Coherent 10Q 2022 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________________________

FORM 10-Q

________________________________________________________________


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

For the quarterly period ended March 31, 2022


☐			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 May 6, 2022, 106,456,567 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 – March 31, 2022 and June 30, 2021 (Unaudited)	3
	Condensed Consolidated Statements of Earnings – Three and nine months ended March 31, 2022 and 2021 (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended March 31, 2022 and 2021 (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows – Nine months ended March 31, 2022 and 2021 (Unaudited)	7
	Condensed Consolidated Statements of Shareholders’ Equity and Mezzanine Equity – Three and nine months ended March 31, 2022 and 2021 (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37

Item 6.	Exhibits	38

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

II-VI Incorporated and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

($000)


	March 31, 2022		June 30, 2021
Assets
Current Assets
Cash, cash equivalents, and restricted cash	$	2,600,315	$	1,591,892
Accounts receivable - less allowance for doubtful accounts of $2,899 at March 31, 2022 and $924 at June 30, 2021	653,095		658,962
Inventories	879,510		695,828
Prepaid and refundable income taxes	16,032		13,095
Prepaid and other current assets	84,847		67,617
Total Current Assets	4,233,799		3,027,394
Property, plant & equipment, net	1,320,191		1,242,906
Goodwill	1,292,649		1,296,727
Other intangible assets, net	657,590		718,460

Deferred income taxes	38,708		33,498
Other assets	224,259		193,665
Total Assets	$	7,767,196	$	6,512,650
Liabilities, Mezzanine Equity and Shareholders' Equity
Current Liabilities
Current portion of long-term debt	$	1,383,959	$	62,050
Accounts payable	361,533		294,486
Accrued compensation and benefits	141,461		181,491
Operating lease current liabilities	28,050		25,358
Accrued income taxes payable	35,508		20,295
Other accrued liabilities	173,370		145,909
Total Current Liabilities	2,123,881		729,589
Long-term debt	928,745		1,313,091
Deferred income taxes	74,523		73,962
Operating lease liabilities	115,230		125,541
Other liabilities	140,641		138,119
Total Liabilities	3,383,020		2,380,302
Mezzanine Equity
Series B redeemable convertible preferred stock, no par value, 5% cumulative; authorized - 215,000 shares; issued - 75,000 shares at March 31, 2022 and June 30, 2021; redemption value - $788,326 and $759,583, respectively	756,411		726,178
Shareholders' Equity
Series A preferred stock, no par value, 6% cumulative; authorized - 5,000,000 shares; issued - 2,300,000 shares at March 31, 2022 and June 30, 2021	445,319		445,319
Common stock, no par value; authorized - 300,000,000 shares; issued - 120,319,353 shares at March 31, 2022; 119,126,585 shares at June 30, 2021	2,045,850		2,028,273
Accumulated other comprehensive income	48,117		14,267
Retained earnings	1,321,779		1,136,777
	3,861,065		3,624,636
Treasury stock, at cost; 13,868,570 shares at March 31, 2022 and 13,640,555 shares at June 30, 2021	(233,300)		(218,466)
Total Shareholders' Equity	3,627,765		3,406,170
Total Liabilities, Mezzanine Equity and Shareholders' Equity	$	7,767,196	$	6,512,650

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

($000, except per share data)


	Three Months Ended March 31,
	2022		2021
Revenues	$	827,724	$	783,232

Costs, Expenses, and Other Expense (Income)
Cost of goods sold	506,051		493,242
Internal research and development	96,895		83,231
Selling, general and administrative	118,009		121,678
Interest expense	43,499		13,034
Other expense (income), net	241		(21,432)
Total Costs, Expenses, & Other Expense (Income)	764,695		689,753

Earnings Before Income Taxes	63,029		93,479

Income Tax Expense	14,027		12,387

Net Earnings	$	49,002	$	81,092




Less: Dividends on Preferred Stock	$	17,148	$	7,013
Net Earnings available to the Common Shareholders	$	31,854	$	74,079

Basic Earnings Per Share	$	0.30	$	0.71

Diluted Earnings Per Share	$	0.28	$	0.66

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

($000, except per share data)


	Nine Months Ended March 31,
	2022		2021
Revenues	$	2,429,654	$	2,297,885

Costs, Expenses, and Other Expense (Income)
Cost of goods sold	1,490,190		1,418,219
Internal research and development	281,189		246,337
Selling, general and administrative	358,234		328,403
Interest expense	72,752		45,833
Other expense (income), net	(5,535)		(246)
Total Costs, Expenses, & Other Expense (Income)	2,196,830		2,038,546

Earnings Before Income Taxes	232,824		259,339

Income Tax Expense	41,701		44,081

Net Earnings	$	191,123	$	215,258




Less: Dividends on Preferred Stock	$	50,933	$	20,353
Net Earnings available to the Common Shareholders	$	140,190	$	194,905

Basic Earnings Per Share	$	1.32	$	1.88

Diluted Earnings Per Share	$	1.22	$	1.78

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

($000)


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Net earnings	$	49,002	$	81,092	$	191,123	$	215,258
Other comprehensive income:
Foreign currency translation adjustments	327		(18,400)		(11,461)		81,191
Change in fair value of interest rate swap, net of taxes of $6,519 and $9,967 for the three and nine months ended March 31, 2022, respectively, and $2,299 and $2,929 for the three and nine months ended March 31, 2021, respectively	23,804		8,394		36,395		10,693
Change in fair value of interest rate cap, net of taxes of $2,370 for the three and nine months ended March 31, 2022	8,916		—		8,916		—
Comprehensive income	$	82,049	$	71,086	$	224,973	$	307,142

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

($000)


	Nine Months Ended March 31,
	2022		2021
Cash Flows from Operating Activities
Net earnings	$	191,123	$	215,258
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	153,714		138,300
Amortization	59,820		61,570
Share-based compensation expense	57,424		54,417
Amortization of discount on convertible debt and debt issuance costs	12,159		15,512
Debt extinguishment costs	—		24,747
Unrealized losses (gains) on foreign currency remeasurements and transactions	(912)		4,260
Earnings from equity investments	(1,641)		(2,011)
Deferred income taxes	(8,917)		(2,959)

Increase (decrease) in cash from changes in (net of effect of acquisitions):
Accounts receivable	3,764		(8,454)
Inventories	(184,073)		(27,155)
Accounts payable	27,056		(2,320)

Income taxes	19,957		(7,592)
Accrued compensation and benefits	(40,030)		(16,030)
Other operating net assets (liabilities)	(13,437)		(691)
Net cash provided by operating activities	276,007		446,852
Cash Flows from Investing Activities
Additions to property, plant & equipment	(195,991)		(105,331)
Purchases of businesses, net of cash acquired	—		(34,431)




Other investing activities	(5,750)		(1,057)
Net cash used in investing activities	(201,741)		(140,819)
Cash Flows from Financing Activities
Proceeds from issuance of common shares	—		460,000
Proceeds from issuance of Series A preferred shares	—		460,000
Proceeds from issuance of Series B preferred shares	—		750,000
Proceeds from issuance of Senior Notes	990,000		—




Payments on Finisar Notes	(14,888)		—

Payments on borrowings under Term A Facility	(46,538)		(121,538)
Payments on borrowings under Term B Facility	—		(714,600)
Payments on borrowings under Revolving Credit Facility	—		(74,000)
Debt issuance costs	(10,197)		—
Equity issuance costs	—		(58,596)
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan	17,177		31,562

Payments in satisfaction of employees' minimum tax obligations	(14,948)		(8,253)
Payment of dividends	(27,608)		(13,419)
Other financing activities	(1,715)		(1,967)
Net cash provided by financing activities	891,283		709,189
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	42,874		27,042
Net increase in cash, cash equivalents, and restricted cash	1,008,423		1,042,264
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period	1,591,892		493,046
Cash, Cash Equivalents, and Restricted Cash at End of Period	$	2,600,315	$	1,535,310
Cash paid for interest	$	24,158	$	17,963
Cash paid for income taxes	$	34,757	$	53,696
Additions to property, plant & equipment included in accounts payable	$	71,477	$	21,650

- See notes to condensed consolidated financial statements.

