Business Combination, Goodwill and Purchased Intangible Assets, Net

9 Months Ended

Oct. 01, 2011

Business Combination, Goodwill and Purchased Intangible Assets, Net [Abstract]

Business Combination, Goodwill and Purchased Intangible Assets, Net

5. Business Combination, Goodwill and Purchased Intangible Assets, Net

On November 19, 2010, Intevac acquired the outstanding shares of Solar Implant Technologies, Inc. (“SIT”), a privately-owned, development stage company, which was focused on creating an ion implant module to be used in the manufacturing of photovoltaic cells. Intevac’s primary reasons for this acquisition were to complement its existing product offerings and to provide opportunities for future growth. The preliminary aggregate purchase price was $12.4 million, which consisted of an initial cash payment totaling $2.7 million and a contingent consideration obligation with a fair value of $9.7 million payable in cash. In connection with the acquisition, Intevac acquired $4.0 million of in process research and development (“IPR&D”), $43,000 of tangible assets, and $10.5 million of goodwill and assumed $703,000 of tangible liabilities. Intevac also recorded an $827,000 net deferred tax liability to reflect the tax impact of the identified intangible assets that will not generate tax deductible amortization expense net of the future tax benefit of acquired net operating loss carryforwards. The value attributable to IPR&D has been capitalized as an indefinite-lived intangible asset. Goodwill is attributable to estimated synergies arising from the acquisition and other intangible assets that do not qualify for separate recognition. Goodwill is not deductible for tax purposes.

In connection with the acquisition of SIT, Intevac agreed to pay up to an aggregate of $7.0 million in cash to the selling shareholders if certain milestones are achieved over a specified period. Intevac estimated the fair value of this contingent consideration to be in the amount of $5.6 million based on the probability that certain milestones would be met and the payments would be made on the targeted dates outlined in the acquisition agreement. On July 21, 2011, Intevac made $2.4 million in payments to the selling shareholders for achievement of the first milestone.

In connection with the acquisition of SIT, Intevac also agreed to pay a revenue earnout on Intevac’s net revenue from commercial sales of certain products over a specified period up to an aggregate of $9.0 million in cash to the selling shareholders. Intevac estimated the fair value of this contingent consideration to be in the amount of $4.1 million based on probability-based forecasted revenues reflecting Intevac’s own assumptions concerning future revenue of SIT. A change in the estimated probabilities of revenue achievement could have a material effect on the statement of operations and balance sheets in the period of change.

The fair value measurement of contingent consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Any change in fair value of the contingent consideration subsequent to the acquisition date is recognized in operating income within the statement of operations. The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the three and nine months ended October 1, 2011 (in thousands):

	Three Months Ended			Nine Months Ended
	October 1, 2011
	(In thousands)
Beginning balance	$	10,430		$	9,857
Changes in fair value		344			917
Cash payment made		(2,389	)		(2,389	)
Ending balance	$	8,385		$	8,385

The following table displays the balance sheet classification of the contingent consideration liability account at October 1, 2011 and at December 31, 2010:

	October 1,		December 31,
	2011		2010
	(In thousands)
Other accrued liabilities	$	3,715	$	4,234
Other long-term liabilities		4,670		5,623
Total acquisition-related contingent consideration	$	8,385	$	9,857

Prior to the acquisition, Intevac had an equity interest in SIT with a cost basis of $94,000 that was accounted for under the cost method. As a result of revaluing Intevac’s equity interest in SIT on the acquisition date, the Company recognized a gain of $481,000, which was included in other income, net, in the Consolidated Statement of Operations during the fourth quarter of fiscal 2010.

Intevac accounted for the acquisition of SIT as a business combination. Under business combination accounting, the assets and liabilities of SIT were recorded as of the acquisition date, at their respective fair values, and consolidated with the Company. The preliminary purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. Subsequent to the acquisition in the fourth quarter of fiscal 2010, Intevac paid in full $177,000 in notes payable to certain selling shareholders assumed upon the acquisition. The purchase price was allocated as follows:

(In thousands)
Current assets (including cash of $38)	$	40
Property, plant, and equipment		3
IPR&D		4,000
Goodwill		10,484
Long-term deferred tax assets		697
Total assets acquired		15,224
Notes payable to sellers		177
Current liabilities		526
Long-term deferred tax liabilities		1,524
Total liabilities assumed		2,227
Net assets acquired	$	12,997

The results of operations for SIT for periods prior to the acquisition were not material to Intevac’s Consolidated Statements of Operations and, accordingly, pro forma financial information has not been presented.

Goodwill and indefinite-life intangible assets are tested for impairment on an annual basis or more frequently upon the occurrence of circumstances that indicate that goodwill and indefinite-life intangible assets may be impaired. In the fourth quarter of fiscal 2010, Intevac performed its annual impairment analysis and the results of the analysis indicated that Intevac’s goodwill and purchased intangible assets with an indefinite useful life were not impaired. At October 1, 2011, Intevac had a total of $18.4 million of goodwill and $4.1 million of indefinite-life intangible assets. At October 1, 2011, $10.5 million of goodwill is attributed to the Equipment segment and $7.9 million of goodwill is attributed to the Intevac Photonics segment.

Total amortization expense of finite-lived intangibles for the three and nine months ended October 1, 2011 was $136,000, and $408,000, respectively. As of October 1, 2011, future amortization expense is expected to be $136,000 for the remainder of 2011, $541,000 for 2012, $541,000 for 2013, $363,000 for 2014, $284,000 for 2015 and $592,000 thereafter. Intangible assets by segment are as follows: Equipment: $5.7 million and Intevac Photonics: $893,000.