3. Acquisitions

Acquisition of VIOX Corporation

On January 3, 2011, the Company acquired 100% of Seattle, Washington based specialty glass company, VIOX Corporation (“VIOX”). The purchase price consists of $26.0 million in cash paid at closing, plus a post-closing adjustment of $1.7 million that was paid in March 2011. In addition, the Company is obligated to pay contingent consideration of up to a maximum of $22.0 million, based on VIOX achieving certain sales diversification and earnings targets during the 30-month period following the closing. As of the acquisition date, the estimated value of the contingent consideration was $11.5 million which was accrued as additional purchase consideration. During the fourth quarter of 2011, due to the sharp contraction in the solar industry which negatively impacted VIOX' 2011 business performance and future prospects, the Company determined that VIOX would not achieve the sales diversification and earnings targets that were required for them to earn the contingent consideration during the specified period, accordingly, the contingent consideration of $11.5 million was recorded as a net credit in the consolidated statements of operations for the year ended December 31, 2011.

VIOX is a 40-year-old corporation that develops, manufactures and markets specialty glass compositions for a wide range of electronic, industrial and health care markets. The Company has recorded the purchase of VIOX using the acquisition method of accounting and recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of operations of VIOX have been included in the Company's consolidated results of operations beginning with the date of the acquisition. The Company has made an election to treat the acquisition as an asset purchase for income tax purposes under Internal Revenue Code Section 338 (“Section 338 Election”). As a result of the Section 338 Election, the Company accrued an additional liability of $0.8 million which is payable to the former stockholders of VIOX.

This transaction has been accounted for under the acquisition method of accounting. Under this method, assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values.

The total purchase price of the VIOX acquisition on January 3, 2011 was as follows (in thousands):

Cash consideration paid	$	27,673
Accrued contingent purchase consideration		11,521
Section 338 Election liability to former VIOX stockholders		775
Total purchase price	$	39,969

The above purchase price has been allocated based on the fair values of assets acquired and liabilities assumed as follows (in thousands):

Accounts receivable, net	$	2,385
Inventories		2,702
Other current assets		706
Property, plant and equipment		3,490
Intangible assets		23,600
Goodwill		7,797
Other noncurrent assets		1,269
Accounts payable and other liabilities		(1,980	)
	$	39,969

The purchase price allocation is based on a fair market valuation of acquired intangible assets, inventory and property, plant and equipment. Of the $23.6 million of acquired intangible assets, $20.0 million was assigned to technology-based intangible assets that have a useful life of approximately 20 years, non-amortizable trade name of $3.0 million and $0.6 million was assigned to non-compete agreements with a useful life of three years. The amounts assigned to intangible assets were based on management's estimate of the fair value. The technology-based intangible assets comprise trade secrets used in manufacturing process and related customer relationships which have been valued together as complementary assets with similar useful lives due to the long-term nature of the manufacturing processes inherent in the trade secrets, VIOX' historical pattern of customer retention and VIOX' ability to attract new customers with its manufacturing processes. The technology-based intangible assets are both transferable and separable from the acquired assets.

Identification and allocation of value to the identified intangible assets was based on the acquisition method of accounting. The fair value of the identified intangible assets was estimated by performing a discounted cash flow analysis using the “income” approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets are discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

The estimates of expected useful lives take into consideration the effects of competition, regulatory changes and possible obsolescence. The useful lives of technology-based intangible assets were based on the number of years in which net cash flows have been projected.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of VIOX' historical operating margins and performance of comparable publicly traded entities; number of customers and VIOX' market share; contractual and non-contractual relationships with large customers and patents held.

The goodwill resulting from the VIOX acquisition is included with the Advanced Ceramic Operations segment and resulted primarily from intellectual property and other intangibles acquired that do not qualify for separate recognition. Based on an assessment of goodwill as of December 31, 2011, there was no implied value and accordingly, the total amount of goodwill of $7.8 million was impaired during the fourth quarter of 2011 (see Note 2.i above). For tax purposes, the goodwill will not be tax deductible.

