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Fair Value of Financial Instruments | 9 Months Ended
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Mar. 31, 2018
Business Combinations [Abstract] |
Fair Value of Financial Instruments |
Note 12. | Fair Value of Financial Instruments
The FASB defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous markets for the asset and liability in an orderly transaction between market participants at the measurement date. The Company estimates fair value of its financial instruments utilizing an established three-level hierarchy in accordance with U.S. GAAP. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date as follows:
• | Level 1 – | Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.
• | Level 2 – | Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.
• | Level 3 – | Valuation is based upon other unobservable inputs that are significant to the fair value measurements.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. In February 2016, the Company entered into a contingent earnout arrangement which provides up to a maximum of $6.0 million of additional cash earnout opportunities based upon II-VI EpiWorks achieving certain agreed upon financial and operational targets for capacity, wafers output and gross margin, which if earned would be payable for the achievement of each specific annual target over the next three years. The Company paid the first year earnout amount of $2.0 million during the quarter ended June 30, 2017. In June 2017, the Company entered into a contingent earnout arrangement which 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 relating to finance, information technology and human resources, which if earned would be payable for the achievement of each specific annual target over the next year. At March 31, 2018, the Company had foreign currency forward contracts recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for credit risk, restrictions and other terms specific to the contracts. In November 2017, the Company acquired a 93.8% equity investment in a privately held company. 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 their outstanding interests at any time on or after the third anniversary of the investment or earlier upon certain events. 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 Liabilities” in the Condensed Consolidated Balance Sheet as of the acquisition date in accordance with ASC 815-10, Derivatives and Hedging. The fair value of the net put option is adjusted as necessary on a quarterly basis with any changes in the fair value recorded through earnings. The change in fair value of the net purchase option from the investment date to March 31, 2018 was not material. The fair values of the contingent earnout arrangements and the net put option were measured using valuations based upon other unobservable inputs that are significant to the fair value measurement (Level 3). The Company estimated the fair value of the 0.25% convertible notes based on quoted market prices as of the last trading day prior to March 31, 2018; however, the convertible notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the convertible notes could be retired or transferred. The Company concluded that this fair value measurement should be categorized within Level 2. The carrying value of the convertible notes is net of unamortized discount and issuance costs. See Note 7. Debt for details on the Company’s debt facilities. The fair value and carrying value of the convertible notes were as follows at March 31, 2018 ($000):
|  | Fair Value |  |  | Carrying Value |
Convertible notes |  | $ | 377,775 |  |  | $ | 285,550 |
The following table provides a summary by level of the fair value of financial instruments that are measured on a recurring basis or for which fair value is disclosed for the periods presented ($000):
|  | Fair Value Measurements at March 31, 2018 Using: |
|  |  |  |  |  | Quoted Prices in |  |  | Significant |  |  |  |  |
|  |  |  |  |  | Active Markets |  |  | Other |  |  | Significant |
|  |  |  |  |  | for Identical |  |  | Observable |  |  | Unobservable |
|  |  |  |  |  | Assets |  |  | Inputs |  |  | Inputs |
|  | March 31, 2018 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | 271 |  |  | $ | - |  |  | $ | 271 |  |  | $ | - |
Contingent earnout arrangements |  | $ | 5,130 |  |  | $ | - |  |  | $ | - |  |  | $ | 5,130 |
Net put option |  | $ | 2,233 |  |  | $ | - |  |  | $ | - |  |  | $ | 2,233 |
|  | Fair Value Measurements at June 30, 2017 Using: |
|  |  |  |  |  | Quoted Prices in |  |  | Significant |  |  |  |  |
|  |  |  |  |  | Active Markets |  |  | Other |  |  | Significant |
|  |  |  |  |  | for Identical |  |  | Observable |  |  | Unobservable |
|  |  |  |  |  | Assets |  |  | Inputs |  |  | Inputs |
|  | June 30, 2017 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | $ | 191 |  |  | $ | - |  |  | $ | 191 |  |  | $ | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent earnout arrangements |  | $ | 5,795 |  |  | $ | - |  |  | $ | - |  |  | $ | 5,795 |
The Company’s policy is to report transfers into and out of Levels 1 and 2 of the fair value hierarchy at fair values as of the beginning of the period in which the transfers occur. There were no transfers in and out of Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2018. The following table presents a reconciliation of the beginning and ending fair value measurements of the Company’s Level 3 contingent earnout arrangements related to the acquisition of II-VI EpiWorks and IPI and the net put option relating to the equity investment acquired in November 2017. ($000):
|  | Significant |
|  | Unobservable Inputs |
|  | (Level 3) |
Balance at July 1, 2017 |  | $ | 5,795 |
Contingent earnout arrangements: |  |  |  |
Purchase price adjustment - IPI |  |  | (25 | )
Net put option |  |  | 2,233 |
Changes in fair value recorded in other expense, (income) |  |  | (640 | )
Balance at March 31, 2018 |  | $ | 7,363 |
The fair values of cash and cash equivalents are considered Level 1 among the fair value hierarchy and approximate fair value because of the short-term maturity of those instruments. The Company’s borrowings including its capital lease obligation are considered Level 2 among the fair value hierarchy and their principal amounts approximate fair value.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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