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Acquisition-Related Contingent Consideration

3 Months Ended

Mar. 31, 2012

5. Acquisition-Related Contingent Consideration

In connection with the acquisition of Solar Implant Technologies, Inc. (“SIT”) on November 19, 2010, 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. On July 21, 2011, Intevac made $2.4 million in payments to the selling shareholders for achievement of the first milestone. Intevac estimated the fair value of this contingent consideration on March 31, 2012 to be in the amount of $3.9 million using a discounted cash flow model based on the probabilities that the remaining milestones would be met and the payments would be made on the targeted dates outlined in the acquisition agreement, as amended. On April 12, 2012, Intevac made $2.4 million in payments to the selling shareholders for achievement of the second 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 on March 31, 2012 to be in the amount of $5.1 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-month periods ended March 31, 2012 and April 2, 2011:


	Three months ended
	March 31, 2012		April 2, 2011
	(In thousands)
Opening balance	$	8,715	$	9,857
Changes in fair value		278		300

Closing balance	$	8,993	$	10,157

The following table displays the balance sheet classification of the contingent consideration liability account at March 31, 2012 and at December 31, 2011:


	March 31,		December 31,
	2012		2011
	(In thousands)
Other accrued liabilities	$	4,035	$	3,942
Other long-term liabilities		4,958		4,773

Total acquisition-related contingent consideration	$	8,993	$	8,715

The following table represents the quantitative range of the significant unobservable inputs used in the calculation of fair value of the continent consideration liability as of March 31, 2012. Significant increases or decreases in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.


Quantitative Information about Level 3 Fair Value Measurements at March 31, 2012
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(In thousands, except for percentages)
Milestone Payable	$	3,900	Discounted cash flow	Discount rate	5.3%
				Probabilities of achieving remaining milestones	80.0% - 100.0% (92.2%)
Revenue Earnout	$	5,093	Discounted cash flow	Weighted average cost of capital	16.7%
				Probability weighting of achieving revenue forecasts	10.0% - 35.0% (27.1%)