As of January 3, 2011, the date of acquisition, the Company began to include the financial results of VIOX Corporation in the Advanced Ceramic Operations segment. VIOX sales amounted to $20.3 million in 2011.

The historical results of the operations acquired from VIOX were not material to the Company's consolidated results of operations in current and prior periods. Therefore, proforma disclosures are not necessary.

Acquisition of Assets of Diaphorm Technologies, LLC

On June 1, 2009, the Company acquired substantially all of the business and assets and all technology and intellectual property related to ballistic combat and non-combat helmets of Diaphorm Technologies, LLC (“Diaphorm”), based in Salem, New Hampshire. The purchase price consisted of $9.7 million in cash paid at closing, the assumption of $274,000 of liabilities, plus contingent consideration not to exceed $10 million over the next 5 years based upon performance milestones and revenues achieved during that period from Diaphorm's existing products and new products developed using Diaphorm technology. The Company originally accrued contingent purchase consideration of $5.1 million based on probability weighted expected future cash flows as of the acquisition date. The Company accrued $1.1 million during 2011 and $1.6 million during 2010 to reflect the change in the probability weighted expected cash flows. The Company incurred transaction and related costs of approximately $340,000 which were expensed in 2009. Contingent consideration of $1.0 million, $0.3 million and $0.5 million was earned and paid in September 2009, September 2010 and August 2011, respectively. The acquisition has been accounted for under the purchase method of accounting. Under this method, assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. The goodwill resulting from the Diaphorm acquisition is included with the ACO segment and resulted primarily from intellectual property acquired. Goodwill will not be amortized but is subject to an ongoing assessment for impairment. The goodwill from the Diaphorm acquisition is tax deductible. The historical results of the operations acquired from Diaphorm were not material to the Company's consolidated results of operations in current and prior periods.

Acquisition of SemEquip, Inc.

On August 11, 2008, the Company completed the acquisition of SemEquip, Inc. (“SemEquip”) pursuant to a merger of SemEquip with a wholly-owned subsidiary of Ceradyne. SemEquip is a leader in the development of cluster ion implantation sub-systems and advanced ion source materials for the manufacture of logic and memory chips. SemEquip's technologies enable the utilization of cluster beam ion implantation for manufacturing advanced integrated circuits at low cost and high throughput rates. Ceradyne paid $25.0 million in cash at closing, of which $1.7 million was distributed as incentive compensation to several SemEquip employees and advisors as described below, and incurred direct transaction fees and expenses of $2.0 million. Ceradyne used a portion of its existing cash to make these payments. In addition, Ceradyne will pay contingent consideration of up to $100.0 million in cash during the 15-year period following completion of the merger based upon revenues achieved over that period by SemEquip. The net fair value of assets acquired and liabilities assumed exceeded the total amount of the purchase price paid. As the Company may be required to pay contingent consideration in the future, the Company accrued an additional $25.2 million of purchase consideration to represent the difference between the net fair value of assets acquired and liabilities assumed and the purchase price paid.

The $1.7 million portion of the closing date consideration paid to SemEquip employees and advisors and a portion of the contingent consideration to be paid by Ceradyne over 15 years relates to a pre-closing commitment by SemEquip to pay incentive compensation to several of its employees and advisors. This incentive compensation will not increase the total consideration Ceradyne will pay for the acquisition, but it required Ceradyne to record a $9.8 million pre-tax compensation charge during the year ended December 31, 2008. The liability for the contingent incentive compensation is reevaluated each reporting period. Accordingly, the Company reduced the liability and recognized a corresponding non-cash credit of $0.8 million in the Consolidated Statements of Income during the year ended December 31, 2009. In November 2011, SemEquip entered into a non-exclusive licensing arrangement with a key customer which changed SemEquip's business model and reduced expected future cash flows associated with the future contingent consideration. In connection with the license, SemEquip transferred the hardware related assets to the licensee and reduced its workforce which included production, research and development, and support staff in Billerica, Massachusetts. Approximately half of the workforce was transitioned to the licensee. Accordingly, the estimated liability associated with the incentive compensation plan was reduced by $6.9 million and has been reflected as a credit in acquisition related charges in the consolidated statements of operations for the year ended December 31, 2011.