Note 2.

Acquisitions

Acquisition of Integrated Photonics, Inc.

In June 2017, the Company acquired all the outstanding shares of 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 $39.4 million, net of cash acquired and a working capital adjustment of $0.7 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	$	39,436
Fair value of cash earnout arrangement		2,250
Purchase price	$	41,686

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		11,257
Intangible assets		22,213
Goodwill		17,107
Total assets acquired	$	56,950

Liabilities
Accounts payable	$	846
Other accrued liabilities		1,032
Long-term debt assumed		3,834
Deferred tax liabilities		9,552
Total liabilities assumed		15,264
Net assets acquired	$	41,686

The goodwill of $17.1 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 for the year ended June 30, 2017.

The amount of revenues and net earnings of IPI included in the Company’s Consolidated Statement of Earnings since the acquisition was immaterial. Pro forma information was omitted due to the immaterial impact of IPI financial results.

Acquisition of DirectPhotonics Industries GmbH

During the quarter ended December 31, 2016, the Company purchased certain assets, mainly inventory and fixed assets, of DirectPhotonics Industries GmbH located in Berlin, Germany for approximately $0.6 million. This business was combined with the Company’s II-VI HIGHYAG division in the II-VI Laser Solutions segment. Due to the insignificant amount of the acquisition purchase price, certain business combinations disclosures typically required under U.S. GAAP have been omitted.

Acquisition of EpiWorks, Inc.

In February 2016, the Company acquired all the outstanding shares of EpiWorks, Inc. (“EpiWorks”) a privately held company based in Illinois. Under the terms of the merger agreement, the consideration consisted of initial cash paid at the acquisition date of $43.0 million, net of cash acquired and a working capital adjustment of $0.2 million. In addition, the agreement provided up to a maximum of $6.0 million of additional cash earnout opportunities based upon EpiWorks achieving certain agreed upon financial and operational targets for capacity, wafer output and gross margin, which if earned would be payable in the amount of $2.0 million for the achievement of each specific annual target over the next three years. EpiWorks develops and manufactures compound semiconductor epitaxial wafers for applications in optical components, wireless devices and high-speed communication systems. EpiWorks is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.

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

Net cash paid at acquisition	$	42,981
Cash paid for working capital adjustment		163
Fair value of cash earnout arrangement		4,352
Purchase price	$	47,496

The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition. ($000):

Assets
Accounts receivable	$	2,121
Inventories		2,435
Prepaid and other assets		68
Property, plant & equipment		9,043
Intangible assets		14,124
Goodwill		27,588
Total assets acquired	$	55,379

Liabilities
Accounts payable	$	605
Other accrued liabilities		859
Deferred tax liabilities		6,419
Total liabilities assumed		7,883
Net assets acquired	$	47,496

The goodwill of $27.6 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of EpiWorks. 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 $0.4 million for the year ended June 30, 2016.

The purchase price allocation was finalized in the 2017 first quarter and did not result in any adjustments to the preliminary fair values.

Acquisition of ANADIGICS, Inc.

In March 2016, the Company acquired all the outstanding shares of ANADIGICS (Nasdaq:ANAD), which was a publicly traded company based in New Jersey. Under the terms of the merger agreement, the consideration consisted of both a working capital advance of $3.5 million and cash paid of $78.2 million at the acquisition date, net of cash acquired of $2.7 million. ANADIGICS has a 6-inch gallium arsenide wafer fabrication capability allowing for the production of high performance lasers and integrated circuits in high volume. In addition, at the time of the acquisition, ANADIGICS designed and manufactured innovative radio frequency (RF) solutions for CATV infrastructure, small-cell, WIFI and cellular markets. The Company divested this portion of the business in June 2016. In conjunction with the sale of the RF business, the Company renamed ANADIGICS as II-VI Optoelectronic Devices Division. OED is a business unit of the Company’s II-VI Laser Solutions operating segment for financial reporting purposes.

The following table presents the final allocation of the purchase price of the assets acquired and liabilities assumed at the date of acquisition. ($000):

Assets
Accounts receivable	$	3,973
Inventories		8,322
Prepaid and other assets		2,347
Property, plant & equipment		25,810
Intangible assets		1,060
Goodwill		48,312
Total assets acquired	$	89,824

Liabilities
Accounts payable	$	3,586
Other accrued liabilities		7,226
Total liabilities assumed		10,812
Net assets acquired	$	79,012

The goodwill of $48.3 million is included in the II-VI Laser Solutions segment and is attributed to the expected synergies and the assembled workforce of ANADIGICS. None of the goodwill is deductible for income tax purposes. In conjunction with the June 3, 2016 sale of the RF business noted below, the Company disposed of $35.4 million of goodwill. The fair value of accounts receivable acquired was $4.0 million with the gross contractual amount being $4.0 million. At the time of acquisition, the Company expected to collect all of the accounts receivable. The Company expensed transaction costs of $2.9 million for the year ended June 30, 2016.

The purchase price allocation was finalized in the 2017 first quarter and did not result in any adjustments to the preliminary fair values.

Deferred Income Taxes

In connection with the acquisitions of EpiWorks and ANADGICS, the Company adopted an accounting policy to apply acquired deferred tax liabilities to pre-existing deferred tax assets before evaluating the need for a valuation allowance for acquired deferred tax assets. During fiscal year 2016, the Company recorded a $36.2 million valuation allowance within purchase accounting as a result of the Company incurring a cumulative U.S. three year loss.

Divesture of the RF Business of ANADIGICS

On June 3, 2016, the Company sold the RF business of ANADIGICS that it acquired on March 15, 2016. The consideration consisted of $45.0 million of cash received at closing, a working capital adjustment of $0.6 million to be received within 60 days after closing and $5.0 million contingent consideration to be earned based upon supplying minimum volumes of wafers to the purchaser over an 18-month period through December 2017. The $5.0 million contingent consideration will be recognized in net earnings when earned and received from the purchaser. The Company believes the sale of this non-strategic business will allow the Company to focus its financial resources and devote greater attention to the 6-inch wafer fab business. The Company incurred approximately $0.4 million in transaction expenses and recorded an immaterial gain of less than $0.1 million on the sale of the RF business.

The following table presents the carrying value of the assets and liabilities included as part of the disposal of the RF business of ANADIGICS ($000):

Assets
Inventories	$	5,378
Equipment		5,813
Goodwill		35,352
	$	46,543

Liabilities
Accounts payable	$	963

Total Consideration	$	45,580

In conjunction with the sale of the RF business, the Company recorded approximately $7.5 million of severance expense for employees of the business. The amount of revenue and net loss from the RF business of ANADIGICS from the acquisition date to the date of sale included in the Company’s Consolidated Statements of Earnings were $10.1 million and $8.4 million, respectively, for the year ended June 30, 2016.