Goodwill and Other Intangible Assets

12 Months Ended

Jun. 30, 2014

Note 6.

Goodwill and Other Intangible Assets

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

In connection with the two acquisitions completed in fiscal year 2014 and the acquisitions completed in fiscal year 2013, the Company recorded the excess purchase prices over the net assets of the businesses acquired as goodwill in the accompanying Consolidated Balance Sheets, based on the purchase price allocation. Changes in the carrying amount of goodwill were as follows:

	Year Ended June 30, 2014
			Near-		Military		Advanced			Active
	Infrared		Infrared		&		Products			Optical
	Optics		Optics		Materials		Group			Products		Total

Balance-July 1, 2013	$	9,677	$	60,269	$	30,712	$	22,694		$	-	$	123,352
Goodwill acquired		-		-		-		-			73,093		73,093
Goodwill adjustment		-		-		-		(516	)		-		(516	)
Foreign currency translation		77		139		-		-			-		216
Balance-June 30, 2014	$	9,754	$	60,408	$	30,712	$	22,178		$	73,093	$	196,145

During the year ended June 30, 2014, the Company recorded an adjustment to goodwill of $0.5 million associated with the November 2012 acquisition of M Cubed Technologies, Inc. (“M Cubed”). This adjustment related to a change in deferred income tax assets and was recorded in conjunction with the finalization and filing of the M Cubed final income tax return.

	Year Ended June 30, 2013
			Near-		Military		Advanced
	Infrared		Infrared		&		Products
	Optics		Optics		Materials		Group		Total

Balance-July 1, 2012	$	9,612	$	48,496	$	12,326	$	10,314	$	80,748
Goodwill acquired		-		10,980		18,386		12,381		41,746
Foreign currency translation		65		793		-		-		858
Balance-June 30, 2013	$	9,677	$	60,269	$	30,712	$	22,694	$	123,352

The Company reviews the recoverability of goodwill at least annually and any time business conditions indicate a potential change in recoverability. The measurement of a potential impairment begins with comparing the current fair value of the Company’s reporting units to the recorded value (including goodwill). The Company used a discounted cash flow (DCF) model and a market analysis to determine the current fair value of all its reporting units except for the Active Optical Products reporting unit. A number of significant assumptions and estimates are involved in estimating the forecasted cash flows used in the DCF model, including markets and market shares, sales volume and pricing, costs to produce, working capital changes and income tax rates. Management considers historical experience and all available information at the time the fair values of the reporting units are estimated. The Company has the option to perform a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. Due to the timing of the Company’s finalization of the current year acquisitions of Laser Enterprise and Network Solutions, a qualitative test was performed on the Active Optical Products segment during fiscal year ended 2014. As of April 1 of fiscal years 2014 and 2013, the Company completed its annual impairment tests of its reporting units. Based on the results of these analyses, the Company’s goodwill of $196.1 million as of June 30, 2014 and $123.4 million as of June 30, 2013 was not impaired.

As the estimated fair value of the Near Infrared Optics reporting unit was approximately 9% greater than its carrying value, the Company has concluded that this reporting unit is at risk of not passing step one of future goodwill impairment tests. In the event of unfavorable changes to the existing assumptions used in the impairment test such as the weighted average cost of capital (discount rate), growth rates and market multiples as well as changes in our internal structure, the carrying value of the Company’s goodwill could be impaired. Although the Company believes that the current assumptions and estimates are reasonable, supportable and appropriate, the Near Infrared Optics reporting unit competes in a challenging environment with significant pricing pressure and rapidly changing technology and there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment test will prove to be accurate predictions of future performance.

As a result of the July 1, 2014 segment realignment as described in Item 1 of this Annual Report on Form 10-K, the Company will reassign the Active Optical Products segment's existing goodwill balance to the new reporting units utilizing a relative fair value allocation approach in accordance with authoritative accounting guidance. As part of this reassignment, the Company may be required to review the recoverability of the carrying value of goodwill at the new reporting units.

The gross carrying amount and accumulated amortization of the Company’s intangible assets other than goodwill as of June 30, 2014 and 2013 were as follows:

	Year Ended June 30, 2014							Year Ended June 30, 2013
	Gross					Net		Gross					Net
	Carrying		Accumulated			Book		Carrying		Accumulated			Book
	Amount		Amortization			Value		Amount		Amortization			Value

Technology and patents	$	50,505	$	(14,474	)	$	36,031	$	39,659	$	(10,455	)	$	29,204
Trademarks		17,870		(1,037	)		16,833		17,855		(963	)		16,892
Customer lists		102,839		(19,448	)		83,391		52,614		(12,189	)		40,425
Other		1,586		(1,437	)		149		1,580		(1,400	)		180
Total	$	172,800	$	(36,396	)	$	136,404	$	111,708	$	(25,007	)	$	86,701

Amortization expense recorded on the intangible assets for the fiscal years ended June 30, 2014, 2013 and 2012 was $11.3 million, $6.7 million, and $4.5 million, respectively. The technology and patents are being amortized over a range of 60 to 240 months with a weighted-average remaining life of approximately 118 months. The customer lists are being amortized over 120 to 192 months with a weighted-average remaining life of approximately 150 months. As a result of the completion of the valuations of our recent acquisitions of Laser Enterprise and Network Solutions, the Company recorded $10.8 million of technology and patents and $50.1 million of customer lists.

In connection with past acquisitions, the Company acquired tradenames with indefinite lives. The carrying amount of these tradenames of $16.4 million is not amortized but tested annually for impairment. The Company completed its impairment test of these tradenames with indefinite lives in the fourth quarter of fiscal years 2014 and 2013. Based on the results of these tests, the tradenames were not impaired at June 30, 2014 or 2013.

Included in the gross carrying amount and accumulated amortization of the Company’s patents, customer list and other component of intangible assets and goodwill is the effect of the foreign currency translation of the portion relating to the Company’s German subsidiaries, Photop and AOFR. The estimated amortization expense for existing intangible assets for each of the five succeeding years is as follows:

Year Ending June 30,
2015	$	11,716
2016		11,619
2017		11,609
2018		11,140
2019		10,715

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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