INTEVAC, INC. This Quarterly Report on Form 10-Q contains forward-looking statements, which involve risks and uncertainties. Words such as "believes," "expects," "anticipates" and the like indicate forward-looking statements. These forward-looking statements include comments related toIntevac's shipments, projected revenue recognition, product costs, gross margin, operating expenses, interest income, income taxes, cash balances and financial results in 2022 and beyond; projected customer requirements forIntevac's new and existing products, and when, and if,Intevac's customers will place orders for these products; the timing of delivery and/or acceptance of the systems and products that compriseIntevac's backlog for revenue and the Company's ability to achieve cost savings.Intevac's actual results may differ materially from the results discussed in the forward-looking statements for a variety of reasons, including those set forth under "Risk Factors" and in other documents we file from time to time with theSecurities and Exchange Commission , including our Annual Report on Form 10-K filed onFebruary 17, 2022 , our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.Intevac's trademarks include the following: "200 Lean ® ," "INTEVAC LSMA ® ," "INTEVAC MATRIX ® ," "oDLC ® ," and "TRIO ™ ." 20
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Discontinued Operations
OnDecember 30, 2021 , the Company completed the sale of its Photonics business toEOTECH, LLC , aMichigan limited liability company ("EOTECH"). As a result of the disposition, the results of operations from the Photonics reporting segment are reported as "Net loss from discontinued operations, net of taxes" in the condensed consolidated financial statements. The Company has recast prior period amounts presented to provide visibility and comparability. All discussion herein, unless otherwise noted, refers toIntevac's remaining operating segment after the disposition, the Thin Film Equipment ("TFE") business. See Note 2 "Divestiture and Discontinued Operations" to the condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Overview
Intevac is a provider of vacuum deposition equipment for a wide variety of thin-film applications. The Company leverages its core capabilities in high-volume manufacturing of small substrates to provide process manufacturing equipment solutions to the hard disk drive ("HDD") and display cover panel ("DCP") industries.Intevac's customers include manufacturers of hard disk media and DCPs.Intevac operates in a single segment: TFE. Product development and manufacturing activities occur inNorth America andAsia .Intevac also has field offices inAsia to support its customers.Intevac's products are highly technical and are sold primarily throughIntevac's direct sales force.Intevac's results of operations are driven by a number of factors including success in its equipment growth initiatives in the DCP market and by worldwide demand for HDDs. Demand for HDDs depends on the growth in digital data creation and storage, the rate of areal density improvements, and the end-user demand for PCs, enterprise data storage, nearline "cloud" applications, video players and video game consoles that include such drives.Intevac continues to execute its strategy of diversification beyond the HDD industry by focusing on the Company's ability to provide proprietary tools to enhance scratch protection and durability for the DCP market and by working to develop the next generation of high volume DCP manufacturing equipment.Intevac believes that its renewed focus on the DCP market will result in incremental equipment revenues forIntevac and decreaseIntevac's dependence on the HDD industry.Intevac's equipment business is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for HDDs and cell phones as well as other factors such as global economic conditions and technological advances in fabrication processes. InMarch 2022 , the Company's management approved a restructuring plan to realign the Company's operational focus, scale the business and improve costs. The restructuring program includes (i) reducing the Company's headcount and (ii) eliminating several research and development ("R&D") programs and product offerings. As part of this realignment effort, the Company will no longer be pursuing several DCP projects including the coating of the backside covers of smartphones, solar ion implantation (also known asENERGi ® ), and advanced packaging for semiconductor manufacturing.
