10) Acquisitions and Dispositions

Electro Scientific Industries, Inc.

See Note 22 for information on the acquisition of Electro Scientific Industries, Inc.

Newport Corporation

On April 29, 2016, the Company completed its acquisition of Newport pursuant to an Agreement and Plan of Merger, dated as of February 22, 2016 (the “Merger Agreement”), by and among the Company, PSI Equipment, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and Newport (the “Newport Merger”). At the effective time of the Newport Merger and pursuant to the terms and conditions of the Merger Agreement, each share of Newport’s common stock that was issued and outstanding immediately prior to the effective time of the Newport Merger was converted into the right to receive $23.00 in cash, without interest and subject to deduction for any required withholding tax.

Newport’s innovative solutions leverage its expertise in advanced technologies, including lasers, photonics and precision motion equipment, and optical components and sub-systems, to enhance the capabilities and productivity of its customers’ manufacturing, engineering and research applications. Newport is a global supplier of advanced-technology products and systems to customers in the scientific research and defense/security, microelectronics, life and health sciences and industrial manufacturing markets.

The purchase price of Newport consisted of the following:


Cash paid for outstanding shares(1)	$	905,254
Settlement of share-based compensation awards(2)		8,824
Cash paid for Newport debt(3)		93,200

Total purchase price	$	1,007,278

Less: cash and cash equivalents acquired		(61,463	)

Total purchase price, net of cash and cash equivalents acquired	$	945,815

(1)	Represents cash paid of $23.00 per share for approximately 39,359,000 shares of Newport common stock, without interest and subject to a deduction for any required withholding tax.

(2)	Represents the vested but unissued portion of Newport share-based compensation awards as of the acquisition date of April 29, 2016.

(3)	Represents the cash paid for the outstanding balance of Newport’s senior secured revolving credit agreement.

The Company funded the payment of the aggregate consideration with a combination of the Company’s available cash on hand and the proceeds from the Company’s senior secured term loan facility, as described in Note 13.

Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Newport 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. Goodwill and intangible assets will not be amortizable for tax purposes.

The following table summarizes the allocation of the purchase price to the fair values assigned to assets acquired and liabilities assumed at the date of the Newport Merger:


Current assets (including cash)	$	186,137
Inventory		142,714
Intangible assets		404,506
Goodwill		396,027
Property, plant and equipment		119,932
Long-term assets		22,725

Total assets acquired		1,272,041
Current liabilities		95,156
Intangible liability		4,302
Other long-term liabilities		165,305

Total liabilities assumed		264,763

Fair value of assets acquired and liabilities assumed		1,007,278

Less: cash and cash equivalents acquired		(61,463	)

Total purchase price, net of cash and cash equivalents acquired	$	945,815

The fair value write-up of acquired finished goods inventory was $15,090, the amount of which will be amortized over the expected period during which the acquired inventory is sold. Accordingly, the Company recorded $15,090 of incremental costs of sales charges associated with the fair value write-up of inventory acquired in the Newport Merger for the year ended December 31, 2016.

The fair value write-up of acquired property, plant and equipment of $36,242 will be amortized over the useful life of the assets. Property, plant and equipment is valued at its value-in-use, unless there was a known plan to dispose of the asset.

The acquired intangible assets are being amortized on a straight-line basis, which approximates the economic use of the asset.

The following table reflects the allocation of the acquired intangible assets and liabilities and related estimate of useful lives:


Order backlog	$	12,100	1 year
Customer relationships		247,793	6-18 years
Trademarks and trade names		55,900	Indefinite
Developed technology		75,386	4-8 years
In-process research and development		6,899	Undefined⁽¹⁾
Leasehold interest (favorable)		6,428	4-5 years

Total intangible assets	$	404,506

Leasehold interest (unfavorable)	$	4,302

(1)	The useful lives of in-process research and development will be defined in the future upon further evaluation of the status of these programs.

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 the Company’s 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, the excess amount of which was allocated to goodwill.

The Company believes 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) potential to leverage the Company’s sales force to attract new customers and revenue and cross sell to existing customers.

The results of this acquisition were included in the Company’s consolidated operations beginning on April 29, 2016. Newport constitutes the Company’s Light & Motion reportable segment (Note 19).

Certain executives from Newport had severance provisions in their respective Newport employment agreements. The agreements included terms that were accounted for as dual-trigger arrangements. Through the Company’s acquisition accounting, the expense relating to these benefits was recognized in the combined entity’s financial statements, however, the benefit itself will not be distributed until the final provision is met by each eligible executive. The Company recorded costs of $6,635 and $3,334 as compensation expense and stock-based compensation expense, respectively, during 2016 in connection with these severance provisions. The shares underlying the restricted stock units and stock appreciation rights that are eligible for accelerated vesting if the executive exercises his rights are not issued as of each reporting period-end and are excluded from the computation of basic earnings per share and included in the computation of diluted earnings per share for each reporting period.

Pro Forma Results

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the Newport Merger had occurred on January 1, 2015. The unaudited pro forma financial information is not necessarily indicative of what the Company’s condensed consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.


	2016
Total net revenues	$	1,475,637

Net income		111,076

Net income per share:
Basic	$	2.08

Diluted	$	2.06

The unaudited pro forma financial information above gives effect primarily to the following:

(1)

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.

(2)

Revenue adjustments as a result of the reduction in deferred revenue related to its estimated fair value.

(3)

Incremental interest expense related to the Company’s term loan credit agreement.

(4)

The exclusion of acquisition costs and inventory step-up amortization from the year ended December 31, 2016.

(5)

The estimated tax impact of the above adjustments.

Cost Method Investment in a Private Company

In April 2016, the Company invested $9,300 for a minority interest in a private company, which operates in the field of semiconductor process equipment instrumentation. The Company accounted for this investment using the cost method of accounting. During the fourth quarter of 2016, the Company recognized an impairment loss on this investment of $5,000 based upon financial information of this private company. In July 2017, the Company invested an additional $100 in this private company.

Sale of Data Analytics Solutions

In April 2017, the Company completed the sale of its Data Analytics Solutions business for total proceeds of $72,509, net of cash sold and recorded a gain of $74,856. This business, which had revenues in 2016 of $12,700 and was included in the Vacuum & Analysis segment, was no longer a part of the Company’s long-term strategic objectives.

The business did not qualify as a discontinued operation as this sale did not represent a strategic shift in the Company’s business, nor did the sale have a major effect on the Company’s operations. Therefore, the results of operations for all periods are included in the Company’s income from operations. The assets and liabilities of this business have not been reclassified or segregated in the consolidated balance sheet or consolidated statements of cash flows as the amounts were immaterial.