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II-VI Incorporated and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity and Mezzanine Equity (Unaudited)

($000, including share amounts)


	Common Stock			Preferred Stock			Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total		Mezzanine Equity
	Shares	Amount		Shares	Amount						Shares	Amount				Preferred Shares	Amount
Balance - June 30, 2021	119,127	$	2,028,273	2,300	$	445,319	$	14,267	$	1,136,777	(13,640)	$	(218,466)	$	3,406,170	75	$	726,178
Share-based and deferred compensation activities	844	30,567		—	—		—		—		(200)	(12,935)		17,632		—	—


Net Earnings	—	—		—	—		—		74,464		—	—		74,464		—	—
Foreign currency translation adjustments	—	—		—	—		(14,381)		—		—	—		(14,381)		—	—
Change in fair value of interest rate swap, net of taxes of $734	—	—		—	—		2,681		—		—	—		2,681		—	—
Accretion to redemption value of Series B shares issued in March 2021	—	—		—	—		—		(478)		—	—		(478)		—	478

Dividends	—	—		—	—		—		(16,604)		—	—		(16,604)		—	9,704
Adjustment for ASU 2020-06	—	(56,388)		—	—		—		44,916		—	—		(11,472)		—	—
Balance - September 30, 2021	119,971	$	2,002,452	2,300	$	445,319	$	2,567	$	1,239,075	(13,840)	$	(231,401)	$	3,458,012	75	$	736,360
Share-based and deferred compensation activities	82	16,854		—	—		—		—		(13)	(806)		16,048		—	—

Net Earnings	—	—		—	—		—		67,657		—	—		67,657		—	—
Foreign currency translation adjustments	—	—		—	—		2,593		—		—	—		2,593		—	—
Change in fair value of interest rate swap, net of taxes of $2,714	—	—		—	—		9,910		—		—	—		9,910		—	—

Accretion to redemption value of Series B shares issued in March 2021	—	—		—	—		—		(496)		—	—		(496)		—	496
Dividends	—	—		—	—		—		(16,311)		—	—		(16,311)		—	9,307
Balance - December 31, 2021	120,053	$	2,019,306	2,300	$	445,319	$	15,070	$	1,289,925	(13,853)	$	(232,207)	$	3,537,413	75	$	746,163
Share-based and deferred compensation activities	266	26,544		—	—		—		—		(16)	(1,093)		25,451		—	—

Net Earnings	—	—		—	—		—		49,002		—	—		49,002		—	—
Foreign currency translation adjustments	—	—		—	—		327		—		—	—		327		—	—
Change in fair value of interest rate swap, net of taxes of $6,519	—	—		—	—		23,804		—		—	—		23,804		—	—
Change in fair value of interest rate cap, net of taxes of $2,370	—	—		—	—		8,916		—		—	—		8,916		—	—

Accretion to redemption value of Series B shares issued in March 2021	—	—		—	—		—		(516)		—	—		(516)		—	516
Dividends	—	—		—	—		—		(16,632)		—	—		(16,632)		—	9,732
Balance - March 31, 2022	120,319	$	2,045,850	2,300	$	445,319	$	48,117	$	1,321,779	(13,869)	$	(233,300)	$	3,627,765	75	$	756,411

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	Common Stock			Preferred Stock			Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total		Mezzanine Equity
	Shares	Amount		Shares	Amount						Shares	Amount				Preferred 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	575	16,764		—	—		—		—		(120)	(5,498)		11,266		—	—

Shares issued in underwritten public offering	10,698	438,589		2,300	445,319		—		—		—	—		883,908		—	—
Net Earnings	—	—		—	—		—		46,266		—	—		46,266		—	—
Foreign currency translation adjustments	—	—		—	—		35,524		—		—	—		35,524		—	—
Change in fair value of interest rate swap, net of taxes of $(152)	—	—		—	—		(555)		—		—	—		(555)		—	—

Dividends	—	—		—	—		—		(6,535)		—	—		(6,535)		—	—
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	—	$	—
Share-based and deferred compensation activities	327	25,377		—	—		—		—		(3)	(1,115)		24,262		—	—
Common stock repurchase	—	—		—	—		—		—		—	—		—		—	—
Net Earnings	—	—		—	—		—		81,092		—	—		81,092		—	—
Series B shares issued in March 2021	—	—		—	—		—		—		—	—		—		75	716,087
Accretion to redemption value of Series B shares issued in March 2021	—	—		—	—		—		(9)		—	—		(9)		—	9
Foreign currency translation adjustments	—	—		—	—		(18,400)		—		—	—		(18,400)		—	—
Change in fair value of interest rate swap, net of taxes of $2,299	—	—		—	—		8,394		—		—	—		8,394		—	—

Dividends	—	—		—	—		—		(7,004)		—	—		(7,004)		—	104
Balance - March 31, 2021	118,370	$	2,011,210	2,300	$	445,319	$	4,501	$	1,071,362	(13,490)	$	(207,244)	$	3,325,148	75	$	716,200

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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 nine months ended March 31, 2022 and 2021 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 financial statements and notes thereto included in the Company’s Annual Report on Form 10-K dated August 20, 2021. The condensed consolidated results of operations for the three and nine months ended March 31, 2022 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, 2021 was derived from the Company’s audited consolidated financial statements.

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

We previously classified intangible asset amortization expense within Selling, general and administrative (“SG&A”) expenses in our Condensed Consolidated Statements of Earnings. Amortization expense on the developed technology intangible assets is now classified within Cost of goods sold, with amortization expense on customer lists and trade names remaining within SG&A expenses in our Condensed Consolidated Statements of Earnings. Prior period amounts have been conformed to the current period presentation, which resulted in an increase to Cost of goods sold and a decrease to SG&A expenses of $10 million and $29 million for the three and nine months ended March 31, 2021, respectively.

Note 2. Recently Issued Financial Accounting Standards

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

In August 2020, the Financial Accounting Standards Board (the "FASB") issued ASC Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). The update simplifies the accounting for convertible instruments by eliminating two accounting models (i.e., the cash conversion model and beneficial conversion feature model) and reducing the number of embedded conversion features that could be recognized separately from the host contract. ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. The Company adopted this standard as of July 1, 2021. The Company elected to use the modified retrospective method to report the effect of the changes. Adoption of the standard affected the Company's currently outstanding 0.25% convertible senior notes due 2022 (the "II-VI Convertible Notes"). Refer to Note 8. Debt for the impact of the adoption on the II-VI Convertible Notes.

Note 3. Pending Coherent Acquisition

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

Stock”), issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”):

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

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

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

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

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

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

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

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

The completion of the Merger is subject to the termination or expiration of any applicable waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, and the approval by the State Administration for Market Regulation in China, along with the satisfaction and completion of other customary closing conditions. Subject to the satisfaction or waiver of each of the closing conditions, II-VI anticipates that the Merger will be completed by the end of the second calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed later or not at all.

the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.1 billion in debt financing. II-VI and the Commitment Parties amended and restated the Commitment Letter on October 25, 2021 (the "Amended and Restated Commitment Letter") to effect certain amendments thereto, including to reduce the total amounts of commitments thereunder to $4.99 billion. The obligation of the Commitment Parties to provide the debt financing provided for in the Amended and Restated Commitment Letter is subject to a number of customary conditions. Subject to the terms of the Amended and Restated Commitment Letter, the commitment parties thereto committed to provide a senior unsecured bridge loan facility in an aggregate principal amount of $990 million (the "Bridge Loan Commitment"). As a result of the issuance of the Senior Notes (defined in Note 8), the Bridge Loan Commitment was terminated, such that the total amounts of commitments under the Amended and Restated Commitment Letter are $4.0 billion.

On December 10, 2021, II-VI issued $990 million of the Senior Notes. The Senior Notes are guaranteed by each of the Company’s domestic subsidiaries that guarantee its obligations under its existing credit agreement. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), or to persons outside the United States under Regulation S of the Securities Act. Interest on the Senior Notes will be payable on December 15 and June 15 of each year, commencing on June 15, 2022, at a rate of 5.000% per annum. The Senior Notes will mature on December 15, 2029.

