BUSINESS COMBINATIONS

Fiscal 2018 Acquisitions

OR Laser

On March 8, 2018, we acquired OR Laser for approximately $47.4 million, excluding transaction costs. OR Laser produces laser-based material processing equipment for a variety of uses including additive manufacturing, welding, cladding, marking, engraving and drilling. OR Laser's operating results have been included in our Industrial Lasers & Systems segment. See Note 17, "Segment Information".

Our preliminary allocation of the purchase price is as follows (in thousands):



Tangible assets:
Cash	$	1,936
Accounts receivable	3,973
Inventories	2,360
Prepaid expenses and other assets	630
Property and equipment	1,515
Liabilities assumed	(4,963		)
Deferred tax liabilities	(4,517		)
Intangible assets:
Existing technology	14,100
Non-competition	200
Backlog	100
Customer relationships	700
Trademarks	50
Goodwill	31,300
Total	$	47,384

Results of operations for the business have been included in our condensed consolidated financial statements subsequent to the date of acquisition and pro forma results of operations in accordance with authoritative guidance for prior periods have not been presented because the effect of the acquisition was not material to our prior period consolidated financial results.

The identifiable intangible assets are being amortized over their respective preliminary useful lives of 1 to 8 years. The fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, which was allocated to goodwill.

We believe the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to the development of new technologies related primarily to the additive manufacturing business; and (2) the potential to leverage our sales force to attract new customers and revenue and cross-sell to existing customers.

None of the goodwill from this purchase is deductible for tax purposes.

We expensed $0.4 million of acquisition-related costs as selling, general and administrative expenses in our condensed consolidated statement of operations for the three and six months ended March 31, 2018.

Fiscal 2017 Acquisitions

Rofin

On November 7, 2016, we completed our acquisition of Rofin pursuant to the Merger Agreement dated March 16, 2016. Rofin is one of the world's leading developers and manufacturers of high-performance industrial laser sources and laser-based solutions and components. Rofin's operating results have been included primarily in our Industrial Lasers & Systems segment. See Note 17, "Segment Information".

As a condition of the acquisition, we were required to divest and hold separate Rofin’s low power CO₂ laser business based in Hull, United Kingdom (the "Hull Business"), and had reported this business separately as a discontinued operation until its divestiture. We completed the divestiture of the Hull Business on October 11, 2017, after receiving approval for the terms of the sale from the European Commission. See Note 19, "Discontinued Operations and Assets Held for Sale".

The total purchase consideration has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on a valuation analysis.

The total purchase consideration allocated to net assets acquired was approximately $936.3 million and consisted of the following (in thousands):



Cash consideration to Rofin's shareholders	$	904,491
Cash settlement paid for Rofin employee stock options	15,290
Total cash payments to Rofin shareholders and option holders	919,781
Add: fair value of previously owned Rofin shares	20,685
Less: post-merger stock compensation expense	(4,152		)
Total purchase price to allocate	$	936,314

The acquisition was an all-cash transaction at a price of $32.50 per share of Rofin common stock. We funded the payment of the aggregate consideration with a combination of our available cash on hand and the proceeds from the Euro Term Loan described in Note 9, "Borrowings". The total payment of $15.3 million due to the cancellation of options held by employees of Rofin was allocated between total estimated merger consideration of $11.1 million and post-merger stock-based compensation expense of $4.2 million based on the portion of the total service period of the underlying options that had not been completed by the merger date.

We recognized a gain of $5.4 million in the first quarter of fiscal 2017 on the increase in fair value from the date of purchase for the shares of Rofin we owned before the acquisition.

Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Rofin based on their fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. We concluded that all such goodwill will not be deductible for tax purposes.

Our allocation of the purchase price is as follows (in thousands):



Cash, cash equivalents and short-term investments	$	163,425
Accounts receivable	90,877
Inventory	189,869
Prepaid expenses and other assets	15,362
Assets held-for-sale, current	29,545
Property and equipment	125,723
Other assets	31,854
Intangible assets:
Existing technology	169,029
In-process research and development	6,000
Backlog	5,600
Customer relationships	39,209
Trademarks	5,699
Patents	300
Goodwill	298,170
Current portion of long-term obligations	(3,633		)
Current liabilities held for sale	(7,001		)
Accounts payable	(21,314		)
Other current liabilities	(68,242		)
Long-term debt	(11,641		)
Other long-term liabilities	(122,517		)
Total	$	936,314

The fair value write-up of acquired finished goods and work-in-process inventory was $26.4 million, which was amortized over the expected period during which the acquired inventory was sold, or 6 months. Accordingly, for fiscal 2017, we recorded $26.4 million of incremental cost of sales associated with the fair value write-up of inventory acquired in the merger with Rofin. The fair value write-up of inventory acquired was fully amortized in fiscal 2017.

