Note 3.

Acquisitions and Investment

Purchase of Equity Investment

In November 2017, the Company acquired a 93.8% equity investment in a privately-held company for $51.5 million. The Company’s pro-rata share of earnings from this investment since the acquisition date was $1.1 million, and was recorded in other expense (income), net for the three and six months ended December 31, 2017, in the Consolidated Statements of Earnings.

The Company has a nonconsolidated investment that is accounted for under the equity method of accounting (“Equity Investment”). The following table summarizes the Company's equity in the nonconsolidated investment:

Interest

Ownership % as of

Equity as of

Location

Type

December 31, 2017

December 31, 2017 ($000)

USA

Equity Investment

93.80%

54,835

The Equity Investment has been determined to be a variable interest entity because the Company has an overall 93.8% economic position in the investee comprising a significant portion of its capitalization, but has only a 25% voting interest. The Company’s obligation to receive rewards and absorb expected losses is disproportionate to its voting interest. The Company is not the primary beneficiary because it does not have the power to direct the activities of the equity investment that most significantly impact its economic performance. Certain business decisions, including, but not limited to, decisions with respect to operating budgets, material capital expenditures, indebtedness, significant acquisitions or dispositions, and strategic decisions, require the approval of owners holding a majority percentage in the Equity Investment. Beginning on the date it was acquired, the Company accounted for its interest as an equity method investment as the Company has the ability to exercise significant influence over operating and financial policies of the Equity Investment.

As of December 31, 2017, the Company’s maximum financial statement exposure related to the Equity Investment was approximately $54.8 million, which is the investment balance on the Consolidated Balance Sheet as of December 31, 2017.

The Company has the right to purchase all of the outstanding interest of each of the minority equity holders and the minority equity holders have the right to cause the Company to purchase all of outstanding interest at any time on or after the third anniversary of the investment or earlier upon certain events. The purchase price is equal to the greater of: (a) (i) the product of the aggregate trailing 12-month revenues of the investment preceding the date of purchase, multiplied by (ii) a factor of 2.9 multiplied by (iii) a factor of 0.723, multiplied by (iv) the percentage interest owned by each minority equity holder and (b) $966,666. The Company performed a Monte Carlo simulation to estimate the fair value of the net put option at the investment date and recorded a liability of $2.2 million in other long-term liabilities in the Condensed Consolidated Balance Sheet at December 31, 2017 in accordance with ASC 815-10, Derivatives and Hedging. The fair value of the net put option will be adjusted on a quarterly basis with any changes in the fair value recorded through earnings.

Kaiam Laser Limited, Inc.

In August 2017, the Company acquired Kaiam Laser Limited, Inc. (“Kaiam”) a privately held company based in Newton Aycliffe, United Kingdom. Under the terms of the merger agreement, the consideration consisted of cash paid at the acquisition date of $79.5 million, net of cash acquired. The acquisition of Kaiam provides the Company with a 150mm wafer fabrication platform to significantly expand the Company’s capacity for the production of vertical cavity surface emitting lasers (“VCSELs”) for the 3D sensing market and broadens the capability to address new market opportunities in other compound semiconductor materials. Kaiam now operates under the name II-VI Compound Semiconductor Ltd. within the Company’s II-VI Laser Solutions operating segment. Due to the timing of the acquisition, the Company is still in the process of measuring the fair value of assets acquired, including tangible, intangible assets and related deferred income taxes.

The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition, as the Company intends to finalize its accounting for the acquisition of II-VI Compound Semiconductor Ltd. within one year from the date of acquisition ($000):

Assets
Accounts receivable	$	79
Inventories		4,559
Prepaid and other assets		1,246
Property, plant & equipment		63,899
Intangible assets		4,046
Goodwill		19,670
Total assets acquired	$	93,499

Liabilities
Accounts payable	$	751
Other accrued liabilities		2,486
Deferred tax liabilities		10,797
Total liabilities assumed		14,034
Net assets acquired	$	79,465

The goodwill of $19.7 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of II-VI Compound Semiconductor Ltd. None of the goodwill is deductible for income tax purposes. The Company expensed transaction costs of $0.6 million for the six months ended December 31, 2017.

The amount of revenues of II-VI Compound Semiconductor Ltd. included in the Company’s Consolidated Statement of Earnings for the three and six months ended December 31, 2017 was $1.0 million and $1.6 million, respectively. The amount of net loss of II-VI Compound Semiconductor Ltd. included in the Company’s Consolidated Statement of Earnings for the three and six months ended December 31, 2017 was $2.5 million and $6.2 million, respectively.

Integrated Photonics, Inc.

In June 2017, the Company acquired Integrated Photonics, Inc. (“IPI”), a privately held company based in New Jersey. IPI is a leader in engineered magneto-optic materials that enable high-performance directional components such as optical isolators for the optical communications market. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $40.1 million, net of cash acquired and a working capital adjustment of $0.8 million. In addition, the agreement provides up to a maximum of $2.5 million of additional cash earnout opportunities based upon IPI achieving certain agreed upon financial and transitional objectives, which if earned would be payable in the amount of $2.5 million for the achievement of the annual target.

The following table presents the preliminary purchase price at the date of acquisition ($000):

Net cash paid at acquisition	$	40,098
Working capital adjustment		837
Fair value of cash earnout arrangement		2,215
Purchase price	$	43,150

The following table presents the preliminary allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition, as the Company intends to finalize its accounting for the valuation of property, plant and equipment, identifiable intangibles and deferred income tax liabilities and anticipates completion of the valuation within one year from the date of the acquisition ($000):

Assets
Accounts receivable	$	2,083
Inventories		3,968
Prepaid and other assets	322
Property, plant & equipment		11,235
Intangible assets		23,554
Goodwill		17,503
Total assets acquired	$	58,665

Liabilities
Accounts payable	$	847
Other accrued liabilities		1,032
Long-term debt assumed		3,834
Deferred tax liabilities		9,802
Total liabilities assumed		15,515
Net assets acquired	$	43,150

The goodwill of $17.5 million is included in the II-VI Photonics segment and is attributed to the expected synergies and the assembled workforce of IPI. None of the goodwill is deductible for income tax purposes. The fair value of accounts receivable acquired was $2.1 million with the gross contractual amount being $2.1 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $0.3 million all within the year ended June 30, 2017.

The amount of revenues of IPI included in the Company’s Consolidated Statement of Earnings for the three and six months ended December 31, 2017 was $4.9 million and $10.3 million, respectively. The amount of net earnings of IPI included in the Company’s Consolidated Statement of Earnings for the three and six months ended December 31, 2017 was $1.0 million and $1.4 million, respectively.