As of December 10, 2021, the New Term Facilities and the New Revolving Credit Facility (as defined in Note 8) contemplated by the Amended and Restated Commitment Letter have been fully priced and allocated. The Company intends to borrow under the New Term Facilities and to use the net proceeds from the issuance and sale of the Senior Notes in connection with the Merger. The New Revolving Credit Facility is expected to be available concurrently with the Closing.

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

•105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company, no par value per share ("II-VI Series B-2 Convertible Preferred Stock," and together with the II-VI Series B-1 Convertible Preferred Stock, “New II-VI Convertible Preferred Stock”), for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.05 billion, immediately prior to the Closing; and

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

Following the Company’s provision of notice to the Investor of its election to offer the Upsize Shares, the Investor informed the Company on June 8, 2021 of its agreement to purchase the Upsize Shares from the Company immediately prior to the Closing, increasing the Investor’s total equity commitment to II-VI pursuant to the Investment Agreement to $2.15 billion.

The expenses associated with the Merger for the three and nine months ended March 31, 2022 have not been allocated to an Operating Segment, and are presented in the Unallocated and Other in Note 13. Segment Reporting.

Note 4. Revenue from Contracts with Customers

The Company believes that disaggregating revenue by end market provides the most relevant information regarding the nature, amount, timing, and uncertainty of revenues and cash flows.

The following tables summarize disaggregated revenue for the three and nine months ended March 31, 2022 and 2021 ($000):


	Three Months Ended March 31, 2022				Nine Months Ended March 31, 2022
	Photonic Solutions		Compound Semiconductors			Total		Photonic Solutions		Compound Semiconductors		Total

Industrial	$	18,372	$	82,421		$	100,793	$	53,372	$	251,721	$	305,093
Communications	531,256		34,006			565,262		1,519,733		94,813		1,614,546
Aerospace & Defense	—		45,096			45,096		—		136,405		136,405
Consumer	2,194		41,773			43,967		6,615		164,615		171,230
Semiconductor	3,111		36,670			39,781		10,288		97,359		107,647
Other	12,857		19,968			32,825		38,774		55,959		94,733
Total Revenues	$	567,790	$	259,934		$	827,724	$	1,628,782	$	800,872	$	2,429,654


	Three Months Ended March 31, 2021				Nine Months Ended March 31, 2021
	Photonic Solutions		Compound Semiconductors			Total		Photonic Solutions		Compound Semiconductors		Total

Industrial	$	12,081	$	77,160		$	89,241	$	33,305	$	192,508	$	225,813
Communications	476,234		34,130			510,364		1,403,960		105,702		1,509,662
Aerospace & Defense	—		51,686			51,686		—		147,317		147,317
Consumer	2,402		65,544			67,946		5,924		237,011		242,935
Semiconductor	2,082		27,648			29,730		6,717		77,005		83,722
Other	15,182		19,083			34,265		38,681		49,755		88,436
Total Revenues	$	507,981	$	275,251		$	783,232	$	1,488,587	$	809,298	$	2,297,885

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

Contract Liabilities

Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Contract liabilities relate to billings in advance of performance under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed. During the nine months ended March 31, 2022, the Company recognized revenue of $9 million related to customer payments that were included as contract liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2021. The Company had $65 million of contract liabilities recorded in the Condensed Consolidated Balance Sheet as of March 31, 2022.

Note 5. Inventories

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


	March 31, 2022		June 30, 2021
Raw materials	$	316,342	$	211,890
Work in progress	386,042		336,391
Finished goods	177,126		147,547
	$	879,510	$	695,828

Note 6. Property, Plant and Equipment

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


	March 31, 2022		June 30, 2021
Land and improvements	$	20,208	$	20,454
Buildings and improvements	425,996		419,157
Machinery and equipment	1,632,459		1,483,183
Construction in progress	206,971		136,544
Finance lease right-of-use asset	25,000		25,000
	2,310,634		2,084,338
Less accumulated depreciation	(990,443)		(841,432)
	$	1,320,191	$	1,242,906

Note 7. Goodwill and Other Intangible Assets

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


	Nine Months Ended March 31, 2022
	Photonic Solutions		Compound Semiconductors		Total
Balance-beginning of period	$	1,053,028	$	243,699	$	1,296,727


Foreign currency translation	(857)		(3,221)		(4,078)
Balance-end of period	$	1,052,171	$	240,478	$	1,292,649

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of March 31, 2022 and June 30, 2021 were as follows ($000):


	March 31, 2022						June 30, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Technology	$	475,864	$	(135,542)	$	340,322	$	476,200	$	(106,802)	$	369,398
Trade Names	22,719		(7,247)		15,472		22,660		(6,233)		16,427
Customer Lists	467,436		(165,640)		301,796		469,154		(136,519)		332,635
Other	1,569		(1,569)		—		1,576		(1,576)		—
Total	$	967,588	$	(309,998)	$	657,590	$	969,590	$	(251,130)	$	718,460

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Note 8. Debt

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


	March 31, 2022		June 30, 2021
Term A Facility, interest at LIBOR, as defined, plus 1.375%	$	1,010,875	$	1,057,412

Debt issuance costs, Term A Facility and Revolving Credit Facility	(20,080)		(25,191)


5.000% Senior Notes	990,000		—
Debt issuance costs and discount, Senior Notes	(12,183)		—
0.50% convertible senior notes, assumed in the Finisar acquisition	—		14,888
0.25% convertible senior notes	344,951		344,969
Debt issuance costs and discount, 0.25% convertible senior notes	(859)		(16,937)

Total debt	2,312,704		1,375,141
Current portion of long-term debt	(1,383,959)		(62,050)
Long-term debt, less current portion	$	928,745	$	1,313,091

Senior Credit Facilities

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

The credit agreement governing the Senior Credit Facilities (the "Credit Agreement") provides for senior secured financing of $2.425 billion in the aggregate, consisting of

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

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

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

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

The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of September 24, 2019 (the "Closing Date"). The Company is obligated to repay the outstanding principal amount of the Revolving Credit Facility, if any, on the fifth anniversary of the Closing Date. Notwithstanding the foregoing, all amounts outstanding under the Senior Credit Facilities will become due and payable 120 days prior to the maturity of the II-VI Convertible Notes if (i) the II-VI Convertible Notes remain outstanding and (ii) the Company has insufficient cash and borrowing availability under the Revolving Credit Facility to repay the principal amount of the II-VI Convertible Notes. The II-VI Convertible Notes are included in the current portion of long-term debt. The Company has sufficient cash to repay the principal amount of the II-VI Convertible Notes, therefore the Senior Credit Facilities remain classified as long-term obligations in the Condensed Consolidated Balance Sheet.

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

Amounts outstanding under the Senior Credit Facilities will bear interest at a rate per annum equal to an applicable margin over a eurocurrency rate or an applicable margin over a base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) a eurocurrency rate plus 1.00%, in each case as calculated in accordance with the terms of the Credit Agreement. The applicable interest rate would increase under certain circumstances

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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 is 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 is 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 March 31, 2022, the Company was in compliance with all financial covenants under the Credit Agreement.

In addition, on December 2, 2021, the Company entered into an amendment to the Credit Agreement, by and among the Company, Bank of America, N.A., as administrative agent, and the lenders party thereto, related to the offering of the Senior Notes (as defined below).

Allocation and Pricing of New Senior Credit Facilities

As of December 10, 2021, a new term loan A credit facility (the "New Term A Facility") in an aggregate principal amount of $850 million, a new term loan B credit facility (the "New Term B Facility" and, together with the New Term A Facility, the “New Term Facilities”) in an aggregate principal amount of $2,800 million, and a new revolving credit facility (the “New Revolving Credit Facility”) in an aggregate principal amount of $350 million, in each case as contemplated under the Amended and Restated Commitment Letter, have been fully priced and allocated. The New Term Facilities are expected be funded concurrently with the Closing. The New Revolving Credit Facility is expected to be available concurrently with the Closing. The New Term A Facility and the New Revolving Credit Facility will each bear interest at LIBOR subject to a 0.00% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The New Term A Facility and the New Revolving Credit Facility borrowings are initially expected to bear interest at LIBOR plus 2.00%. The New Term B Facility will bear interest at LIBOR (subject to a 0.50% floor) plus 2.75%. In relation to the New Term B Facility, the Company incurred expense of $14 million in the three months ended March 31, 2022, which is included in interest expense in the Condensed Consolidated Statements of Earnings. The definitive documentation for the New Term Facilities and the New Revolving Credit Facility is expected to include customary LIBOR replacement provisions.

