COHERENT CORP. (COHR)

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of Coherent’s financial statements with a narrative from the perspective of management. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included under Item 8 of this annual report. Coherent’s MD&A is presented in the following sections:

•Forward-Looking Statements

•Overview

•Restructuring and Site Consolidation

•Silicon Carbide Investment

•Critical Accounting Policies and Estimates

•Conversion of Series A Preferred Stock

•Fiscal Year 2024 Compared to Fiscal Year 2023

•Fiscal Year 2023 Compared to Fiscal Year 2022

•Liquidity and Capital Resources

•Off Balance Sheet Arrangements

Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to Item 1A for discussion of these risks and uncertainties).

Forward-Looking Statements

Certain statements contained in this MD&A are forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “projects” or similar expressions.

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

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

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

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Overview

Coherent Corp. (“Coherent”, the “Company,” “we,” “us” or “our”), a global leader in materials, networking, and lasers, is a vertically integrated manufacturing company that develops, manufactures, and markets engineered materials, optoelectronic components and devices, and lasers for use in the industrial, communications, electronics and instrumentation markets. Headquartered in Saxonburg, Pennsylvania, Coherent has research and development, manufacturing, sales, service, and distribution facilities worldwide. Coherent produces a wide variety of lasers, along with application-specific photonic and electronic materials and components, and deploys them in various forms, including integrated with advanced software to enable its customers.

We generate almost all of our revenues, earnings and cash flows from developing, manufacturing and marketing a broad portfolio of products and services for our end markets. We also generate revenue, earnings and cash flows from externally-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 our end markets.

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 player in all of our highly competitive markets. We may elect to change the way in which we operate or are organized in the future to enable the most efficient implementation of our strategy.

Restructuring and Site Consolidation

Restructuring Plan

On May 23, 2023, the Board of Directors approved the Company’s May 2023 Restructuring Plan which includes site consolidations, facilities moves and closures, as well as the relocation and requalification of certain manufacturing facilities. These restructuring actions are expected to be accompanied by other cost reductions and are intended to realign our cost structure as part of a transformation to a simpler, more streamlined, resilient and sustainable business model.

In fiscal 2024, these activities resulted in charges of $27 million, primarily for accelerated depreciation, the write-off of property and equipment, and site move costs. In fiscal 2023, these activities resulted in $119 million of charges primarily for employee termination costs, and the write-off of property and equipment, net of $65 million from reimbursement arrangements. We expect the restructuring actions to be substantially completed by the end of fiscal 2025. However, the actual timing and costs associated with these restructuring actions may differ from our current expectations and estimates and such differences may be material. See Note 22. Restructuring Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Synergy and Site Consolidation Plan

On May 20, 2023, the Company announced that it had accelerated some of the actions planned as part of its multi-year synergy and site consolidation efforts following the acquisition of Coherent, Inc., including site consolidations and relocations to lower cost sites. These relocations and other actions are expected to result in the Company achieving its previously announced $250 million synergy plan, which includes savings from supply chain management, internal supply of enabling materials and components, operational efficiencies in all functions due to scale, global functional model efficiencies and consolidation of corporate costs. In fiscal 2024, the acceleration of these activities resulted in $40 million of charges primarily for overlapping labor related to transition of manufacturing operations to other sites, shut down costs for sites being exited, accelerated depreciation and employee termination costs. In fiscal 2023, the acceleration of these activities resulted in $20 million in charges primarily for employee termination costs, the write-off of inventory for products that have been exited and shut down costs.

Silicon Carbide Investment

On May 10, 2023, the Company announced that it had commenced a review of strategic alternatives for its Silicon Carbide business. On December 4, 2023, Silicon Carbide LLC (“Silicon Carbide”), one of the Company’s subsidiaries, completed the sale of Class A Common Units to Denso Corporation (“Denso”) and Mitsubishi Electric Corporation (“MELCO”), under which they collectively invested an aggregate of $1 billion in Silicon Carbide LLC (collectively, the “Equity Investments”). As a consequence of the Equity Investments, the Company’s ownership interest in the Class A Common Units of Silicon Carbide LLC was reduced to approximately 75%. Denso and MELCO each, individually, own approximately 12.5% of the Class A Common Units of Silicon Carbide LLC. The Equity Investments in Silicon Carbide enables Coherent to increase its available free cash flow to provide greater financial and operational flexibility to execute its capital allocation priorities, as the aggregate $1 billion investment will be used to fund future capital expansion of Silicon Carbide. See Note 12. Noncontrolling Interests

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included in Item 8 of this Annual Report on Form 10-K for further information on the noncontrolling interests in our Silicon Carbide subsidiary.

Critical Accounting Policies and Estimates

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

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

Goodwill

We test goodwill for impairment annually, and when events or changes in circumstances indicate that goodwill might be impaired. The determination of whether goodwill is impaired requires us to make judgments based on long-term projections of future performance. Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated results and general economic and market conditions and their projections. For fiscal year 2024, we performed a quantitative assessment. The fair values of the reporting units were determined using a discounted cash flow analysis with projected financial information based on our most recently completed long-term strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting units, as well as a market analysis. Determination of the fair value requires discretion and the use of estimates by management. If actual results are not consistent with management’s estimates and assumptions, a material goodwill impairment charge could occur, which could have a material adverse effect on our consolidated financial statements.

Due to the cyclical nature of our business, and the other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges and other factors. If material adverse conditions occur that impact one or more of our reporting units, our determination of future fair value might not support the carrying amount of one or more of our reporting units, and the related goodwill would need to be impaired. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods.

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Income Taxes

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

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

The Organization for Economic Co-operation and Development (“OECD”), a global policy forum, introduced a framework to implement a global minimum tax of 15% which would apply to multinational corporations, referred to as Pillar Two. Nearly all OECD member jurisdictions have agreed in principle to adopt these provisions and numerous jurisdictions have enacted legislation, including jurisdictions where the Company operates, with a subset of the rules becoming effective for our fiscal year beginning on July 1, 2024, and the remaining rules becoming effective for our fiscal year beginning on July 1, 2025, or in later periods. The Company is continuing to analyze the Pillar Two rules as countries implement additional legislation. Implementation of the OECD proposal may have a material Impact on the Company's Consolidated Financial Statements in the future.

Conversion of Series A Preferred Stock

All outstanding shares of Mandatory Convertible Preferred Stock were converted to Company Common Stock on July 3, 2023, and no shares of Mandatory Convertible Preferred Stock are currently issued and outstanding.

Fiscal Year 2024 Compared to Fiscal Year 2023

The Company reports its financial results in the following three designated segments: (i) Networking, (ii) Materials, and (iii) Lasers.

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The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2024 and 2023 ($ in millions except per share information) (1):

(1) Some amounts may not add due to rounding.

Consolidated

Revenues. Revenues for the year ended June 30, 2024 decreased 9% to $4,708 million, compared to $5,160 million for the prior fiscal year.

Revenues decreased in all four markets, with the largest decline, $270 million, or 43%, in the electronics market, primarily from lower volumes in the consumer electronics vertical, largely due to a design change implemented by a significant electronics customer. Revenues decreased by $82 million, or 17% in the instrumentation market due to decreased volumes in the life sciences vertical from continued inventory digestion by our customers and in the industrial market by $81 million, or 5%, as a result of decreased shipments in the precision manufacturing vertical primarily due to macroeconomic conditions. In addition, revenues decreased $20 million, or 1%, in the communications market, primarily due to decreased volumes in the telecom vertical as our communications service provider customers continued to work down their inventory levels with reduced capital spending, partially offset by increased shipments in the datacom vertical driven by increased AI-related datacom shipments.

From a segment perspective, Materials decreased $333 million year-over-year, primarily due to lower demand for sensing products and other consumer applications in the consumer electronics vertical within the electronics market for the reasons discussed above. Networking revenues decreased $45 million year-over-year, with decreases from the telecom vertical partially offset by increases in the datacom vertical, both in our communications market, for the reasons discussed above. Lasers revenue decreased $74 million year-over-year due to lower demand in the life sciences vertical in the instrumentation market and to lower demand in the precision manufacturing and semiconductor and display capital equipment verticals in the industrial end market.

Gross margin. Gross margin for the year ended June 30, 2024 was $1,456 million, or 30.9%, of total revenues, compared to $1,618 million, or 31.4% of total revenues, for fiscal 2023, a slight decrease of 43 basis points. During fiscal 2023, the Company recorded $158 million in Cost of goods sold related to the fair value adjustment on acquired inventory from the acquisition of Coherent, Inc. (“Merger”). Gross margin, excluding the fair value adjustment on acquired inventory, decreased 349 basis points for fiscal 2024 compared to fiscal 2023 primarily due to lower revenues, less favorable sales mix especially in the datacom vertical in the communications market, underutilized operating capacity in several plants, shut down costs related to site consolidations, lower yields in the datacom vertical, higher costs related to product lines that are being exited, higher inventory provisions and the unfavorable foreign exchange rates.

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Internal research and development. Internal research and development (“IR&D”) expenses for the fiscal year ended June 30, 2024 were $479 million, or 10% of revenues, compared to $500 million, or 10% of revenues, last fiscal year. The decrease of $21 million for fiscal 2024 is due to all three segments and was driven by lower costs due to the consolidation of sites and our efforts to control costs. The IR&D expenses are primarily related to our continued investment in new products and platform technologies in an effort to accelerate our organic growth across all of our businesses, including significant investments in datacom transceivers for AI, indium phosphide and gallium arsenide semiconductor lasers, silicon carbide materials, and lasers for display processing, semiconductor capital equipment, and instrumentation.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2024 were $854 million, or 18% of revenues, compared to $1,037 million, or 20% of revenues, last fiscal year. The decrease in SG&A as a percentage of revenue for fiscal 2024 compared to fiscal 2023 was primarily the result of lower amortization expense of $117 million resulting from (1) the Merger, as backlog intangibles were fully amortized in fiscal 2023, (2) lower amortization for tradenames impaired in the fourth quarter of fiscal 2023, and (3) $31 million charges for impairment of certain tradename and customer list intangibles assets in fiscal 2023. In addition, SG&A decreased due to lower charges related to the Merger, including $39 million lower transaction fees and financing, and lower one-time expense of $18 million related to share-based compensation resulting from the Merger, as well as lower costs due to the consolidation of sites and our efforts to control costs, partially offset by the impact of lower revenues.

