash (millions):


	Six Months Ended Dec 31,
	2020		2019
Net cash provided by operating activities	$	355.7	$	56.3
Net proceeds from equity issuance	883.9		—
Effect of exchange rate changes on cash and cash equivalents and other items	26.3		1.7
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan	22.4		3.1
Proceeds on long-term borrowings	—		2,131.0
Payments on Finisar Notes	—		(560.1)
Debt issuance costs	—		(63.5)
Common stock repurchases	—		(1.6)
Payments under prior term loan and credit facility	—		(176.6)
Payments under new long-term borrowings and credit facility	(819.6)		(83.3)
Additions to property, plant & equipment	(79.3)		(80.3)
Purchases of businesses, net of cash acquired	(34.4)		(1,036.6)
Payments in satisfaction of employees' minimum tax obligations	(6.9)		(15.0)
Payment of dividends	(6.5)		—
Other items	(0.2)		(3.0)

Net cash provided by operating activities:

Net cash provided by operating activities was $355.7 million during the current six-month period compared to $56.3 million of cash used by operating activities during the same period last fiscal year. The increase in cash flows provided by operating activities during the six months ended December 31, 2020 compared to the same period last fiscal year was primarily driven by additional net earnings of $258.4 million in the six months ended December 31, 2020 compared to the same period last fiscal

year. Lower earnings in the prior year resulted from acquisition-related expenses incurred for the acquisition of Finisar. Acquisition-related expenses include transaction expenses, and expensing of the fair value write-up of acquired inventory. Additional drivers of increased cash flow from operations over the prior year included improved working capital during the current quarter.

Net cash used in investing activities:

Net cash used in investing activities was $113.8 million for the six months ended December 31, 2020, compared to net cash used of $1,118.0 million for the same period last fiscal year. Net cash used in investing activities during the current period primarily included $34.4 million for net cash paid for the acquisitions of Ascatron AB and INNOViON Corporation and $79.3 million of capital expenditures to continue to increase capacity to meet the growing demand for the Company’s product portfolio. Net cash used in investing activities from the six-month period ended December 31, 2019 was primarily used to fund the Finisar acquisition.

Net cash provided by financing activities:

Net cash provided by financing activities was $72.8 million for the six months ended December 31, 2020, compared to net cash provided by financing activities of $1,232.1 million for the same period last fiscal year. Net cash provided by financing activities was primarily impacted by $883.9 million of net proceeds from the Company's equity issuance in July 2020, offset by cash used to repay borrowings of $819.6 million.

Senior Credit Facilities

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

The Credit Agreement 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”),

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

The Term B Facility was repaid in full by the Company subsequent to the public offerings that closed on July 7, 2020. Additional information regarding the underwritten public offering is set forth in Note 11.

Additional information regarding the Senior Credit Facilities and certain of the Company's other indebtedness is set forth in Note 8. Debt to our unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISKS

The Company is exposed to market risks arising from adverse changes in foreign currency exchange rates. In the normal course of business, the Company uses a variety of techniques and derivative financial instruments as part of its overall risk management strategy, which is primarily focused on its exposure in relation to the Japanese Yen, Chinese Renminbi, Swiss Franc, Euro, and the Malaysian Ringgit. No significant changes have occurred in the techniques and instruments used.

Interest Rate Risks

As of December 31, 2020, the Company’s total borrowings include variable rate borrowings, which exposes the Company to changes in interest rates. On November 24, 2019, the Company entered into an interest rate swap contract to limit the exposure of its variable interest rate debt by effectively converting it to fixed interest rate debt. If the Company had not effectively

hedged its variable rate debt, a change in the interest rate of 100 basis points on these variable rate borrowings would have resulted in additional interest expense of $3.1 million and $6.4 million for the three and six months ended December 31, 2020.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer and Treasurer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

No changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) were implemented during the Company’s most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are involved from time to time in various claims, lawsuits, and regulatory proceedings incidental to its business. The resolution of each of these matters is subject to various uncertainties, and it is possible that these matters may be resolved unfavorably to the Company. Management believes, after consulting with legal counsel, that the ultimate liabilities, if any, resulting from these legal and regulatory proceedings will not materially affect the Company’s financial condition, liquidity or results of operations.

Item 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2020, any of which could materially affect our business, financial condition or future results. Those risk factors are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. ISSUER PURCHASES OF EQUITY SECURITIES

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. As of December 31, 2020, the Company has cumulatively purchased 1,416,587 shares of its Common Stock pursuant to the Program for approximately $22.3 million. The dollar value of shares that may yet be purchased under the Program is approximately $27.7 million.

The following table sets forth repurchases of our Common Stock during the quarter ended December 31, 2020:


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Dollar Value of Shares That May Yet be Purchased Under the Plan or Program
October 1, 2020 to October 31, 2020	2,841		$	44.11	—	$	27,658,759
November 1, 2020 to November 30, 2020	2,949	(1)	$	61.67	—	$	27,658,759
December 1, 2020 to December 31, 2020	9,032	(1)	$	70.33	—	$	27,658,759
Total	14,822		$	63.58	—

(1)Represents shares of Common Stock transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock awards.

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Item 6. EXHIBITS

Exhibit
Number

Description of Exhibit

Reference

31.01

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith.

31.02

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith.

32.01

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith.

32.02

Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	II-VI INCORPORATED
	(Registrant)

Date: February 9, 2021	By:	/s/ Vincent D. Mattera, Jr.
		Vincent D. Mattera, Jr Chief Executive Officer

Date: February 9, 2021	By:	/s/ Mary Jane Raymond
		Mary Jane Raymond Chief Financial Officer and Treasurer


Date: February 9, 2021	By:	/s/ Vincent D. Mattera, Jr.
		Vincent D. Mattera, Jr. Chief Executive Officer