The Company capitalized approximately $17 million of debt issuance costs during the nine months ended March 31, 2022. These capitalized costs are presented within the prepaid and other current assets and other long-term assets captions in the Condensed Consolidated Balance Sheet. Amortization of debt issuance costs related to the New Term Facilities for the three and nine months ended March 31, 2022 totaled $2 million and $3 million, respectively, and is included in interest expense in the Condensed Consolidated Statements of Earnings.

5.000% Senior Notes due 2029

On December 10, 2021, the Company issued $990 million aggregate principal amount of 5.000% Senior Notes due 2029 (the "Senior Notes") pursuant to the indenture, dated as of December 10, 2021 (the "Indenture"), between the Company and U.S. Bank National Association, as trustee (the "Trustee"). The Senior Notes are guaranteed by each of the Company’s domestic subsidiaries that guarantee its obligations under the Senior Credit Facilities. Interest on the Senior Notes will be payable on December 15 and June 15 of each year, commencing on June 15, 2022, at a rate of 5.000% per annum. The Senior Notes will mature on December 15, 2029.

The Company intends to use the proceeds from the offering of the Senior Notes, together with other financing sources (including the New Term Facilities and cash on hand), to fund the cash consideration, the repayment of certain indebtedness and certain fees and expenses in connection with the Merger. If (i) the Merger has not been consummated on or prior to 11:59 p.m., Eastern Time, on December 15, 2022 or (ii) the Company informs the Trustee, in writing or otherwise announces in writing that the Merger is no longer being pursued and/or the Merger Agreement has been terminated, the Company will be required to redeem all of the outstanding Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date (the "Special Mandatory Redemption Date"). Pursuant to the terms of the Indenture, prior to the earlier of (i) the date of the consummation of the Merger and (ii) the Special Mandatory Redemption Date, the gross proceeds from the Senior Notes cannot be used for any purpose, and therefore $990 million of restricted cash is classified within cash, cash equivalents, and restricted cash on the Condensed Consolidated Balance Sheet at March 31, 2022.

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

The Indenture contains customary covenants and events of default, including, default relating to among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. As of March 31, 2022, the Company was in compliance with all covenants under the Indenture.

Bridge Loan Commitment

Subject to the terms of the Amended and Restated Commitment Letter, the commitment parties thereto committed to provide, in addition to the New Term Facilities and the New Revolving Credit Facilities, a senior unsecured bridge loan facility in an aggregate principal amount of $990 million (the "Bridge Loan Commitment"). As a result of the issuance of the Senior Notes, the Bridge Loan Commitment was terminated, such that the total amounts of commitments under the Amended and Restated Commitment Letter are $4.0 billion. During the three months ended March 31, 2022, there was no expense incurred related to the Bridge Loan Commitment. During the nine months ended March 31, 2022, the Company incurred expenses of $3 million related to the Bridge Loan Commitment, which is included in interest expense in the Condensed Consolidated Statements of Earnings.

0.50% Finisar Convertible Notes

On November 1, 2021, Finisar delivered to holders of all outstanding 0.50% Convertible Senior Notes due 2036 issued by Finisar (the "Finisar Notes") a notice of redemption pursuant to which Finisar provided notice that it would redeem on December 22, 2021 all of the Finisar Notes that were not repurchased by Finisar on December 15, 2021 pursuant to the terms of the Finisar Notes and that remained outstanding on December 22, 2021. On December 15, 2021, Finisar repurchased $14.6 million aggregate principal amount of Finisar Notes that were tendered for repurchase by holders of Finisar Notes. Each holder of Finisar Notes that remained outstanding after the repurchase on December 15, 2021 had the option to elect to receive (i) a redemption price equal to 100% of the principal amount of the redeemed Finisar Notes, plus accrued and unpaid interest on the redeemed Finisar Notes or (ii) to convert all or any portion of the Finisar Notes held by such holder in accordance with the terms of the Finisar Notes until the close of business on December 21, 2021. Based on the elections of such holders, the Company issued 45 shares of common stock and paid approximately $0.3 million in the aggregate on December 22, 2021 to settle the conversion of the Finisar Notes that were converted and to redeem all remaining outstanding Finisar Notes.

0.25% Convertible Senior Notes

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

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

With the adoption of ASU 2020-06 on July 1, 2021, the Company reversed that accounting, electing to use the modified retrospective method. The adoption resulted in an increase of $15 million to the current portion of long-term debt, a decrease of $3 million to deferred income taxes, and a decrease of $11 million to shareholders' equity.

The initial conversion rate is 21.25 shares of II-VI Common Stock per $1,000 principal amount of II-VI Convertible Notes, which is equivalent to an initial conversion price of $47.06 per share of II-VI Common Stock. Throughout the term of the II-VI Convertible Notes, the conversion rate may be adjusted upon the occurrence of certain events. The if-converted value of the II-VI Convertible Notes amounted to $531 million as of March 31, 2022 and $532 million as of June 30, 2021 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended).

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

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

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

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

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

Holders of the II-VI Convertible Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a II-VI Convertible Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited. Notes were convertible during the quarter ended March 31, 2022; conversions were immaterial. Because the last reported sale price of II-VI Common Stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended March 31, 2022 was equal to or greater than 130% of the applicable conversion price on each applicable trading day, the II-VI Convertible Notes are convertible at the option of the holders thereof during the fiscal period ranging from April 1, 2022 to May 31, 2022. As of June 1, 2022, the II-VI Convertible Notes become convertible regardless of compliance with any other conversion trigger until the close of business on the business day immediately preceding the Maturity Date.

The following tables set forth total interest expense recognized related to the II-VI Convertible Notes for the three and nine months ended March 31, 2022 and March 31, 2021 ($000):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
0.25% contractual coupon	$	216	$	216	$	656	$	656
Amortization of debt discount and debt issuance costs including initial purchaser discount	508		3,410		1,433		10,262
Interest expense	$	724	$	3,625	$	2,089	$	10,918

The effective interest rates on the liability component for the three and nine months ended March 31, 2022 and 2021 presented were 1% and 5%, respectively.

Aggregate Availability

The Company had aggregate availability of $450 million under its Revolving Credit Facility as of March 31, 2022.

Note 9. Income Taxes

The Company’s year-to-date effective income tax rate at March 31, 2022 was 18% compared to an effective tax rate of 17% for the same period in 2021. The variations between the Company’s effective tax rate and the U.S. statutory rate of 21% were due to tax rate differentials between U.S. and foreign jurisdictions.

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 March 31, 2022 and June 30, 2021, the Company’s gross unrecognized income tax benefit, excluding interest and penalties, was $40 million and $38 million, respectively. The Company has classified the uncertain tax positions as non-current income tax liabilities, as the amounts are not expected to be paid within one year. If recognized, $34 million of the gross unrecognized tax benefits at March 31, 2022 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. The amount of accrued interest and penalties included in the gross unrecognized income tax benefit was $3 million at both March 31, 2022 and June 30, 2021. Fiscal years 2018 to 2021 remain open to examination by the Internal Revenue Service, fiscal years 2017 to 2021 remain open to examination by certain state jurisdictions, and fiscal years 2011 to 2021 remain open to examination by certain foreign taxing jurisdictions. The Company is currently under examination in New York for the years ended June 30, 2018 through June 30, 2019 and under examination for certain subsidiary companies in California for the years ended April 30, 2017 through April 28, 2019; India for the year ended March 31, 2016; Philippines for the years ended June 30, 2018 through June 30, 2019; Germany for the years ended June 30, 2012 through June 30, 2018; and Switzerland for the years ended June 30, 2020 through June 30, 2021. 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 March 31, 2022		Nine months ended March 31, 2022
Finance Lease Cost
Amortization of right-of-use assets	$	417	$	1,255
Interest on lease liabilities	298		907
Total finance lease cost	$	715	$	2,162
Operating lease cost	9,240		27,635
Sublease income	—		507
Total lease cost	$	9,955	$	29,290

Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases	$	298	$	907
Operating cash flows from operating leases	8,899		26,565
Financing cash flows from finance leases	332		954

Weighted-Average Remaining Lease Term (in Years)
Finance leases	9.8
Operating leases	6.7

Weighted-Average Discount Rate
Finance leases	5.6 %
Operating leases	5.8 %


	Three Months Ended March 31, 2021		Nine Months Ended March 31, 2021
Finance Lease Cost
Amortization of right-of-use assets	$	417	$	1,250
Interest on lease liabilities	315		957
Total finance lease cost	$	732	$	2,207
Operating lease cost	9,212		27,147
Sublease income	368		1,103
Total lease cost	$	9,576	$	28,251

Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating cash flows from finance leases	$	315	$	957
Operating cash flows from operating leases	9,150		26,003
Financing cash flows from finance leases	298		849

Note 11. Equity and Redeemable Preferred Stock

Mandatory Convertible Preferred Stock

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

Unless previously converted, each outstanding share of Mandatory Convertible Preferred Stock will automatically convert on the Mandatory Conversion Date (as defined in the Statement with Respect to Shares establishing the Mandatory Convertible Preferred Stock) into a number of shares of II-VI Common Stock equal to not more than 4.6512 shares and not less than 3.8760 shares (the "Minimum Conversion Rate"), depending on the applicable market value of the II-VI Common Stock, 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, in whole or in part, at a 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, into shares of II-VI Common Stock at the conversion rate determined in accordance with the terms of the Mandatory Convertible Preferred Stock during the period beginning on, and including, the effective date of such change and ending on, and including, the date that is 20 calendar days after the effective date of such fundamental change (or, if later, the date that is 20 calendar days after holders receive notice of such fundamental change, but in no event later than July 1, 2023). Holders who convert their shares of the Mandatory Convertible Preferred Stock during that period will also receive a dividend make-whole amount and, to the extent there is any, the accumulated dividend amount, in each case as calculated in accordance with the terms of the Mandatory Convertible Preferred Stock.

The Company recognized $7 million and $21 million of preferred stock dividends for the three and nine months ended March 31, 2022, respectively, associated with the Mandatory Convertible Preferred Stock, which were presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of March 31, 2022.

The following table presents dividends per share and dividends recognized for the three and nine months ended March 31, 2022:


	Three Months Ended March 31, 2022		Nine Months Ended March 31, 2022
Dividends per share	$	3.00	$	9.00
Mandatory Convertible Preferred Stock dividends ($000)	$	6,900	$	20,700

Redeemable Convertible Preferred Stock

In March 2021, the Company issued 75,000 shares of II-VI Series B-1 Convertible Preferred Stock, no par value per share. Refer to Note 3. Pending Coherent Acquisition for additional information.

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

•at the election of the holder, at a conversion price of $85 per share (“Conversion Price”) after the earliest to occur of (i) the issuance of shares of II-VI Series B-2 Convertible Preferred Stock upon the Closing, (ii) the termination of the Merger Agreement or (iii) the delivery by II-VI to the Investor of an offer to repurchase the II-VI Series B-1 Convertible Preferred Stock upon the occurrence of a Fundamental Change (as defined in the Statement with Respect to Shares establishing the New II-VI Convertible Preferred Stock); and

•at the election of the Company, any time following March 31, 2024 at the then-applicable Conversion Price if the volume-weighted average price of II-VI Common Stock exceeds 150% of the then-applicable Conversion Price for 20 trading days out of any 30 consecutive trading days.

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

On or at any time after March 31, 2031:

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

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

In connection with any Fundamental Change, and subject to the procedures set forth in the Statement with Respect to Shares establishing the New II-VI Convertible Preferred Stock, the Company must, or will cause the survivor of a Fundamental Change to, make an offer to repurchase, at the option and election of the holder thereof, each share of II-VI Series B-1 Convertible Preferred Stock then-outstanding at a purchase price per share in cash equal to (i) the Stated Value for such shares plus an amount equal to all accrued or declared and unpaid dividends on such shares that had not previously been added to the Stated Value as of the date of repurchase plus (ii) if prior to March 31, 2026, the aggregate amount of all dividends that would have been paid (subject to certain exceptions), from the date of repurchase through March 31, 2026.

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

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

The II-VI Series B-1 Convertible Preferred Stock is initially measured at fair value less issuance costs, accreted to its redemption value over a 10-year period (using the effective interest method) with such accretion accounted for as deemed dividends and reductions to Net Earnings Available to Common Shareholders.

The Company recognized $10 million and $30 million of preferred stock dividends for the three and nine months ended March 31, 2022, respectively, which were presented as a reduction to retained earnings on the Condensed Consolidated Balance Sheet as of March 31, 2022.

The following table presents dividends per share and dividends recognized for the three and nine months ended March 31, 2022:


	Three Months Ended March 31, 2022		Nine Months Ended March 31, 2022
Dividends per share	$	137	$	403
Dividends ($000)	9,732		28,743
Deemed dividends ($000)	516		1,490

Note 12. Earnings Per Share

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

Diluted earnings per common share is computed by dividing the diluted earnings 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 nine months ended March 31, 2022, diluted shares outstanding include the dilutive effect of the potential shares II-VI Common Stock issuable from stock options, performance and restricted shares, as well as the shares of II-VI Common Stock issuable upon conversion of outstanding convertible debt.

Potentially dilutive shares whose effect would have been anti-dilutive are excluded from the computation of diluted earnings per common share. For the three and nine months ended March 31, 2022, diluted earnings per share excluded the potentially dilutive effect of the Series A Mandatory Convertible Preferred Stock and the Series B Convertible Preferred Stock (under the If-Converted method), as their effects were anti-dilutive.

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and nine months ended March 31, 2022 ($000):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021			2022		2021
Numerator
Net earnings	$	49,002	$	81,092		$	191,123	$	215,258
Deduct Series A preferred stock dividends	(6,900)		(6,900)			(20,700)		(20,240)
Deduct Series B dividends and deemed dividends	(10,248)		(113)			(30,233)		(113)
Basic earnings available to common shareholders	$	31,854	$	74,079		$	140,190	$	194,905

Effect of dilutive securities:
Add back interest on II-VI Convertible Notes (net of tax)	$	571	$	3,066		$	1,650	$	9,199

Diluted earnings available to common shareholders	$	32,425	$	77,145		$	141,840	$	204,103

Denominator
Weighted average shares	106,323		104,767			106,079		103,883
Effect of dilutive securities:
Common stock equivalents	3,296		4,203			3,001		3,424
II-VI Convertible Notes	7,330		7,331			7,330		7,331


Diluted weighted average common shares	116,949		116,302			116,410		114,637

Basic earnings per common share	$	0.30	$	0.71		$	1.32	$	1.88

Diluted earnings per common share	$	0.28	$	0.66		$	1.22	$	1.78

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The following table presents potential shares of II-VI Common Stock excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive for the three and nine months ended March 31, 2022 (000):


	Three Months Ended March 31,		Nine Months Ended March 31,
	2022	2021	2022	2021
Common stock equivalents	2	14	12	154
Series A Mandatory Convertible Preferred Stock	8,915	8,915	8,915	8,915


Series B Redeemable Preferred Stock	9,217	98	9,105	33
Total anti-dilutive shares	18,134	9,027	18,032	9,102

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 2 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.

The accounting policies are consistent across each segment. To the extent possible, the Company’s corporate expenses and assets are allocated to the segments. The expenses associated with the pending acquisition of Coherent for the three and nine months ended March 31, 2022 have not been allocated to an Operating Segment, and are presented in Unallocated and Other.