Restructuring Charges. Restructuring charges related to our Restructuring Plan for the year ended June 30, 2024 were $27 million, or 1% of revenues, and consist primarily of accelerated depreciation, equipment write-offs and move costs due to the consolidation of certain manufacturing sites. Restructuring charges related to our Restructuring Plan for the year ended June 30, 2023 were $119 million, or 2% of revenues, and consisted of severance and equipment write-offs, net of reimbursements, due to the consolidation of certain manufacturing sites. See Note 22. Restructuring Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Interest and other, net. Interest and other, net for the year ended June 30, 2024 was expense of $244 million compared to expense of $318 million last fiscal year, a decrease of $75 million. Included in Interest and other, net, were interest expense on borrowings, Merger financing fees (fiscal 2023), foreign currency gains and losses, amortization of debt issuance costs, equity gains and losses from unconsolidated investments, and interest income on excess cash balances. The decrease of $75 million in comparison to fiscal 2023 was driven by driven by $39 million incremental interest and dividend income due to increases in interest and dividend rates earned on investments, as well as the increase in restricted cash balances and $35 million incurred in the prior year related to financing of the Merger. In addition, interest expense increased $2 million due to higher interest rates on our Term facilities, net of higher benefit from our interest rate cap and swap.

Income taxes. Our effective income tax rate for fiscal 2024 was (8)%, compared to an effective tax rate of 27% last fiscal year. The difference between our effective tax rate and the U.S. statutory rate of 21% was due to the establishment of a valuation allowance related to certain US deferred tax assets.

Net loss attributable to noncontrolling interests. Net loss attributable to noncontrolling interests for the year ended June 30, 2024 was $3 million, and represents the noncontrolling interest holders’ shares of losses of Silicon Carbide LLC after the close of the transaction on December 4, 2023. See Note 12. Noncontrolling Interests to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Segment Reporting

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

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Networking ($ in millions)

Revenues for the year ended June 30, 2024 for Networking decreased 2% to $2,296 million, compared to $2,341 million for last fiscal year. The decrease in revenues of $45 million during fiscal 2024 was primarily due to decreased volumes year-over-year in the telecom vertical as our communications service provider customers continue to work down their inventory levels with reduced capital spending, partially offset by increases in the datacom vertical driven by increased AI-related datacom transceivers shipments, both within the communications market.

Operating income for the year ended June 30, 2024 for Networking decreased 20% to $179 million, compared to operating income of $222 million last fiscal year. The decrease in operating income for fiscal 2024 was driven by $45 million lower revenues and lower margin percentage partially offset by lower restructuring charges. The margin percentage was lower than fiscal 2023 due to less favorable sales mix in the datacom vertical, the impact of fixed manufacturing costs as a percentage of revenues on lower revenues in the telecom vertical, lower yields in the datacom vertical and higher inventory provisions related to products that are being exited. The restructuring charges decreased $60 million due to lower charges for employee terminations related to our Restructuring Plan.

Materials ($ in millions)

Revenues for the fiscal year ended June 30, 2024 for Materials decreased 25% to $1,017 million, compared to revenues of $1,350 million last fiscal year. The decrease in revenues during the current fiscal year was primarily related to a decrease of $265 million in the electronics market mostly due to lower volumes in our consumer electronics vertical largely due to a design change implemented by a significant electronics customer, partially offset by higher shipments in our automotive vertical driven by electric vehicles, as well as decreases in shipments to a lesser extent derived from macroeconomic conditions in our precision manufacturing and semiconductor capital equipment verticals in the industrial market.

Operating income for the fiscal year ended June 30, 2024 for Materials decreased 61%, with operating income of $63 million in the current year, compared to operating income of $160 million last fiscal year. The decrease in operating income during the current fiscal year was driven by $333 million lower revenues and higher costs for sites being shutdown, partially offset by $33 million lower restructuring charges, primarily severance, related to our Restructuring Plan and $33 million charges in fiscal 2023 for impairment of certain tradename, customer list and technology intangibles.

Lasers ($ in millions)

Revenues for the fiscal year ended June 30, 2024 for Lasers decreased 5% to $1,395 million, compared to revenues of $1,469 million last fiscal year. The decrease was primarily due to $56 million lower shipments to the instrumentation market, primarily in the life sciences vertical where we see continued inventory digestion by our customers, and an $18 million drop in the industrial market as a result of lower volumes in our precision manufacturing and display capital equipment verticals due to macroeconomic conditions, partially offset by higher volumes in our semiconductor capital equipment display vertical.

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Operating loss for the fiscal year ended June 30, 2024 for Lasers decreased 65%, with operating loss of $146 million in the current year, compared to operating loss of $419 million last fiscal year. The lower operating loss was driven by $312 million lower costs in the current year compared to the prior year related to the Merger, including $158 million lower amortization of the fair value step-up on acquired inventory, $83 million lower amortization expense related to the fair value of intangible assets acquired, $39 million lower transaction fees and financing, $18 million lower nonrecurring share-based compensation and $14 million lower integration costs. Excluding the lower Merger related costs, operating income for fiscal 2024 decreased $39 million primarily due to lower revenues and lower gross margin percentage, due to less favorable mix within the industrial and instrumentation markets, the unfavorable impact of fixed manufacturing costs with lower revenues and higher inventory provisions.

Fiscal Year 2023 Compared to Fiscal Year 2022

The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2023 and 2022 ($ in millions except per share information) (1):

(1) Some amounts may not add due to rounding.

Consolidated

Revenues. Revenues for the year ended June 30, 2023 increased 56% to $5,160 million, compared to $3,317 million for fiscal 2022. The biggest driver of increased revenue relates to the Lasers segment, which was acquired as part of the Merger. The largest growth was in the industrial market with increased sales of $1,015 million, or 136%, year-over-year primarily due to the Lasers segment. The remaining contributions to the increased revenues were from volume growth in the electronics market, which grew 102% year-over-year, contributing an incremental $315 million in sales, and strength in the communications market, which grew by 6% year-over-year, contributing an incremental $139 million in sales. The growth in the industrial end market was primarily due to incremental sales of $1,088 million in the Lasers segment, partially offset by $73 million of softer sales in the Materials and Networking segments. The growth in the electronics market was primarily in the Materials segment due to innovations in sensing products. The strength in the communications market, primarily in the Networking segment, was due to stronger demand volumes in telecom and datacom. Lasers revenue for fiscal 2023 was $1,469 million, of which 74% was in the industrial end market and 26% in the instrumentation end market.

Organic revenue growth was $374 million, or 11%, year-over-year. Materials contributed $230 million of this organic growth year-over-year, with $316 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the industrial end market. Networking increased $144 million year-over-year, with volume growth in both telecom and datacom.

Gross margin. Gross margin for the year ended June 30, 2023 was $1,618 million, or 31%, of total revenues, compared to $1,265 million, or 38% of total revenues, for fiscal 2022. Gross margin as a percentage of revenues decreased 680 basis points compared to fiscal 2022. The decrease as a percent of revenue for fiscal 2023 was driven by $158 million of additional expense related to the preliminary fair value adjustment on acquired inventory from the Merger and $87 million of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the fair value adjustment on acquired inventory and incremental amortization decreased 206 basis points for fiscal 2023 compared to the

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fiscal 2022, which included a less favorable mix of revenues, higher costs related to the write-off of inventory for product lines that are being exited, underutilized operating capacity in several plants, shut down costs related to site consolidations, and the unfavorable impact of foreign exchange rates.

Internal research and development. IR&D expenses for the fiscal year ended June 30, 2023 were $500 million, or 10% of revenues, compared to $377 million, or 11% of revenues, in fiscal 2022. The increase of $122 million for fiscal 2023 was driven by an additional $132 million of IR&D expenses from the Lasers segment. As a percentage of revenues, IR&D spend in the Materials segment decreased 4% year-over-year, due to higher costs in fiscal 2022 related to the launch of new products. The IR&D expenses are primarily related to our continued investment in new products and manufacturing processes across all of our businesses, including significant investments in indium phosphide semiconductor lasers, silicon carbide materials, devices for both power electronics and wireless devices, and lasers for display processing and semiconductor capital equipment.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2023 were $1,037 million, or 20% of revenues, compared to $474 million, or 14% of revenues, in fiscal year 2022. The increase in SG&A as a percentage of revenue for fiscal 2023 compared to fiscal 2022 was primarily the result of incremental amortization expense of $240 million, including $209 million related to the Merger and $31 million charges for impairment of certain tradename and customer list intangibles assets (see Note 7. Goodwill and Other Intangible Assets to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information). In addition, the increase in SG&A as a percentage of revenue was due to higher one time-charges related to the Merger of $125 million for integration, share-based compensation, and transaction fees, as well as the comparatively larger sales and administrative efforts required to sell an entire laser system versus components and subsystems.

Restructuring Charges. Restructuring charges related to our Restructuring Plan for the year ended June 30, 2023 were $119 million, or 2% of revenues, and consist of severance and equipment write-offs, net of reimbursements, due to the consolidation of certain manufacturing sites. See Note 22. Restructuring Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Interest and other, net. Interest and other, net for the year ended June 30, 2023 was expense of $318 million compared to expense of $132 million in fiscal 2022, an increase of $186 million. Included in Interest and other, net, were interest expense on borrowings, Merger financing fees, foreign currency gains and losses, amortization of debt issuance costs, equity gains and losses from unconsolidated investments, and interest income on excess cash balances. The increase of $186 million in comparison to fiscal 2022 was driven by $166 million incremental interest expense due to the new debt assumed in the financing of the Merger, with $79 million of the fiscal 2022 interest expense related to funding both raised in advance of the closing of the Merger, and fees for financing to be funded contingent upon the close of the Merger, as well as $35 million incurred in the current year related to financing of the Merger. The increases were partially offset by $6 million lower net foreign currency losses and $5 million of incremental interest income.