The fair value write-up of acquired property, plant and equipment of $36.0 million will be amortized over the useful lives of the assets, ranging from 3 to 31 years. Property, plant and equipment is valued at its value-in-use, unless there was a known plan to dispose of the asset.

The acquired existing technology, backlog, trademarks and patents are being amortized on a straight-line basis, which approximates the economic use of the asset, over their estimated useful lives of 3 to 5 years, 6 months, 3 years, and 5 years, respectively. Customer relationships are being amortized on an accelerated basis utilizing free cash flows over periods ranging from 5 to 10 years. The useful lives of in-process research and development will be defined in the future upon further evaluation of the status of these applications. The fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, which was allocated to goodwill.

We believe the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to market opportunities for a combined product offering; and (2) the potential to leverage our sales force to attract new customers and revenue and cross-sell to existing customers.

In-process research and development (“IPR&D”) consists of two projects that had not yet reached technological feasibility as of the date of the acquisition. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. The value assigned to IPR&D was determined by considering the value of the products under development to the overall development plan, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired IPR&D projects, the assets would then be considered finite-lived intangible assets and amortization of the assets will commence. One project was completed in December 2017 and amortization for that project began in the quarter ending March 31, 2018. The other project has not been completed as of March 31, 2018, but is expected to be completed in fiscal 2019.

We expensed $17.6 million of acquisition-related costs as selling, general and administrative expenses in our condensed consolidated statements of operations in fiscal 2017.

The results of this acquisition were included in our consolidated operations beginning on November 7, 2016. The amount of continuing Rofin net sales and net loss from continuing operations included in our condensed consolidated statements of operations for the three months ended April 1, 2017 was approximately $110.7 million and $17.9 million, respectively. The amount of continuing Rofin net sales and net loss from continuing operations included in our condensed consolidated statements of operations for the six months ended April 1, 2017 was approximately $185.1 million and $29.9 million, respectively.

Unaudited Pro Forma Information (in thousands, except per share data)

The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of Rofin and the related issuance of our Euro Term Loan had occurred on October 4, 2015. The unaudited pro forma financial information is not necessarily indicative of what our condensed consolidated results of operations actually would have been had the acquisition been completed on October 4, 2015. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company. The actual results may differ significantly from the pro forma results presented here due to many factors.



	Three Months Ended			Six Months Ended
		April 1, 2017		April 1, 2017
Total net sales		$	432,998	$	822,814
Net income		$	55,519	$	94,702
Net income per share:
Basic		$	2.27	$	3.88
Diluted		$	2.24	$	3.83

The unaudited pro forma financial information above includes the net income of Rofin’s low power CO₂ laser business based in Hull, United Kingdom, which was recorded as a discontinued operation in the three and six months ended April 1, 2017. See Note 19, "Discontinued Operations and Assets Held for Sale".

The unaudited pro forma financial information above reflects the following material adjustments:


•	Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation.


•	The exclusion of amortization of inventory step-up to its estimated fair value from the three and six months ended April 1, 2017.


•	The exclusion of revenue adjustments as a result of the reduction in customer deposits and deferred revenue related to its estimated fair value from the three and six months ended April 1, 2017.


•	Incremental interest expense and amortization of debt issuance costs related to our Euro Term Loan and Revolving Credit Facility (as defined in Note 9, "Borrowings").


•	The exclusion of acquisition costs incurred by both Coherent and Rofin from the three and six months ended April 1, 2017.


•	The exclusion of a stock-based compensation charge related to the acceleration of Rofin options from the six months ended April 1, 2017.


•	The exclusion of a gain on business combination for our previously owned shares of Rofin from the six months ended April 1, 2017.


•	The exclusion of a foreign exchange gain on forward contracts related to our debt commitment and debt issuance from the six months ended April 1, 2017.


•	The estimated tax impact of the above adjustments.