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


	Three Months Ended March 31, 2022
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	567,790	$	259,934	$	—	$	827,724
Inter-segment revenues	10,039		73,251		(83,290)		—
Operating income	54,604		61,768		(9,604)		106,768
Interest expense	—		—		—		(43,499)
Other expense, net	—		—		—		(241)
Income taxes	—		—		—		(14,027)
Net earnings	—		—		—		49,002
Depreciation and amortization	44,402		28,415		—		72,817
Expenditures for property, plant & equipment	18,415		75,887		—		94,302
Segment assets	4,991,163		2,776,033		—		7,767,196
Goodwill	1,052,171		240,478		—		1,292,649

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	Three Months Ended March 31, 2021
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	507,981	$	275,251	$	—	$	783,232
Inter-segment revenues	12,209		61,272		(73,481)		—
Operating income	48,286		52,522		(15,728)		85,080
Interest expense	—		—		—		(13,034)
Other income, net	—		—		—		21,432
Income taxes	—		—		—		(12,387)
Net earnings	—		—		—		81,092
Depreciation and amortization	41,060		26,925		—		67,985
Expenditures for property, plant & equipment	16,364		9,639		—		26,002


	Nine Months Ended March 31, 2022
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	1,628,782	$	800,872	$	—	$	2,429,654
Inter-segment revenues	35,979		243,889		(279,868)		—
Operating income	160,863		168,688		(29,511)		300,041
Interest expense	—		—		—		(72,752)
Other income, net	—		—		—		5,535
Income taxes	—		—		—		(41,701)
Net earnings	—		—		—		191,123
Depreciation and amortization	129,388		84,147		—		213,535
Expenditures for property, plant & equipment	55,277		140,714		—		195,991


	Nine Months Ended March 31, 2021
	Photonic Solutions		Compound Semiconductors		Unallocated & Other		Total
Revenues	$	1,488,587	$	809,298	$	—	$	2,297,885
Inter-segment revenues	27,866		193,171		(221,037)		—
Operating income	147,159		173,494		(15,728)		304,925
Interest expense	—		—		—		(45,833)
Other income, net	—		—		—		246
Income taxes	—		—		—		(44,081)
Net earnings	—		—		—		215,258
Depreciation and amortization	119,510		80,360		—		199,870
Expenditures for property, plant & equipment	62,450		42,881		—		105,331

Note 14. Share-Based Compensation

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

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


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Stock Options and Cash-Based Stock Appreciation Rights	$	1,635	$	1,328	$	4,107	$	8,662
Restricted Share Awards and Cash-Based Restricted Share Unit Awards	13,317		12,089		44,449		37,972
Performance Share Awards and Cash-Based Performance Share Unit Awards	2,614		3,320		8,380		13,684

	$	17,566	$	16,737	$	56,936	$	60,318

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 $18 million is recognized in the Condensed Consolidated Balance Sheet within other assets as of March 31, 2022. Changes in fair value are recorded within accumulated other comprehensive income on the Condensed Consolidated Balance Sheet and reclassified into the Condensed Consolidated Statement of Earnings 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.

On February 23, 2022, the Company entered into an interest rate cap ("the Cap") with an effective date of July 1, 2023. The Cap manages the Company's exposure to interest rate movements on a portion of the Company's floating rate debt. The Cap provides the Company with the right to receive payment if one-month LIBOR exceeds 1.85%. Beginning in July 2023, the Company will begin to pay a fixed monthly premium based on an annual rate of 0.853% for the Cap. The Cap will carry a notional amount ranging from $500 million to $1,500 million. The fair value of the interest rate cap of $11 million is recognized in the Condensed Consolidated Balance Sheet within other assets as of March 31, 2022.

The Cap is designed to mirror the terms of the Company's Credit Agreement as of the effective date, or its direct replacement. The Company designated the Cap as a cash flow hedge of the variability of the LIBOR-based interest payments on the Term

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Loans. Every period over the life of the hedging relationship, the entire change in fair value related to the hedging instrument will first be recorded within accumulated other comprehensive income. Amounts accumulated in accumulated other comprehensive income will be reclassified into interest expense in the same period or periods in which interest expense is recognized on the Credit Agreement, or its direct replacement. The fair value of the Cap is determined using widely accepted valuation techniques and reflects the contractual terms of the Cap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves. The Cap is classified as a Level 2 item within the fair value hierarchy.

The Company estimated the fair value of the II-VI Convertible Notes based on quoted market prices as of the last trading day prior to March 31, 2022; however, the II-VI Convertible Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the II-VI Convertible Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the II-VI Convertible Notes is net of unamortized discount and issuance costs. See Note 8. Debt for details on the Company’s debt facilities.

The Company estimated the fair value of the Senior Notes based on quoted market prices as of the last trading day prior to March 31, 2022; however, the Senior Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the Senior Notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the Senior Notes is net of unamortized discount and issuance costs. See Note 8. Debt for details on the Company’s debt facilities.

The fair value and carrying value of the II-VI Convertible Notes and Senior Notes were as follows at March 31, 2022 ($000):


	Fair Value		Carrying Value
II-VI Convertible Notes	$	539,879	$	344,092
Senior Notes	973,121		977,817

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

The Company, from time to time, purchases foreign currency forward exchange contracts, that permit it to sell specified amounts of these foreign currencies expected to be received from its export sales, for pre-established U.S. dollar amounts at specified dates. These contracts are entered into to limit transactional exposure to changes in currency exchange rates of export sales transactions in which settlement will occur in future periods and which otherwise would expose the Company, on the basis of its aggregate net cash flows in respective currencies, to foreign currency risk. At March 31, 2022, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts. Realized losses related to these contracts for both the three and nine months ended March 31, 2022 were $2 million, and were included in other expense in the Condensed Consolidated Statements of Earnings.

Note 16. Share Repurchase Programs

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of II-VI 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 March 31, 2022. As of March 31, 2022, the Company has cumulatively purchased 1,416,587 shares of II-VI Common Stock pursuant to the Program for approximately $22 million. The dollar value of shares as of March 31, 2022 that may yet be purchased under the Program is approximately $28 million.

Note 17. Accumulated Other Comprehensive Income

The changes in accumulated other comprehensive income (“AOCI”) by component, net of tax, for the nine months ended March 31, 2022 were as follows ($000):


	Foreign Currency Translation Adjustment		Interest Rate Swap		Interest Rate Cap		Defined Benefit Pension Plan		Total Accumulated Other Comprehensive Income
AOCI - June 30, 2021	$	55,395	$	(31,773)	$	—	$	(9,355)	$	14,267
Other comprehensive income (loss) before reclassifications	(11,461)		24,852		8,916		—		22,307
Amounts reclassified from AOCI	—		11,543		—		—		11,543
Net current-period other comprehensive income (loss)	(11,461)		36,395		8,916		—		33,850
AOCI - March 31, 2022	$	43,934	$	4,622	$	8,916	$	(9,355)	$	48,117

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, 2021 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 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, conclusion of any analysis, 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 communications, industrial, 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 and customer-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.

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

Pending Coherent Acquisition

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

Pursuant to the terms of the Merger Agreement, and subject to the conditions set forth therein, at the effective time of the Merger (the “Effective Time”), each share of common stock of Coherent (the “Coherent Common Stock”) issued and outstanding immediately prior to the Effective Time will be canceled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”): (A) $220.00 in cash, without interest (the “Cash Consideration”), and (B) 0.91 of a validly issued, fully paid and nonassessable share of common stock of II-VI, no par value per share ("II-VI Common Stock").

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

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

anticipates that the Merger will be completed by the end of the second calendar quarter of 2022. However, it is possible that factors outside the control of both companies could result in the Merger being completed later or not at all.

In connection with entering into the Merger Agreement, II-VI has obtained a fully underwritten financing commitment pursuant to a commitment letter (the “Commitment Letter”), dated as of March 25, 2021, as further amended and restated on April 21, 2021, with JPMorgan Chase Bank, N.A., Citigroup Global Markets Inc., MUFG Bank, Ltd., MUFG Securities Americas Inc., PNC Capital Markets LLC, PNC Bank, National Association, HSBC Securities (USA) Inc., HSBC Bank USA, National Association, Citizens Bank, N.A., Mizuho Bank, Ltd., BMO Capital Markets Corp., Bank of Montreal, TD Securities (USA) LLC, The Toronto-Dominion Bank, New York Branch, TD Bank, N.A. and First National Bank of Pennsylvania (collectively, the “Commitment Parties”) pursuant to which the Commitment Parties have committed to provide up to $5.125 billion in debt financing. II-VI and the Commitment Parties amended and restated the Commitment Letter on October 25, 2021 (the “Amended and Restated Commitment Letter”) to effect certain amendments thereto, including to reduce the total amounts of commitments thereunder to $4.99 billion. The obligation of the Commitment Parties to provide the debt financing provided for in the Amended and Restated Commitment Letter is subject to a number of customary conditions. Subject to the terms of the Amended and Restated Debt Commitment Letter, the commitment parties thereto committed to provide a senior unsecured bridge loan facility in an aggregate principal amount of $990 million (the "Bridge Loan Commitment"). As a result of the issuance of the Senior Notes (defined in Note 8), the Bridge Loan Commitment was terminated, such that the total amounts of commitments under the Amended and Restated Commitment Letter are $4.0 billion.