Foreign currency losses were $11 million for the year ended June 30, 2023, primarily the result of volatility in the foreign exchange market, compared to $16 million of losses for the year ended June 30, 2022. The fiscal 2022 losses include a $24 million realized loss related the purchase of $345 million Euros to pay off the Euro based debt of Coherent, Inc. at transaction closing.

Income taxes. Our effective income tax rate for fiscal 2023 was 27%, compared to an effective tax rate of 17% last fiscal year. The difference between our effective tax rate and the U.S. statutory rate of 21% was due to research and development incentives in certain jurisdictions.

Segment Reporting

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

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Networking ($ in millions)

Revenues for the year ended June 30, 2023 for Networking increased 7% to $2,341 million, compared to $2,197 million for fiscal year 2022. The increase in revenues of $144 million during fiscal 2023 was primarily due to increased revenue in the communications market due to stronger demand in telecom and datacom.

Operating income for the year ended June 30, 2023 for Networking decreased 4% to $222 million, compared to operating income of $232 million for fiscal year 2022. The driver of the decreased operating income was the $56 million in restructuring charges, primarily severance, related to our Restructuring Plan, partially offset by strong sales, lower variable compensation costs and the leveraging of corporate resources across each of our three segments.

Materials ($ in millions)

Revenues for the fiscal year ended June 30, 2023 for Materials increased 21% to $1,350 million, compared to revenues of $1,119 million for fiscal year 2022. The increase in revenues during fiscal 2023 was primarily driven by an increase in demand in the electronics end market from innovations in sensing products, partially offset by softer demand in the industrial end market.

Operating income for the fiscal year ended June 30, 2023 for Materials decreased 27%, with operating income of $160 million in fiscal 2023, compared to operating income of $219 million for fiscal year 2022. The decrease in operating income during fiscal 2023 was driven by $60 million in restructuring charges, primarily severance, related to our Restructuring Plan and $33 million for charges for impairment of certain tradename, customer list and technology intangibles. The increases were partially offset by lower variable compensation costs and lower IR&D spending. As a percentage of revenue, operating income decreased from 20% to 12% primarily due to lower gross margins and the fiscal 2023 restructuring charges, partially offset by lower IR&D spending and lower variable compensation. The lower gross margins as a percentage of revenue were driven by less favorable mix of revenues, higher costs related to the write-off of inventory for products that are being exited, underutilized operating capacity in several plants and shut down costs related to site consolidations.

Lasers ($ in millions)

Revenues for the fiscal year ended June 30, 2023 for Lasers were $1,469 million, with 74% in the industrial end market and 26% from the instrumentation end market.

Operating loss for the fiscal year ended June 30, 2023 for Lasers was $419 million. The loss was driven by $297 million of amortization expense related to the preliminary fair value of intangible assets acquired, $158 million of amortization of the preliminary fair value step-up on acquired inventory, $79 million of integration and site consolidation and shut down costs, one-time charges of $39 million for transaction fees and financing, and $18 million of nonrecurring share-based compensation.

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Liquidity and Capital Resources

Historically, our primary sources of cash have been provided from operations, long-term borrowings, 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 business acquisitions, capital expenditures, investments in research and development, 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):

Net cash provided by operating activities:

Net cash provided by operating activities was $546 million during the current fiscal year ended June 30, 2024 compared to $634 million of cash provided by operating activities during the same period last fiscal year. The decrease in cash flows provided by operating activities during the year ended June 30, 2024 compared to the same period last fiscal year was primarily due to lower non-cash adjustments partially offset by lower losses.

Net cash provided by operating activities was $634 million and $413 million for the fiscal years ended June 30, 2023 and 2022, respectively. The increase in cash flows provided by operating activities during the fiscal year ended June 30, 2023 compared to the fiscal year ended June 30, 2022 was driven by improved management of working capital accounts.

Net cash used in investing activities:

Net cash used in investing activities was $0.4 billion for the fiscal year ended June 30, 2024, compared to net cash used of $5.9 billion for the same period last fiscal year. In fiscal 2023, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures decreased by $89 million year-over-year.

Net cash used in investing activities was $5.9 billion and $320 million for the fiscal years ended June 30, 2023 and 2022, respectively. In fiscal 2023, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures increased by $122 million during the fiscal year ended June 30, 2023 compared to the fiscal year ended June 30, 2022, to continue to increase capacity to meet the growing demand for our product portfolio.

Net cash provided by financing activities:

Net cash provided by financing activities was $0.8 billion for the fiscal year ended June 30, 2024, compared to net cash provided by financing activities of $3.6 billion for the same period last fiscal year. Financing inflows in the current year included the $1.0 billion contribution from noncontrolling interests and proceeds from employee stock purchases, partially offset by payments on existing debt and equity issuance costs related to the contribution from noncontrolling interests.

Net cash provided by financing activities was $3.6 billion for the year ended June 30, 2023 compared to net cash provided by financing activities of $863 million for the year ended June 30, 2022. Cash inflow for fiscal 2023 was from borrowings under the New Term Facilities, defined below, as well the net proceeds from the issuance of Coherent’s Series B-2 Convertible Preferred Stock. Financing outflows included payments to settle the Company’s existing senior credit facilities.

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New Senior Credit Facilities

On July 1, 2022, Coherent entered into a Credit Agreement by and among the Company, the lenders, and other parties thereto, and JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, which provides for senior secured financing of $4.0 billion, consisting of a term loan A credit facility (the “Term A Facility”), with an aggregate principal amount of $850 million, a term loan B credit facility (the “Term B Facility” and, together with the Term A Facility, the “Term Facilities”), with an aggregate principal amount of $2,800 million, and a revolving credit facility (the “Revolving Credit Facility” and, together with the Term Facilities, the “Senior Credit Facilities”), in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. On March 31, 2023, Coherent entered into Amendment No. 1 to the Credit Agreement, which replaced the adjusted LIBOR-based rate of interest therein with an adjusted Secured Overnight Financing Rate (“SOFR”) based rate of interest. As amended, the Term A Facility and the Revolving Credit Facility each bear interest at an adjusted SOFR rate subject to a 0.10% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The Term A Facility and the Revolving Credit Facility borrowings bear interest at adjusted SOFR plus 2.00% as of June 30, 2024. On April 2, 2024, Coherent entered into Amendment No. 2 to the Credit Agreement, under which the principal amount of term B loans outstanding under the Credit Agreement (the “Existing Term B Loans”) were replaced with an equal amount of new term loans (the “New Term B Loans”) having substantially similar terms as the Existing Term B Loans, except with respect to the interest rate applicable to the New Term B Loans and certain other provisions. As further amended, the New Term B Loans bear interest at a SOFR rate (subject to a 0.50% floor) plus 2.50% as of June 30, 2024. The maturity of the New Term Loans and revolving credit facility remains unchanged. In relation to the Term Facilities, the Company incurred expense of $237 million for the fiscal year ended June 30, 2024, which is included in Interest expense in the Consolidated Statements of Earnings (Loss). On July 1, 2023, our interest rate cap became effective, which together with our interest rate swap, reduced interest expense by $45 million during the fiscal year ended June 30, 2024.

During the fiscal year ended June 30, 2024, the Company made payments of $225 million for the Term Facilities, including voluntary prepayments of $155 million.

As of June 30, 2024, the Company had no borrowings outstanding under the Revolving Credit Facility.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 7% and 6% for the years ended June 30, 2024 and 2023, respectively.

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

Other Liquidity

On December 4, 2023, the Company consummated two investment agreements under which Silicon Carbide LLC, a Company subsidiary, received $1.0 billion cash in exchange for 25% of the equity of that entity. Such funds will be used primarily to fund future capital expansion, including the previously-announced capital that Coherent intended to invest in its silicon carbide business. As a result, the transaction is enabling Coherent to allocate the capital it had intended to invest in this business unit to other corporate purposes, thus increasing its available free cash flow which will provide greater financial and operational flexibility. See Note 12. Noncontrolling Interests to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

The Company believes existing cash, cash flow from operations, and available borrowing capacity from its Senior Credit Facilities will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and lease obligations, investments in IR&D, and internal and external growth objectives at least through fiscal year 2025.

Our cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of June 30, 2024, we held approximately $870 million of cash, cash equivalents and restricted cash outside of the United States. Generally, cash balances held outside the United States could be repatriated to the United States.

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At June 30, 2024, we had $864 million of restricted cash, which includes $858 million at our Silicon Carbide LLC that is restricted for use by only that subsidiary.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined by Regulation S-K of the Securities Act of 1933.

Contractual Obligations

As of June 30, 2024, in the ordinary course of business, we had total estimated purchase commitments from vendors of approximately $751 million. In addition, as of June 30, 2024, we had obligations under our operating leases of approximately $258 million, $52 million of which will be paid in the fiscal year 2025.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of Coherent’s financial statements with a narrative from the perspective of management. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included under Item 8 of this annual report. Coherent’s MD&A is presented in ten sections:

•Forward-Looking Statements

•Overview

•Acquisition and Background of Coherent, Inc.

•Restructuring and Site Consolidation

•Critical Accounting Policies and Estimates

•Transfer to the New York Stock Exchange and Conversion of Series A Preferred Stock

•Fiscal Year 2023 Compared to Fiscal Year 2022

•Fiscal Year 2022 Compared to Fiscal Year 2021

•Liquidity and Capital Resources

•Off Balance Sheet Arrangements

Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to Item 1A for discussion of these risks and uncertainties).

Forward-Looking Statements

Certain statements contained in this MD&A are forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding projected growth rates, markets, product development, financial position, capital expenditures and foreign currency exposure. Forward-looking statements are also identified by words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “projects” or similar expressions.