On December 10, 2021, II-VI issued $990 million aggregate principal amount of the Senior Notes. The Senior Notes are guaranteed by each of the Company’s domestic subsidiaries that guarantee its obligations under its existing credit agreement. The Senior Notes were offered and sold either to persons reasonably believed to be “qualified institutional buyers” pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), or to persons outside the United States under Regulation S of the Securities Act. Interest on the Senior Notes will be payable on December 15 and June 15 of each year, commencing on June 15, 2022, at a rate of 5.00% per annum. The Senior Notes will mature on December 15, 2029.

The Company intends to use the net proceeds from the offering of the Senior Notes, together with other financing sources (including the New Term Facilities described further under Note 3. Pending Coherent Acquisition in Part I, Item 1 of this Quarterly Report on Form 10-Q) and cash on hand, to fund the Cash Consideration, the repayment of certain indebtedness and certain fees and expenses in connection with the Merger.

If (i) the Merger has not been consummated on or prior to 11:59 p.m., Eastern Time, on December 15, 2022 or (ii) the Company informs the Trustee in writing or otherwise announces in writing that the Merger is no longer being pursued and/or the Merger Agreement has been terminated, the Company will be required to redeem all of the outstanding Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

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

$750 million. Subject to the terms and conditions of the Investment Agreement, among other things, the Company and the Investor also agreed that the Company would issue, sell and deliver to the Investor:

•105,000 shares of a new Series B-2 Convertible Preferred Stock of the Company (“II-VI Series B-2 Convertible Preferred Stock”) for a purchase price per share equal to the Equity Per Share Price, resulting in an aggregate purchase price of $1.05 billion, immediately prior to the Closing; and

The expenses associated with the Merger for the nine months ended March 31, 2022, have not been allocated to an Operating Segment, and are presented in the Unallocated and Other within this Quarterly Report.

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 20, 2021 describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.

New Accounting Standards

See Note 2. Recently Issued Financial Accounting Standards 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

In response to the global spread of COVID-19, governments at various levels have implemented, and may continue to implement, unprecedented response measures. Overall, the COVID-19 pandemic and related factors have 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 continue to materially adversely impact, our business, results of operations, financial condition and stock price. In particular, the COVID-19 pandemic continues to have a significant impact on global trade, which has resulted in supply chain and production disruptions impacting our business.

In particular, our supply chain has been affected by various measures implemented in response to the pandemic. In certain cases, our suppliers have not had the materials, capacity or capability to supply us with the components necessary for continuing our manufacturing operations or development efforts at our normal levels or on predictable timing. We also have experienced restrictions and delays on logistics, such as those relating to air cargo carriers, as well as increased logistics costs due to limited capacity and high demands for freight forwarders. As a result of these factors, we have increased our inventory of certain items to mitigate these logistical uncertainties. Similarly, our customers have also experienced, and could continue to experience, disruptions in their operations, which may result in reduced, delayed, or canceled orders, and have increased collection risks, which may adversely affect our results of operations.

The full extent of the impact of the COVID-19 pandemic and the related responses on our operational and financial performance remains uncertain and will depend on many factors outside our control, including, without limitation, the duration and severity of the pandemic, the imposition of protective public safety measures, and the impact of the pandemic and related factors 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.

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

The following tables set forth select items from our Condensed Consolidated Statements of Earnings for the three and nine months ended March 31, 2022 and 2021 ($ in millions):


	Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
			% of Revenues				% of Revenues
Total revenues	$	828	100	%	$	783	100	%
Cost of goods sold	506		61		493		63
Gross margin	322		39		290		37
Operating expenses:
Internal research and development	97		12		83		11
Selling, general and administrative	118		14		122		16
Interest and other, net	44		5		(8)		(1)
Earnings before income taxes	63		8		94		12
Income taxes	14		2		12		2
Net earnings	$	49	6	%	$	81	10	%

Diluted earnings per share	$	0.28			$	0.66


	Nine Months Ended March 31, 2022				Nine Months Ended March 31, 2021
			% of Revenues				% of Revenues
Total revenues	$	2,430	100	%	$	2,298	100	%
Cost of goods sold	1,490		61		1,418		62
Gross margin	940		39		880		38
Operating expenses:
Internal research and development	281		12		246		11
Selling, general and administrative	358		15		328		14
Interest and other, net	67		3		46		2
Earnings before income taxes	233		10		259		11
Income taxes	42		2		44		2
Net earnings	$	191	8	%	$	215	9	%

Diluted earnings per share	$	1.22			$	1.78

Consolidated

Revenues. Revenues for the three months ended March 31, 2022 increased 6% to $828 million, compared to $783 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2022 increased 6% to $2,430 million, compared to $2,298 million for the same period last fiscal year. The increase in revenue for both the three and nine months ended March 31, 2022 is driven by increased sales in the industrial, semiconductor capital equipment and communications markets, partially offset by decreased sales in the consumer electronics and aerospace and defense markets.

Gross margin. Gross margin for the three months ended March 31, 2022 was $322 million, or 39% of total revenues, compared to $290 million, or 37% of total revenues, for the same period last fiscal year, an increase of 190 basis points. Gross margin for the nine months ended March 31, 2022 was $940 million, or 39% of total revenues, compared to $880 million, or 38% of total revenues for the same period last fiscal year, an increase 40 basis points. The increase as a percent of revenue for both the three and nine months ended March 31, 2022, was driven by improved product mix and increased shipments.

Internal research and development. Internal research and development (“IR&D”) expenses for the three months ended March 31, 2022 were $97 million, or 12% of revenues, compared to $83 million, or 11% of revenues, for the same period last fiscal year. IR&D for the nine months ended March 31, 2022 increased 14% to $281 million, compared to $246 million for the same period last fiscal year. The increase for both the three and nine months ended March 31, 2022 was driven by additional operating expenses of $13 million related to the start-up of new devices for new customer applications.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2022 were $118 million, or 14% of revenues, compared to $122 million, or 16% of revenues, for the same period last fiscal year. SG&A expenses for the nine months ended March 31, 2022 were $358 million, or 15% of revenues, compared to $328 million, or 14% of revenues, for the same period last fiscal year. The decrease in SG&A as a percentage of revenue for the three months ended March 31, 2022 compared to the same period last fiscal year was primarily the result of cost control measures across the Company. The increase in SG&A for the nine months ended March 31, 2022, compared to the same period last fiscal year was primarily the result of $13 million of incremental integration and transaction expenses related to the Merger.

Interest and other, net. Interest and other, net for the three months ended March 31, 2022 was expense of $44 million, compared to income of $8 million for the same period last fiscal year. Included in interest and other, net, was interest expense on borrowings, equity earnings from unconsolidated investments, foreign currency gains and losses, amortization of debt issuance costs, and interest income on excess cash balances. For the three months ended March 31, 2022, interest and other, net increased by $52 million in comparison to the same period last fiscal year, driven by additional expense incurred in the current year related to financing of the Merger, and an $11 million mark to market gain on the Series B Preferred Shares in the prior year. For the nine months ended March 31, 2022, interest and other, net increased by $22 million in comparison to the same period last fiscal year, due to additional expense incurred in the current year related to financing of the Merger and the mark to market gain on the Series B Preferred Shares in the prior year, partially offset by a favorable foreign currency fluctuation year-over-year of approximately $8 million. There were foreign currency gains of $4 million for the current nine-month period, compared to $4 million of losses for the nine months ended March 31, 2021.

Income taxes. The Company’s year-to-date effective income tax rate at March 31, 2022 was 18%, compared to an effective tax rate of 17% 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 due to tax rate differentials between U.S. and foreign jurisdictions.

Segment Reporting

Revenues and operating income for the Company’s reportable segments are discussed below. Operating income differs from net earnings 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 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, which is incorporated herein by reference.

Photonic Solutions ($ in millions)


	Three Months Ended March 31,				% Increase	Nine Months Ended March 31,				% Increase
	2022		2021			2022		2021
Revenues	$	568	$	508	12%	$	1,629	$	1,489	9%
Operating income	$	55	$	48	13%	$	161	$	147	9%

Revenues for the three months ended March 31, 2022 increased 12% to $568 million, compared to $508 million for the same period last fiscal year. Revenues for the nine months ended March 31, 2022 increased 9% to $1,629 million, compared to $1,489 million for the same period last fiscal year. The increase in revenue during the three and nine months ended March 31, 2022 was primarily due to sustained demand for products in the communications market.

Operating income for the three months ended March 31, 2022 increased 13% to $55 million, compared to operating income of $48 million for the same period last fiscal year. Operating income for the nine months ended March 31, 2022 increased 9% to $161 million, compared to operating income of $147 million for the same period last fiscal year. The increase in operating income for both the three and nine months ended March 31, 2022 was driven by the increase in the communications market, and remained consistent as a percentage of sales.

Compound Semiconductors ($ in millions)


	Three Months Ended March 31,				% Increase (Decrease)	Nine Months Ended March 31,				% Increase (Decrease)
	2022		2021			2022		2021
Revenues	$	260	$	275	(6)%	$	801	$	809	(1)%
Operating income	$	62	$	53	18%	$	169	$	173	(3)%

Revenues for the three months ended March 31, 2022 decreased 6% to $260 million, compared to revenues of $275 million for the same period last fiscal year. Compared to the three months ended March 31, 2021, 3D sensing revenue was lower due to a design change that resulted in a lower unit price, accompanied by lower volume than the comparable period. This decrease was partially offset by growth in the industrial and semiconductor capital equipment markets. Revenues for the nine months ended March 31, 2022 decreased 1% to $801 million, compared to revenues of $809 million for the same period last fiscal year. Revenue decreased slightly during the nine months ended March 31, 2022 with lower 3D sensing revenue being offset by higher revenue in industrial and semiconductor capital equipment markets.

Operating income for the three months ended March 31, 2022 increased 18% to $62 million, compared to operating income of $53 million for the same period last fiscal year, primarily driven by changes in product mix, which included increases in margin from the communications market. Operating income for the nine months ended March 31, 2022 decreased 3% to $169 million, compared to operating income of $173 million for the same period last fiscal year, primarily driven by slightly lower revenue and increased expense related to the start-up of new devices for new customer applications.

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):


	Nine Months Ended March 31,
	2022		2021
Net cash provided by operating activities	$	276	$	447
Net proceeds from debt and equity issuances	990		1,611
Effect of exchange rate changes on cash and cash equivalents and other items	43		27
Proceeds from exercises of stock options and purchases of stock under employee stock purchase plan	17		32
Purchases of businesses, net of cash acquired	—		(34)



Other items	(2)		(3)
Debt issuance costs	(10)		—
Payments in satisfaction of employees' minimum tax obligations	(15)		(8)
Payments on Finisar Notes	(15)		—
Payment of dividends	(28)		(13)
Payments under long-term borrowings and credit facility	(47)		(910)
Additions to property, plant & equipment	(196)		(105)

Operating activities:

Net cash provided by operating activities was $276 million for the nine months ended March 31, 2022 compared to $447 million of net cash provided by operating activities for the same period last fiscal year. The decrease in cash flows provided by operating activities during the nine months ended March 31, 2022 compared to the same period last fiscal year was primarily due to increased working capital requirements to mitigate the impact of our supply chain challenges, therefore, spend on

inventory increased $157 million year-over-year. An additional driver of the decrease in operating cash flows was a decrease in net earnings of $24 million year-over-year.

Investing activities:

Net cash used in investing activities was $202 million for the nine months ended March 31, 2022, compared to net cash used of $141 million for the same period last fiscal year. Cash used to fund capital expenditures increased by $91 million year over year, to continue to increase capacity to meet the growing demand for the Company’s product portfolio. Net cash used in investing activities for the nine months ended March 31, 2021 was used to fund capital expenditures and the acquisitions of Ascatron AB and Innovion Corporation.

Financing activities:

Net cash provided by financing activities was $891 million for the nine months ended March 31, 2022, compared to net cash provided by financing activities of $709 million for the same period last fiscal year. Cash outflow for the current period was primarily comprised of payments on the Term A facility (as defined below), payment to repurchase, redeem and settle conversions of Finisar Corporation's 0.50% Convertible Senior Notes due 2036 and payment of cash dividends on II-VI's outstanding preferred stock, no par value. Net cash provided by financing activities in the current year primarily consisted of receipt of the net proceeds from the offering of the Senior Notes.

Senior Credit Facilities

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

The credit agreement governing the Senior Credit Facilities (the "Credit Agreement") provides for senior secured financing of $2.425 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 million and a swing loan sub-facility initially not to exceed $20 million.

The Company is obligated to repay the outstanding principal amount of the Term A Facility in quarterly installments equal to 1.25% of the initial aggregate principal amount of the Term A Facility, with the remaining outstanding balance due and payable on the fifth anniversary of September 24, 2019 (the "Closing Date"). The Company is obligated to repay the outstanding principal amount of the Revolving Credit Facility, if any, on the fifth anniversary of the Closing Date. Notwithstanding the foregoing, all amounts outstanding under the Senior Credit Facilities will become due and payable 120 days prior to the maturity of the Company’s currently outstanding 0.25% Convertible Senior Notes due 2022 (the “II-VI Convertible Notes”) if (i) the II-VI Convertible Notes remain outstanding, and (ii) the Company has insufficient cash and borrowing availability under the Revolving Credit Facility to repay the principal amount of the II-VI Convertible Notes. The II-VI Convertible Notes are included in the current portion of long-term debt. The Company has sufficient cash to repay the principal amount of the II-VI Convertible Notes, therefore the Senior Credit facilities remain classified as long-term obligations in the Condensed Consolidated Balance Sheet.

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

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

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

The Credit Agreement contains customary affirmative and negative covenants with respect to the Senior Credit Facilities, including limitations with respect to liens, investments, indebtedness, dividends, mergers and acquisitions, dispositions of assets and transactions with affiliates. The Company is 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 is obligated to maintain a consolidated total net leverage ratio (as calculated in accordance with the terms of the Credit Agreement) of not greater than (i) 5.00 to 1.00 for the first four fiscal quarters after the Finisar Closing Date, commencing with the first full fiscal quarter after the Finisar Closing Date, (ii) 4.50 to 1.00 for the fifth fiscal quarter through and including the eighth fiscal quarter after the Finisar Closing Date, and (iii) 4.00 to 1.00 for each subsequent fiscal quarter. As of March 31, 2022 the Company was in compliance with all financial covenants under the Credit Agreement.

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 Malaysian Ringgit, Chinese Renminbi, Swiss Franc and Japanese Yen. No significant changes have occurred in the techniques and instruments used.

Interest Rate Risks

As of March 31, 2022, the Company’s total borrowings include variable rate borrowings, which expose 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 $10 million and $11 million for the three and nine months ended March 31, 2022.

On February 23, 2022, the Company entered into an interest rate cap (the "Cap"), with an effective date of July 1, 2023. As the Cap is not effective until July 2023, there is no impact on variable rate borrowings from the Cap for the three and nine months ended March 31, 2022.

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, 2021, 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.

Table of Contents

Item 6. EXHIBITS

Exhibit
Number

Description of Exhibit

Reference

10.1

Offer Letter from II-VI Incorporated to Ronald Basso

Filed herewith.

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

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101.SCH

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101.CAL

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101.LAB

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101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

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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: May 10, 2022	By:	/s/ Vincent D. Mattera, Jr.
		Vincent D. Mattera, Jr Chief Executive Officer

Date: May 10, 2022	By:	/s/ Mary Jane Raymond
		Mary Jane Raymond Chief Financial Officer and Treasurer

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Coherent (COHR) 10-Q2022 Q3 Quarterly report

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