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

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

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

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Overview

Coherent Corp. (“Coherent”, the “Company,” “we,” “us” or “our”), a global leader in materials, networking, and lasers, is a vertically integrated manufacturing company that develops, manufactures, and markets engineered materials, optoelectronic components and devices, and lasers for use in the industrial, communications, electronics and instrumentation markets. Headquartered in Saxonburg, Pennsylvania, Coherent has research and development, manufacturing, sales, service, and distribution facilities worldwide. Coherent produces a wide variety of lasers, along with application-specific photonic and electronic materials and components, and deploys them in various forms, including integrated with advanced software to enable its customers.

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

Our customer base includes original equipment manufacturers; laser end users; system integrators of high-power lasers; manufacturers of equipment and devices for industrial, optical communications, electronics, and instrumentation markets; 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 player in all of our highly competitive markets. We may elect to change the way in which we operate or are organized in the future to enable the most efficient implementation of our strategy.

Acquisition and Background of Coherent, Inc.

The acquisition of Coherent, Inc. (“Legacy Coherent”), one of the world’s leading providers of laser and optics-based product solutions, closed on July 1, 2022. For the full fiscal year 2023, Legacy Coherent was included in the combined company and renamed as the Lasers segment. The Lasers segment’s lasers and optics products serve industrial customers in semiconductor and display capital equipment, precision manufacturing and aerospace & defense, as well as instrumentation customers in life science and scientific instrumentation.

Legacy Coherent delivers systems to the world’s leading brands, innovators, and researchers, all backed with a global service and support network. Since inception in 1966, Legacy Coherent has grown through internal organic expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes, and product offerings.

The word “laser” is an acronym for “light amplification by stimulated emission of radiation.” Lasers emit an intense output of light with unique and highly useful properties, of which its near perfect collimation (beam like property) is the most commonly known, as well usually being highly monochromatic at a precise wavelength (color). The name Coherent originates from another key property which is related to the synchronization of the phase of the light oscillations, which is known as coherence. Therefore, lasers are many orders of magnitude brighter than any other optical source. Lasers also can be pulsed at almost any repetition rate, even beyond a billion times per second, and are the technology which underpin the global fiber optic communications network, as well as producing the shortest man-made pulses of any technology known.

As a result of their highly collimated beams, the light can be focused to a very small and intense spot or line, useful for applications requiring enough power to modify the target material, with very high precision through processes such as heat treating (annealing), welding or cutting almost any material. The laser’s high spatial resolution is also useful for microscopic imaging and inspection applications, where the laser light is essentially a highly precise illumination source. These applications typically operate at lower powers, so as not to alter the physical property of the target material.

Lasers can produce the lasing action in the form of a gas, liquid, semiconductor, solid state crystal or fiber. Lasers can also be classified by their output wavelength: ultraviolet, visible, infrared or wavelength tunable. The Lasers segment manufactures all of these laser types, in various options such as continuous wave, pulse duration, output power, and beam dimensions. Each application has its own specific requirements in terms of laser performance.

The Lasers segment's key laser applications include: semiconductor wafer inspection; manufacturing of advanced printed circuit boards; flat panel display manufacturing; metal cutting and welding, including welding of electric vehicle batteries; manufacturing of medical devices; marking; medical; bio-instrumentation and imaging; and research and development. For example, UV lasers are enabling the continuous move towards miniaturization, which drives innovation and growth in many markets. In addition, the advent of industrial grade ultrafast lasers continues to open up new applications for laser processing.

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The Lasers segment’s products are manufactured at sites in California, Oregon, Michigan, New Jersey, and Connecticut in the United States; Germany, Scotland, Finland, Sweden, Switzerland, and Spain in Europe; and South Korea, Singapore, and Malaysia in Asia. In addition, our Lasers segment uses contract manufacturers in Southeast Asia, Eastern Europe and the United States for the production of certain assemblies and turnkey solutions.

Restructuring and Site Consolidation

Restructuring Plan

On May 23, 2023, the Board of Directors approved the Company’s May 2023 Restructuring Plan which includes site consolidations, facilities moves and closures, as well as the relocation and requalification of certain manufacturing facilities. These restructuring actions are expected to be accompanied by other cost reductions and are intended to realign our cost structure as part of a transformation to a simpler, more streamlined, resilient and sustainable business model.

In the fourth quarter of fiscal 2023, these activities resulted in $119 million of charges primarily for employee termination and the write-off of property and equipment, net of $65 million from reimbursement arrangements. We expect the restructuring actions to be substantially completed by the end of fiscal 2025. However, the actual timing and costs associated with these restructuring actions may differ from our current expectations and estimates and such differences may be material. See Note 21. Restructuring and Synergy and Site Consolidation Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

Synergy and Site Consolidation Plan

On May 20, 2023, the Company announced that it has accelerated some of the actions planned as part of its multi-year synergy and site consolidation efforts following the acquisition of Legacy Coherent, including site consolidations and relocations to lower cost sites. These relocations and other actions are expected to result in the Company achieving its previously announced $250 million synergy plan, which includes savings from supply chain management, internal supply of enabling materials and components, operational efficiencies in all functions due to scale, global functional model efficiencies and consolidation of corporate costs. In the fourth quarter of fiscal 2023, the acceleration of these activities resulted in $20 million in charges primarily for employee termination, the write-off of inventory for products that are being exited and shut down costs. See Note 21. Restructuring and Synergy and Site Consolidation Plan to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information.

SiC Strategy

On May 10, 2023, the Company announced that it has commenced a review of strategic alternatives for its Silicon Carbide “SiC” business. We expect to consider a range of strategic alternatives including a minority investment in the SiC business by a strategic or financial partner, joint venture, and/or a sale of the SiC business in fiscal 2024.

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Critical Accounting Policies and Estimates

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

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

Goodwill

We test goodwill for impairment annually, and when events or changes in circumstances indicate that goodwill might be impaired. The determination of whether goodwill is impaired requires us to make judgments based on long-term projections of future performance. Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated results and general economic and market conditions and their projections. For fiscal year 2023, we performed a quantitative assessment, The fair values of the reporting units were determined using a discounted cash flow analysis with projected financial information based on our most recently completed long-term strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting units, as well as a market analysis. Determination of the fair value requires discretion and the use of estimates by management. As of April 1, 2023, we had significant headroom in the Networking and Materials reporting units.

For the Lasers reporting unit, as of April 1, 2023, based on the quantitative assessment, the estimated fair value exceeded the carrying value by approximately 10% and we had determined that the goodwill was at risk for impairment going forward should there be a deterioration of projected cash flows of the reporting unit. Our Lasers reporting unit has goodwill of approximately $3.2 billion at June 30, 2023. In evaluating the Lasers reporting unit, significant weight was provided to the forecasted revenue and related gross margins as we determined that these have the most significant impact on its fair value. The forecasted profitability is expected to increase as volumes increase and the achievement of operating efficiencies and the benefit from the multi-year synergy and site consolidation plans are realized. We used a discount rate of 13.0% which is the required return a market participant would require in its investment in the Reporting Unit based on observed market inputs. If actual results are not consistent with management’s estimates and assumptions, a material goodwill impairment charge could occur, which could have a material adverse effect on our consolidated financial statements.

Due to the cyclical nature of our business, and the other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges and other factors. If material adverse conditions occur that impact one or more of our reporting units, our determination of future fair value might not support the carrying amount of one or more of our reporting units, and the related goodwill would need to be impaired. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods.

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Income Taxes

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

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

Business Combinations

Business combinations are accounted for using the purchase method of accounting. As such, assets acquired, including identified intangible assets, and liabilities assumed are recorded at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. Management engages third party experts to assist in the valuation of material acquisitions. For our acquisition of Legacy Coherent, we used the multi-period excess earnings method to value the customer relationships and relief from royalty method to value trade name and technology intangible assets. The significant assumptions used to estimate the fair value of customer relationships included the forecasted revenue growth, gross margin, projected operating expenses inclusive of expected synergies, including future cost savings, and other benefits expected to be achieved by combining the Company and Legacy Coherent, attrition rate and discount rate. The significant assumption used to estimate the fair value of the trade name included an estimated royalty rate. The significant assumptions used to estimate the fair value of technology included the forecasted revenue growth and an estimated royalty rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions.

Transfer to New York Stock Exchange and Conversion of Series A Preferred Stock

On February 8, 2023, the Company announced the voluntary transfer of the listing of its common stock, no par value (“Company Common Stock”) and Series A Mandatory Convertible Preferred Stock, no par value (“Mandatory Convertible Preferred Stock”), from the NASDAQ Global Select Market to the New York Stock Exchange (the “NYSE”), effective as of the close of trading on February 22, 2023. The Company Common Stock and Mandatory Convertible Preferred Stock began trading on the NYSE on February 23, 2023, under the ticker symbols “COHR” and “IIVI”, respectively.

All outstanding shares of Mandatory Convertible Preferred Stock were converted to Company Common Stock on July 3, 2023, and no shares of Mandatory Convertible Preferred Stock are currently issued and outstanding.

Fiscal Year 2023 Compared to Fiscal Year 2022

Effective July 1, 2022, the Company was aligned to report its financial results in the following three designated segments: (i) Materials, (ii) Networking, and (iii) Lasers. The Materials segment represents the former Compound Semiconductors segment and the Networking segment represents the former Photonic Solutions segment. The Lasers segment represents Legacy Coherent. In addition, prior year numbers have been recast to reflect the transfer of two entities between the Networking and Materials segments. We are reporting financial information (revenue and operating income) for these new reporting segments in this Annual Report on Form 10-K.

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The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2023 and 2022 ($ in millions except per share information):

Consolidated

Revenues. Revenues for the year ended June 30, 2023 increased 56% to $5,160 million, compared to $3,317 million for the prior fiscal year. The biggest driver of increased revenue relates to the Lasers segment, which was acquired as part of the Legacy Coherent (“Merger”) acquisition. The largest growth was in the industrial market with increased sales of $1,015 million, or 136%, year-over-year primarily due to the Lasers segment. The remaining contributions to the increased revenues were from growth in the electronics market, which grew 102% year-over-year, contributing an incremental $315 million in sales, and strength in the communications market, which grew by 6% year-over-year, contributing an incremental $139 million in sales. The growth in the industrial end market was primarily due to incremental sales of $1,088 million in the Lasers segment, partially offset by $73 million of softer sales in the Materials and Networking segments. The growth in the electronics market was primarily in the Materials segment due to innovations in sensing products. The strength in the communications market, primarily in the Networking segment, was due to stronger demand in telecom and datacom. Lasers revenue for fiscal 2023 was $1,469 million, of which 74% was in the industrial end market and 26% in the instrumentation end market.

Organic revenue growth was $374 million, or 11%, year-over-year. Materials contributed $230 million of this organic growth year-over-year, with $316 million growth in the electronics end market from innovations in sensing products, partially offset by softer sales from the industrial end market. Networking increased $144 million year-over-year, with growth in both telecom and datacom.

Gross margin. Gross margin for the year ended June 30, 2023 was $1,618 million, or 31%, of total revenues, compared to $1,265 million, or 38% of total revenues, for fiscal 2022. Gross margin as a percentage of revenues decreased 680 basis points compared to the prior fiscal year. The decrease as a percent of revenue for fiscal 2023 was driven by $158 million of additional expense related to the preliminary fair value adjustment on acquired inventory from the Merger and $87 million of incremental amortization expense related to technology acquired as a result of the Merger. Gross margins excluding the fair value adjustment on acquired inventory and incremental amortization decreased 206 basis points for fiscal 2023 compared to the fiscal 2022, which included a less favorable mix of revenues, higher costs related to the write-off of inventory for product lines that are being exited, underutilized operating capacity in several plants, shut down costs related to site consolidations, and the unfavorable impact of foreign exchange rates.

Internal research and development. IR&D expenses for the fiscal year ended June 30, 2023 were $500 million, or 10% of revenues, compared to $377 million, or 11% of revenues, last fiscal year. The increase of $122 million for fiscal 2023 was driven by an additional $132 million of IR&D expenses from the Lasers segment. As a percentage of revenues, IR&D spend in the Materials segment decreased 4% year-over-year, due to higher costs in fiscal 2022 related to the launch of new products. The IR&D expenses are primarily related to our continued investment in new products and manufacturing processes across all of our businesses, including significant investments in indium phosphide semiconductor lasers, silicon carbide materials, devices for both power electronics and wireless devices, and lasers for display processing and semiconductor capital equipment.

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Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses for the year ended June 30, 2023 were $1,037 million, or 20% of revenues, compared to $474 million, or 14% of revenues, last fiscal year. The increase in SG&A as a percentage of revenue for fiscal 2023 compared to fiscal 2022 was primarily the result of incremental amortization expense of $240 million, including $209 million related to the Merger and $31 million charges for impairment of certain tradename and customer list intangibles assets (see Note 7. Goodwill and Other Intangible Assets to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information). In addition, the increase in SG&A as a percentage of revenue was due to higher one time-charges related to the Merger of $125 million for integration, share-based compensation, and transaction fees, as well as the comparatively larger sales and administrative efforts required to sell an entire laser system versus components and subsystems.

Restructuring Charges. Restructuring charges related to our Restructuring Plan for the year ended June 30, 2023 were $119 million, or 2% of revenues, and consist of severance and equipment write-offs, net of reimbursements, due to the consolidation of certain manufacturing sites. See Note 21. Restructuring and Synergy and Site Consolidation Plan for further information.

Interest and other, net. Interest and other, net for the year ended June 30, 2023 was expense of $318 million compared to expense of $132 million last fiscal year, an increase of $186 million. Included in interest and other, net, were interest expense on borrowings, Merger financing fees, foreign currency gains and losses, amortization of debt issuance costs, equity gains and losses from unconsolidated investments, and interest income on excess cash balances. The increase of $186 million in comparison to fiscal 2022 was driven by $166 million incremental interest expense due to the new debt assumed in the financing of the Merger, with $79 million of the fiscal 2022 interest expense related to funding both raised in advance of the closing of the Merger, and fees for financing to be funded contingent upon the close of the Merger, as well as $35 million incurred in the current year related to financing of the Merger. The increases were partially offset by $6 million lower net foreign currency losses and $5 million of incremental interest income.

Foreign currency losses were $11 million for the year ended June 30, 2023, primarily the result of volatility in the foreign exchange market, compared to $16 million of losses for the year ended June 30, 2022. The fiscal 2022 losses include a $24 million realized loss related the purchase of $345 million Euros to pay off the Euro based debt of Legacy Coherent at transaction closing.

Income taxes. Our effective income tax rate for fiscal 2023 was 27%, compared to an effective tax rate of 17% last fiscal year. The difference between our effective tax rate and the U.S. statutory rate of 21% was due to research and development incentives in certain jurisdictions.

Segment Reporting

Revenues and operating income for our reportable segments are discussed below. Operating income differs from net earnings in that operating income excludes certain expenses, including interest, the impact of foreign exchange, and other miscellaneous expenses 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 14. Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference.

Networking ($ in millions)

Revenues for the year ended June 30, 2023 for Networking increased 7% to $2,341 million, compared to $2,197 million for last fiscal year. The increase in revenues of $144 million during fiscal 2023 was primarily due to increased revenue in the communications market due to stronger demand in telecom and datacom.

Operating income for the year ended June 30, 2023 for Networking decreased 4% to $222 million, compared to operating income of $232 million last fiscal year. The driver of the decreased operating income was the $56 million in restructuring charges, primarily severance, related to our Restructuring Plan, partially offset by strong sales, lower variable compensation costs and the leveraging of corporate resources across each of our three segments.

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Materials ($ in millions)

Revenues for the fiscal year ended June 30, 2023 for Materials increased 21% to $1,350 million, compared to revenues of $1,119 million last fiscal year. The increase in revenues during the current fiscal year was primarily driven by an increase in demand in the electronics end market from innovations in sensing products, partially offset by softer demand in the industrial end market.

Operating income for the fiscal year ended June 30, 2023 for Materials decreased 27%, with operating income of $160 million in the current year, compared to operating income of $219 million last fiscal year. The decrease in operating income during the current fiscal year was driven by $60 million in restructuring charges, primarily severance, related to our Restructuring Plan and $33 million for charges for impairment of certain tradename, customer list and technology intangibles. The increases were partially offset by lower variable compensation costs and lower IR&D spending. As a percentage of revenue, operating income decreased from 20% to 12% primarily due to lower gross margins and the fiscal 2023 restructuring charges, partially offset by lower IR&D spending and lower variable compensation. The lower gross margins as a percentage of revenue were driven by less favorable mix of revenues, higher costs related to the write-off of inventory for products that are being exited, underutilized operating capacity in several plants and shut down costs related to site consolidations.

Lasers ($ in millions)

Revenues for the fiscal year ended June 30, 2023 for Lasers were $1,469 million, with 74% in the industrial end market and 26% from the instrumentation end market.

Operating loss for the fiscal year ended June 30, 2023 for Lasers was $419 million. The loss was driven by $297 million of amortization expense related to the preliminary fair value of intangible assets acquired, $158 million of amortization of the preliminary fair value step-up on acquired inventory, $79 million of integration and site consolidation and shut down costs, one-time charges of $39 million for transaction fees and financing, and $18 million of nonrecurring share-based compensation.

Fiscal Year 2022 Compared to Fiscal Year 2021

Effective July 1, 2022, the Company was aligned to report its financial results in the following three designated segments: (i) Materials, (ii) Networking, and (iii) Lasers. The Materials segment represents the former Compound Semiconductors segment and the Networking segment represents the former Photonic Solutions segment. The Lasers segment represents Legacy Coherent. In addition, prior year numbers have been recast to reflect the transfer of two entities between the Networking and Materials segments. We are reporting financial information (revenue and operating income) for these new reporting segments in this Annual Report on Form 10-K.

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The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2022 and 2021 ($ in millions except per share information):

Consolidated

Revenues. Revenues for the year ended June 30, 2022 increased 7% to $3,317 million, compared to $3,106 million for fiscal 2021. The biggest driver of increased revenue was strength in the communications market, which grew by 7% year-over-year, contributing an incremental $151 million in sales. The strength in the communications market was due to strong demand in datacom and transceivers, specifically for transceivers with data rates greater than 100G. In addition, semiconductor capital equipment sales grew 29% and industrial sales grew 26% compared to fiscal 2021, with an additional $34 million and $85 million in incremental revenue, respectively. This growth was partially offset by decreased revenue in the consumer market, which fell 20%, or $56 million, year-over-year due to lower sales in 3D sensing.

Gross margin. Gross margin for the year ended June 30, 2022 was $1,265 million, or 38%, of total revenues, compared to $1,177 million, or 38% of total revenues, for fiscal 2021. Gross margin as a percentage of revenues increased 20 basis points compared to fiscal 2021.

Internal research and development. IR&D expenses for the fiscal year ended June 30, 2022 were $377 million, or 11% of revenues, compared to $330 million, or 11%. of revenues, in fiscal 2021. The IR&D expenses are primarily related to our continued investment in new products and manufacturing processes across all its businesses including significant investments in indium phosphide semiconductor lasers, silicon carbide materials and devices for both power electronics and wireless devices, semiconductor technology, gallium arsenide semiconductor lasers, and silicon carbide semiconductor technology.

Selling, general and administrative. SG&A expenses for the year ended June 30, 2022 were $474 million, or 14% of revenues, compared to $445 million, or 14% of revenues, in fiscal 2021. We incurred transaction and integration costs relating to the Merger, which increased $9 million year-over-year.

Interest and other, net. Interest and other, net for the year ended June 30, 2022 included expense of $132 million compared to expense of $50 million in fiscal 2021, or an increase of $83 million year over year. Interest and other, net includes $121 million for interest expense on borrowings, and $16 million of foreign currency losses. Interest expense of $121 million incurred in fiscal 2022 was related to funding both raised in advance of the closing of the Merger, as well as fees for financing to be funded contingent upon the close of the transaction, the combined expense totaling $79 million.

Foreign currency losses were $16 million for the year ended June 30, 2022, as compared to $6 million of losses for fiscal 2021. The increased foreign currency impact was the result of volatility in the foreign exchange market, particularly in regard to the Euro. The Company purchased $345 million Euros to pay off the Euro based debt of Coherent at transaction closing, which resulted in a $24 million realized loss during fiscal 2022.

Income taxes. Our effective income tax rate in fiscal 2022 was 17%, compared to an effective tax rate of 16% in fiscal 2021. The fiscal 2022 effective tax rate was lower than statutory rates because of favorable research and development incentives in certain jurisdictions and tax rate differentials between U.S. and foreign jurisdictions.

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Segment Reporting

Revenues and operating income for our reportable segments are discussed below. Operating income differs from net earnings in that operating income excludes certain expenses, including interest, the impact of foreign exchange, and other miscellaneous expenses 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 14. Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference.

Networking ($ in millions)

Revenues for the year ended June 30, 2022 for Networking increased 10% to $2,197 million, compared to $2,004 million for fiscal year 2021. Our transceiver business grew across all product lines including the 200G and 400G modules, an increase of $152 million year-over-year.

Operating income for the year ended June 30, 2022 for Networking increased 15% to $232 million, compared to operating income of $201 million for fiscal year 2021. The drivers of the increased operating income were higher sales volume, and improved operating performance.

Materials ($ in millions)

Revenues for the fiscal year ended June 30, 2022 for Materials increased 2% to $1,119 million, compared to revenues of $1,102 million for fiscal year 2021. The increase in revenues during the current fiscal year was primarily driven by strong sales in the industrial market with an increase of $77 million compared to fiscal 2021. This growth was partially offset by a $67 million decrease in the communications market.

Operating income for the fiscal year ended June 30, 2022 for Materials decreased 4% to $219 million, compared to operating income of $227 million for fiscal year 2021. The decrease in operating income during the current fiscal year as a percent of revenue was driven by a $53 million increase in R&D spend in fiscal year 2022 as compared to fiscal year 2021, primarily for SiC materials and devices and InP technology platforms. Additionally, supply chain costs increased year-over-year further driving the decrease in operating income as a percent of revenue.

Liquidity and Capital Resources

Historically, our primary sources of cash have been provided from operations, long-term borrowings, sale of our equity securities and advance funding from customers. Our historic uses of cash have been for business acquisitions, capital expenditures, investments in research and development, 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:

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Sources (uses) of Cash (millions):

Net cash provided by operating activities:

Net cash provided by operating activities was $634 million during the current fiscal year ended June 30, 2023 compared to $413 million of cash provided by operating activities during the same period last fiscal year. The increase in cash flows provided by operating activities during the year ended June 30, 2023 compared to the same period last fiscal year was driven by improved management of working capital accounts.

Net cash provided by operating activities was $413 million and $574 million for the fiscal years ended June 30, 2022 and 2021, respectively. The increase in cash flows provided by operating activities during the fiscal year ended June 30, 2022 compared to the fiscal year ended June 30, 2021 was primarily driven by decreased net earnings of $63 million due to increased interest expense. In addition, higher levels of working capital were needed in order to ensure business continuity in the face of supply chain challenges and projected growth.

Net cash used in investing activities:

Net cash used in investing activities was $5.9 billion for the fiscal year ended June 30, 2023, compared to net cash used of $320 million for the same period last fiscal year. In fiscal 2023, $5.5 billion was used to fund the Merger. Cash used to fund capital expenditures increased by $122 million year-over-year, to continue to increase capacity to meet the growing demand for our product portfolio.

Net cash used in investing activities was $320 million and $173 million for the fiscal years ended June 30, 2022 and 2021, respectively. Net cash used in investing activities during the fiscal year ended June 30, 2022 primarily included $314 million of cash expenditures to continue to increase capacity to meet the growing demand for our product portfolio. Net cash used in investing activities during the fiscal year ended June 30, 2021 primarily included $34 million for net cash paid for the acquisition of Ascatron AB and INNOViON Corporation and $146 million of cash expenditures to continue to increase capacity to meet the growing demand for our product portfolio.

Net cash provided by financing activities:

Net cash provided by financing activities was $3.6 billion for the fiscal year ended June 30, 2023, compared to net cash provided by financing activities of $863 million for the same period last fiscal year. Cash inflow for the current year-to-date period was from borrowings under the New Term Facilities, defined below, as well the net proceeds from the issuance of Coherent’s Series B-2 Convertible Preferred Stock. Financing outflows included payments to settle the Company’s existing senior credit facilities.

Net cash provided by financing activities was $863 million for the year ended June 30, 2022 compared to net cash provided by financing activities of $676 million for the year ended June 30, 2021. Net cash provided by financing activities during the fiscal year ended June 30, 2022 was primarily driven by $980 million of net proceeds from the Company’s issuance of 5.000% Senior Notes due 2029, issued in December 2021, partially offset by cash used to repay borrowings and Series A dividends, of $62 million and $35 million, respectively.

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Senior Credit Facilities as of June 30, 2022

On July 1, 2022, the amounts outstanding under the Company’s prior senior credit facilities were repaid in full using proceeds from the New Term Facilities (defined below).

New Senior Credit Facilities

On July 1, 2022, Coherent entered into a Credit Agreement by and among the Company, the lenders, and other parties thereto, and JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, which provides for senior secured financing of $4.0 billion, consisting of a term loan A credit facility (the “Term A Facility”), with an aggregate principal amount of $850 million, a term loan B credit facility (the “Term B Facility” and, together with the Term A Facility, the “Term Facilities”), with an aggregate principal amount of $2,800 million, and a revolving credit facility (the “Revolving Credit Facility” and, together with the Term Facilities, the “Senior Credit Facilities”), in an aggregate available amount of $350 million, including a letter of credit sub-facility of up to $50 million. On March 31, 2023, Coherent entered into Amendment No. 1 to the Credit Agreement, which replaced the adjusted LIBOR-based rate of interest therein with an adjusted Secured Overnight Financing Rate (“SOFR”) based rate of interest. As amended, the Term A Facility and the Revolving Credit Facility each bear interest at an adjusted SOFR rate subject to a 0.10% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The Term A Facility and the Revolving Credit Facility borrowings bear interest at adjusted SOFR plus 1.75% as of June 30, 2023. As amended, the Term B Facility bears interest at an adjusted SOFR rate (subject to a 0.50% floor) plus 2.75%. In relation to the Term Facilities, the Company incurred expense of $256 million for the fiscal year ended June 30, 2023, which is included in interest expense in the Consolidated Statements of Earnings (Loss).

During the fiscal year ended June 30, 2023, the Company made payments of $265 million for the Term Facilities, including voluntary prepayments of $212 million.

As of June 30, 2023, the Company had no borrowings outstanding under the Revolving Credit Facility. In the three months ended December 31, 2022, we repaid the $65 million that was borrowed in the three months ended September 30, 2022.

Weighted Average Interest Rate

The weighted average interest rate of total borrowings was 6% and 2% for the years ended June 30, 2023 and 2022, respectively.

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

On July 1, 2022, we utilized $2.1 billion of cash, cash equivalents, and restricted cash as part of the funding required to complete the Merger. The Company believes existing cash, cash flow from operations, and available borrowing capacity from its Senior Credit Facilities will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and lease obligations, investments in IR&D, and internal and external growth objectives at least through fiscal year 2024.

Our cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of June 30, 2023, we held approximately $636 million of cash and cash equivalents outside of the United States. Generally, cash balances held outside the United States could be repatriated to the United States.

At June 30, 2023, we had $16 million of restricted cash.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined by Regulation S-K of the Securities Act of 1933.

Contractual Obligations

As of June 30, 2023, in the ordinary course of business, we had total estimated purchase commitments from vendors of approximately $757 million. In addition, as of June 30, 2023, we had obligations under our operating leases of approximately $219 million, $47 million of which will be paid in the fiscal year 2024.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of II-VI’s financial statements with a narrative from the perspective of management. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included under Item 8 of this annual report. II-VI’s MD&A is presented in nine sections:

•Forward-Looking Statements

•Overview

•Acquisition and Background of Coherent, Inc.

•Critical Accounting Policies and Estimates

•COVID-19 Update

•Fiscal Year 2022 Compared to Fiscal Year 2021

•Fiscal Year 2021 Compared to Fiscal Year 2020

•Liquidity and Capital Resources

•Off Balance Sheet Arrangements

Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to Item 1A for discussion of these risks and uncertainties).

Forward-Looking Statements

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

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

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

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

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Overview

II-VI Incorporated (“II-VI,” the “Company,” “we,” “us” or “our”), a global leader in materials, networking and lasers, is a vertically integrated manufacturing company that develops, manufactures and markets engineered materials, optoelectronic components and devices, and lasers for use in industrial materials processing, optical communications, aerospace and defense, consumer electronics, semiconductor capital equipment, medical diagnostics and life sciences, automotive applications, machine tools, consumer goods and medical device manufacturing. Headquartered in Saxonburg, Pennsylvania, II-VI has research and development, manufacturing, sales, service, and distribution facilities worldwide. II-VI produces a wide variety of lasers, along with application-specific photonic and electronic materials and components, and deploys them in various forms, including integrated with advanced software to enable its customers.

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

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

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.

Acquisition and Background of Coherent, Inc.

Coherent, Inc. ("Coherent"), one of the world's leading providers of laser solutions and optics for microelectronics, life sciences, industrial manufacturing, scientific and aerospace and defense markets, was acquired by II-VI Incorporated on July 1, 2022. In fiscal year 2023, it will be included in the combined company, to be rebranded Coherent Corp., as the Lasers Segment.

Coherent delivers systems to the world's leading brands, innovators, and researchers, all backed with a global service and support network. Since inception in 1966, Coherent has grown through internal expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes, and product offerings. Coherent serves important end markets like microelectronics, precision manufacturing, and instrumentation, as well as applications in aerospace and defense.

The word "laser" is an acronym for "light amplification by stimulated emission of radiation." A laser emits an intense coherent beam of light with some unique and highly useful properties. Most importantly, a laser is orders of magnitude brighter than any lamp. As a result of its coherence, the beam can be focused to a very small and intense spot, useful for applications requiring very high power densities including welding and other materials processing procedures. The laser's high spatial resolution is also useful for microscopic imaging and inspection applications. Laser light can be monochromatic—all of the beam energy is confined to a narrow wavelength band. Lasers can produce the lasing action in the form of a gas, liquid, semiconductor, solid state crystal or fiber. Lasers can also be classified by their output wavelength: ultraviolet, visible, infrared or wavelength tunable. Coherent manufactures all of these laser types, in various options such as continuous wave, pulse duration, output power, beam dimensions, etc. Each application has its own specific requirements in terms of laser performance.

Coherent’s key laser applications include: semiconductor wafer inspection; manufacturing of advanced printed circuit boards; flat panel display manufacturing; solar cell production; medical and bio-instrumentation; materials processing; metal cutting and welding; industrial process and quality control; marking; imaging and printing; graphic arts and display; and research and development. For example, UV lasers are enabling the continuous move towards miniaturization, which drives innovation and growth in many markets. In addition, the advent of industrial grade ultrafast lasers continues to open up new applications for laser processing.

Coherent’s products are manufactured at sites in California, Oregon, Michigan, New Jersey, and Connecticut in the United States; Germany, Scotland, Finland, Sweden, Switzerland, and Spain in Europe; and South Korea, China, Singapore, and Malaysia in Asia. In addition, Coherent also uses contract manufacturers in southeast Asia, Eastern Europe and the United States for the production of certain assemblies and turnkey solutions.

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Critical Accounting Policies and Estimates

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

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

Accounting for Commercial Agreements

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

The Company entered into a commercial agreement with one of our customers to produce certain engineered materials products within the Compound Semiconductors segment. We received payments of $23 million and $8 million during the years ended June 30, 2022 and 2021, respectively, which the Company used to partially fund the purchase of plant and equipment, which is recorded as a contract liability. See Note 4. Revenue from Contracts with Customers of the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K. We determined the contractual rights and obligations in the commercial agreement provide us with the substantive right to substitute alternative assets throughout the period of use and therefore the commercial agreement does not contain a lease under ASC 842.

Goodwill

The Company tests goodwill for impairment annually, and when events or changes in circumstances indicate that goodwill might be impaired. The determination of whether goodwill is impaired requires us to make judgments based on long-term projections of future performance. Estimates of fair value are based on our projection of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated results and general economic and market conditions and their projections. For fiscal year 2022, the fair values of the reporting units were determined using a discounted cash flow analysis with projected financial information based on our most recently completed long-term strategic planning processes and also considers the current financial performance compared to our prior projections of the reporting units, as well as a market analysis. As of June 30, 2022, no reporting units are at risk for impairment. Due to the cyclical nature of our business, and the other factors described in the section on Risk Factors set forth in Item 1A of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges and other factors. If material adverse conditions occur that impact one or both of our reporting units, our determination of future fair value might not support the carrying amount of one or both of our reporting units, and the related goodwill would need to be impaired.

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Income Taxes

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

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

COVID-19 Update

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.

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

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Fiscal Year 2022 Compared to Fiscal Year 2021

As of June 30, 2022, the Company was aligned along the following two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report on Form 10-K.

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

The following table sets forth select items from our Consolidated Statements of Earnings (Loss) for the years ended June 30, 2022 and 2021 ($ in millions except per share information):

Consolidated

Revenues. Revenues for the year ended June 30, 2022 increased 7% to $3,317 million, compared to $3,106 million for the prior fiscal year. The biggest driver of increased revenue was strength in the communications market, which grew by 7% year-over-year, contributing an incremental $151 million in sales. The strength in the communications market was due to strong demand in datacom and transceivers, specifically for transceivers with data rates greater than 100G. In addition, semiconductor capital equipment sales grew 29% and industrial sales grew 26% compared to the same period last year, with an additional $34 million and $85 million in incremental revenue, respectively. This growth was partially offset by decreased revenue in the consumer market, which fell 20%, or $56 million, year-over-year due to lower sales in 3D sensing.

Gross margin. Gross margin for the year ended June 30, 2022 was $1,265 million, or 38%, of total revenues, compared to $1,177 million, or 38% of total revenues, for the same period last fiscal year. Gross margin as a percentage of revenues increased 20 basis points compared to the prior fiscal year.

Internal research and development. Internal research and development (“IR&D”) expenses for the fiscal year ended June 30, 2022 were $377 million, or 11% of revenues, compared to $330 million, or 11%. of revenues, last fiscal year. The IR&D expenses are primarily related to the Company's continued investment in new products and manufacturing processes across all its businesses including significant investments in indium phosphide semiconductor lasers, silicon carbide materials and devices for both power electronics and wireless devices, semiconductor technology, gallium arsenide semiconductor lasers, and silicon carbide semiconductor technology.

Selling, general and administrative. SG&A expenses for the year ended June 30, 2022 were $474 million, or 14% of revenues, compared to $445 million, or 14% of revenues, last fiscal year. The Company incurred transaction and integration costs relating to the acquisition of Coherent, which increased $9 million year-over-year.

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Interest and other, net. Interest and other, net for the year ended June 30, 2022 included expense of $132 million compared to expense of $50 million last fiscal year, or an increase of $83 million year over year. Interest and other, net includes $121 million for interest expense on borrowings, and $16 million of foreign currency losses. Interest expense of $121 million incurred in FY22 was related to funding both raised in advance of the closing of the Coherent acquisition, as well as fees for financing to be funded contingent upon the close of the transaction, the combined expense totaling $79 million.

Foreign currency losses were $16 million for the year ended June 30, 2022, as compared to $6 million of losses for the year ended June 30, 2021. The increased foreign currency impact was the result of volatility in the foreign exchange market, particularly in regard to the Euro. The Company purchased $345 million Euros to pay off the Euro based debt of Coherent at transaction closing, which resulted in a $24 million realized loss during the year ended June 30, 2022.

Income taxes. The Company’s year-to-date effective income tax rate at June 30, 2022 was 17%, compared to an effective tax rate of 16% last fiscal year. The current fiscal year’s effective tax rate was lower than statutory rates because of favorable research and development incentives in certain jurisdictions and 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 income from operations in that operating income excludes certain expenses, including interest, the impact of foreign exchange, and other miscellaneous expenses 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, which is used by management in its evaluation of segment performance. See Note 14. Segment and Geographic Reporting to the Company’s Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information on the Company’s reportable segments and for the reconciliation of operating income to net earnings, which is incorporated herein by reference.

Photonic Solutions ($ in millions)

Revenues for the year ended June 30, 2022 for Photonic Solutions increased 9% to $2,226 million, compared to $2,038 million for last fiscal year. Our transceiver business grew across all product lines including the 200G and 400G modules, an increase of $152 million year-over-year.

Operating income for the year ended June 30, 2022 for Photonic Solutions increased 11% to $230 million, compared to an operating income of $208 million last fiscal year. The drivers of the increased operating income were higher sales volume, and improved operating performance.

Compound Semiconductors ($ in millions)

Revenues for the fiscal year ended June 30, 2022 for Compound Semiconductors increased 2% to $1,090 million, compared to revenues of $1,068 million last fiscal year. The increase in revenues during the current fiscal year was primarily driven by strong sales in the industrial and semiconductor capital equipment businesses, an increase of $64 million and $30 million in comparison to prior year, respectively. This growth was partially offset by a $56 million decrease in the consumer market.

Operating income for the fiscal year ended June 30, 2022 for Compound Semiconductors remained flat, with operating income of $220 million in the current year, compared to operating income of $221 million last fiscal year. The decrease in operating income during the current fiscal year as a percent of revenue was driven by a $53 million increase in R&D spend in fiscal year 2022 as compared to fiscal year 2021, primarily for SiC materials and devices and InP technology platforms. Additionally, supply chain costs increased year-over-year further driving the decrease in operating income as a percent of revenue.

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Fiscal Year 2021 Compared to Fiscal Year 2020

As of June 30, 2021, the Company was aligned along the following two reporting segments for the purpose of making operational decisions and assessing financial performance: (i) Compound Semiconductors and (ii) Photonic Solutions. The Company is reporting financial information (revenue and operating income) for these reporting segments in this Annual Report on Form 10-K.

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

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

Consolidated

Revenues. Revenues for the year ended June 30, 2021 increased 30% to $3,106 million, compared to $2,380 million for fiscal year 2020. Revenue for 2021 was a record with growth across all end markets compared to the same period in fiscal year 2020. Communications, our largest vertical, grew 30% compared to the same period in the prior year. This increase was due to a full year of Finisar Corporation ("Finisar") revenue, strong demand across transceivers, including 200/400G products, as well as other optical communications products. The strong demand for our 3D sensing products drove 118% growth in revenue for consumer electronics. Life sciences grew 65%, driven by demand for our filters, optics and thermo-electric coolers for COVID-19 related PCR testing and sequencing instrumentation. Our industrial business grew 11% compared to the same period in the prior year, due to strong growth in both "CO 2" and one micron laser components.

Gross margin. Gross margin for the year ended June 30, 2021 was $1,177 million, or 38%, of total revenues, compared to $791 million, or 33% of total revenues, for the same period fiscal year 2020. Gross margin as a percentage of revenues increased 470 basis points compared to the prior fiscal year. Gross margin was negatively impacted in the in fiscal year 2020 by the effects of purchase accounting on inventory, an increased value of $87.7 million related to the fair value adjustment of the acquired Finisar inventory.

Internal research and development. Company-funded IR&D expenses for the fiscal year ended June 30, 2021 were $330 million, or 11% of revenues, compared to $339 million, or 14% of revenues, fiscal year 2020. The IR&D expenses were primarily related to the Company continuing to invest in new products and processes across all its businesses including investments in high speed datacom and telecom transceivers, high speed integrated circuits (ICs), 5G technology, 3D sensing,

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indium phosphide semiconductor lasers, gallium arsenide semiconductor lasers, silicon carbide semiconductor technology, and other emerging market trends.

Selling, general and administrative. SG&A expenses for the year ended June 30, 2021 were $445 million, or 14% of revenues, compared to $413 million, or 17% of revenues, fiscal year 2020. The Company incurred transaction and integration costs relating to the acquisitions of Finisar, Ascatron AB ("Ascatron") and INNOViON Corporation ("Innovion"), the acquisition of Coherent, increased stock compensation due to the increased II-VI stock price, as well as the SG&A from the operations of Ascatron and Innovion.

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

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

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

Photonic Solutions ($ in millions)

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

Revenues for the year ended June 30, 2021 for Photonic Solutions increased 33% to $2,038 million, compared to $1,537 million for fiscal year 2020. The largest driver of the increase was the inclusion of four full fiscal quarters of revenue from Finisar compared to six days and three quarters of revenue in the prior year. Our transceiver business grew across all product lines including the 200G and 400G modules.

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

Compound Semiconductors ($ in millions)

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

Revenues for the fiscal year ended June 30, 2021 for Compound Semiconductors increased 30% to $1,068 million, compared to revenues of $821 million for fiscal year 2020. The increase in revenues during the current fiscal year was primarily driven by over a 100% increase in VCSEL product shipments addressing the 3D sensing consumer market, and increased revenues to customers in all of our other markets with significant growth in our Life Sciences business.

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Operating income for the fiscal year ended June 30, 2021 for Compound Semiconductors increased 255% to $221 million, compared to operating income of $62 million for fiscal year 2020. The increase in operating income during fiscal year 2021 was primarily driven by product mix and improved absorption of operating costs due to higher volumes and shipping 3D sensing products. In addition, the expenses associated with the fair value inventory write-up and other related acquisition expenses for Finisar did not repeat in fiscal year 2021.

Liquidity and Capital Resources

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

Sources (uses) of Cash (millions):

Net cash provided by operating activities:

Net cash provided by operating activities was $413 million during the current fiscal year ended June 30, 2022 compared to $574 million of cash provided by operating activities during the same period last fiscal year. The decrease in cash flows provided by operating activities during the year ended June 30, 2022 compared to the same period last fiscal year was driven by decreased net earnings of $63 million in the year ended June 30, 2022 due to increased interest expense. In addition, higher levels of working capital were needed in order to ensure business continuity in the face of supply chain challenges and projected growth.

Net cash provided by operating activities was $574 million and $297 million for the fiscal years ended June 30, 2021 and 2020, respectively. The increase in cash flows provided by operating activities during the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 was primarily driven by additional net earnings of $277 million.

Net cash used in investing activities:

Net cash used in investing activities was $320 million for the fiscal year ended June 30, 2022, compared to net cash used of $173 million for the same period last fiscal year. Net cash used in investing activities during the current period included $314 million of capital expenditures to continue to increase capacity to meet the growing demand for the Company’s product portfolio.

Net cash used in investing activities was $173 million and $1,179 million for the fiscal years ended June 30, 2021 and 2020, respectively. Net cash used in investing activities during the fiscal year ended June 30, 2021 primarily included $34 million for

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net cash paid for the acquisition of Ascatron and Innovion and $146 million of cash expenditures to continue to increase capacity to meet the growing demand for the Company's product portfolio. Net cash used in investing activities during the fiscal year ended June 30, 2020 primarily included $1,037 million for net cash paid for the acquisition of Finisar.

Net cash provided by financing activities:

Net cash provided by financing activities was $863 million for the fiscal year ended June 30, 2022, compared to net cash provided by financing activities of $676 million for the same period last fiscal year. Net cash provided by financing activities was driven by $980 million of net proceeds from the Company's issuance of 5.000% Senior Notes due 2029, issued in December 2021, partially offset by cash used to repay borrowings and Series A dividends, of $62 million and $35 million, respectively.

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

Senior Credit Facilities as of June 30, 2022

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

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

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

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

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

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

Funding of Coherent Acquisition on July 1, 2022

The Company funded amounts payable in connection with the Merger with the proceeds of the loans borrowed under the New Term Facilities (as defined below) on the closing date of the Merger, together with other financing sources (including the net proceeds from the issuance and sale of the Company’s previously issued 5.000% Senior Notes due 2029) and cash on hand. In particular, cash from these sources was used to fund (i) the cash consideration payable in connection with the Coherent Merger, (ii) the repayment in full of the Senior Credit Facilities (as defined above), and Coherent’s credit agreement, dated as of November 7, 2016, as amended, and (iii) certain fees and expenses in connection with the Coherent Merger. The net cash outflow on July 1, 2022 to complete the funding of the Merger was $2.1 billion.

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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, were fully priced and allocated. The New Term Facilities were funded concurrently with the closing of the Merger. The New Revolving Credit Facility also became available concurrently with the closing of the Merger. The New Term A Facility and the New Revolving Credit Facility will each bear interest at LIBOR subject to a 0.00% floor plus a range of 1.75% to 2.50%, based on the Company’s total net leverage ratio. The New Term A Facility and the New Revolving Credit Facility borrowings are initially expected to bear interest at LIBOR plus 2.00%. The New Term B Facility will bear interest at LIBOR (subject to a 0.50% floor) plus 2.75%. In relation to the New Term B Facility, the Company incurred expense of $34 million in the year ended June 30, 2022, which is included in interest expense in the Consolidated Statements of Earnings (Loss). The definitive documentation for the New Term Facilities and the New Revolving Credit Facility include customary LIBOR replacement provisions.

As of August 1, 2022, the Company had no amount outstanding under the New Revolving Credit Facility.

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 used 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.

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

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

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.

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. The if-converted value of the II-VI Convertible Notes amounted to $370 million as of June 30, 2022 and $532 million as of June 30, 2021 (based on the Company’s closing stock price on the last trading day of the fiscal periods then ended).

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. For conversions occurring on or after June 1, 2022, the Company has delivered or will deliver shares of II-VI Common Stock to settle conversions.

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

Aggregate Availability

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

Weighted Average Interest Rate

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

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

On July 1, 2022 the Company utilized $2.1 billion of cash, cash equivalents, and restricted cash as part of the funding required to complete the Coherent acquisition. The Company believes existing cash, cash flow from operations, and available borrowing capacity from its New Senior Credit Facilities will be sufficient to fund its needs for working capital, capital expenditures, repayment of scheduled long-term borrowings and lease obligations, investments in internal research and development, and internal and external growth objectives at least through fiscal year 2023. Additionally, the Company expects to settle any future conversions of its II-VI Convertible Notes in shares of common stock. However, the Company may be required to repay in cash any outstanding II-VI Convertible Notes that are not converted prior to the Maturity Date for the II-VI Convertible Notes.

The Company’s cash and cash equivalent balances are generated and held in numerous locations throughout the world, including amounts held outside the United States. As of June 30, 2022, the Company held approximately $332 million of cash and cash equivalents outside of the United States. Cash balances held outside the United States could be repatriated to the United States.

Share Repurchase Program

In August 2014, the Company’s Board of Directors authorized the Company to purchase up to $50 million of its common stock through a share repurchase program (the “Program”) that calls for shares to be purchased in the open market or in private transactions from time to time. The Program has no expiration and may be suspended or discontinued at any time. Shares purchased by the Company are retained as treasury stock and available for general corporate purposes. The Company did not repurchase shares pursuant to this Program during the fiscal years ended June 30, 2022 or June 30, 2021. As of June 30, 2022, the Company has cumulatively purchased 1,416,587 shares of its common stock pursuant to the Program for approximately $22 million. The dollar value of shares as of June 30, 2022 that may yet be purchased under the Program is approximately $28 million.

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Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined by Regulation S-K of the Securities Act of 1933.

Contractual Obligations

As of June 30, 2022, in the ordinary course of business, we had total estimated purchase commitments from vendors of approximately $704 million. In addition, as of June 30, 2022, we had obligations under our operating leases of approximately $171 million, $34 million of which will be paid in the fiscal year 2023.

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

Forward-Looking Statements

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

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

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

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

Overview

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

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

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

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

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

Pending Acquisition of Coherent, Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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Critical Accounting Policies and Estimates

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

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

Series A Preferred Stock

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

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

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

Goodwill

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

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Income Taxes

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

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

COVID-19 Update

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

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

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

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

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

Fiscal Year 2021 Compared to Fiscal Year 2020

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

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

Consolidated

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

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

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

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

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

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

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

Segment Reporting

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

Photonic Solutions ($ in millions)

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

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

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

Compound Semiconductors ($ in millions)

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

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

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

Fiscal Year 2020 Compared to Fiscal Year 2019

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

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

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Consolidated

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

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

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

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

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

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

Photonic Solutions ($ in millions)

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

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

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

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Compound Semiconductors ($ in millions)

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

Sources (uses) of Cash (millions):

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Net cash provided by operating activities:

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

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

Net cash used in investing activities:

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

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

Net cash provided by financing activities:

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

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

Senior Credit Facilities

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

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

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

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

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

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

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

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

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

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

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

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

0.50% Finisar Convertible Notes

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

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

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

0.25% Convertible Senior Notes

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

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

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

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

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

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

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

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

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

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

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

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

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

Aggregate Availability

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

Weighted Average Interest Rate

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

Share Repurchase Programs

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

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

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

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

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

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Off-Balance Sheet Arrangements

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

Tabular Disclosure of Contractual Obligations

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

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

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

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

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