The following table presents certain significant measurements for the three
months ended
Three Months Ended
April 3, April 3, Change over
2021 2021 prior period
(In thousands, except percentages and
per share amounts)
Net revenues $ 4,445 $ 9,238 $ (4,793 )
Gross profit $ 723 $ 2,134 $ (1,411 )
Gross margin percent 16.3 % 23.1 % (6.8) points
Loss from operations $ (7,686 ) $ (5,565 ) $ (2,121 )
Net loss from continuing operations $ (7,720 ) $ (5,568 ) $ (2,152 )
Net loss from discontinued operations, net of taxes $ (135 ) $ (936 ) $ 801
Net loss $ (7,855 ) $ (6,504 ) $ (1,351 )
Net loss per diluted share $ (0.32 ) $ (0.27 ) $ (0.05 )
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Net revenues decreased during the first quarter of fiscal 2022 compared to the same period in the prior year primarily due to lower system sales. We did not recognize revenue on any system sales in the first quarter of fiscal 2022 compared to one MATRIX PVD system for advanced semiconductor packaging recognized in the first quarter of fiscal 2021. Lower gross margin in the first quarter of fiscal 2022 reflects$755,000 in charges for excess and obsolete inventory as part of the Company's realignment effort. Lower gross margin in the first quarter of fiscal 2021 reflected the lower-margin contribution from the first MATRIX PVD system for advanced semiconductor packaging. InMarch 2022 , the Company's management approved a restructuring plan to realign the Company's operational focus, scale the business and improve costs. R&D expenses for the first quarter of fiscal 2022 include$1.5 million in expenditures related to the disposal of certain lab equipment as part of the realignment effort. The cost of employee severance associated with the realignment effort of$1.2 million was offset in full by stock-based compensation forfeitures related to the employees affected by the reduction in workforce. Fees earned pursuant to theTSA with EOTECH since the divestiture of Photonics ("TSA fees") were$787,000 for the three months endedApril 2, 2022 of which$11,000 was reported as a reduction of cost of net revenues and$767,000 was reported as a reduction of selling, general and administrative expenses. The agreed-upon charges for such services are generally intended to allow the service provider to recover all costs and expenses of providing such services. During the first quarter of fiscal 2021, the Company received$66,000 in government assistance related to COVID-19 from the government ofSingapore of which$39,000 was reported as a reduction of cost of net revenues,$10,000 was reported as a reduction of R&D expenses and$17,000 was reported as a reduction of selling, general and administrative expenses. The Company did not receive any JSS grants in the first quarter of fiscal 2022. The Company reported a larger net loss for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 due to lower revenues, lower gross margins and higher operating costs as a result of the realignment effort. We believe fiscal 2022 will be a challenging year andIntevac does not expect be profitable in fiscal 2022.Intevac expects that 2022 HDD equipment sales will be similar to 2021 levels as we expect a customer to take delivery of one system in backlog. We believe there will be improvements to our HDD equipment sales in fiscal 2023 as we expect a customer to take delivery of up to eight systems in backlog. COVID-19 Update The impact of COVID-19, including changes in consumer behavior, pandemic fears, and market downturns, as well as restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. Although COVID-19 vaccines are now broadly distributed and administered, there remains significant uncertainty concerning the magnitude of the impact and the duration of the COVID-19 pandemic. As new strains of COVID-19 develop, the continued impacts to our business could be material to our fiscal 2022 results. Further, the impacts of inflation on our business and the broader economy, which may be exacerbated by the economic recovery from the COVID-19 pandemic, may also impact our financial condition and results of operations. Our customers may delay or cancel orders due to reduced demand, supply chain disruptions, and/or travel restrictions and border closures. We have experienced pandemic-related delays in our evaluation and development work. In response to COVID-19, we implemented initiatives to safeguard our employees, including work-from-home protocols. InJune 2021 , we began reopening our offices on a regional basis in accordance with local authority guidelines while ensuring that our return to work is thoughtful, prudent, and handled with a safety-first approach. All employees inthe United States who could work from home did so through the middle ofJune 2021 , when we fully reopened our offices as restrictions were lifted by the applicable authorities. EffectiveMarch 29, 2022 , 75% of the employees are allowed to work onsite inSingapore . Our employees' health and safety is our top priority, and we will continue to monitor local restrictions across the world, the administration and efficacy of vaccines and the number of new cases. InSingapore ,Intevac received government assistance under the Job Support Scheme ("JSS"). The purpose of the JSS is to provide wage support to employers to help them retain their local employees. Under the JSS,Intevac received$66,000 in JSS grants in the first quarter of fiscal 2021. The Company did not receive any JSS grants in the first quarter of fiscal 2022. During the first quarter of fiscal 2022 and the first quarter of fiscal 2021, the Company's expenses included approximately$18,000 and$43,000 , respectively, due to costs related to actions taken in response to COVID-19. Results of Operations Net revenues Three Months Ended Change over April 2, April 3, 2022 2021 prior period (In thousands) Total net revenues$ 4,445 $ 9,238 $ (4,793 ) 22
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The decrease in revenue in the three months endedApril 2, 2022 versus the three months endedApril 3, 2021 , was primarily driven by lower system sales. We did not recognize revenue on any systems sales in the first quarter of fiscal 2022. We recognized revenue on one MATRIX PVD system for advanced semiconductor packaging in the first quarter of fiscal 2021. Revenue during the three-month periods endedApril 2, 2022 andApril 3, 2021 also included revenue recognized for disk equipment technology upgrades and spare parts. Backlog April 2, January 1, April 3, 2022 2022 2021 (In thousands) Total backlog$ 87,162 $ 24,725 $ 4,221
Backlog at
Revenue by geographic region
Three Months Ended
April 2, 2022 April 3, 2021
(in thousands)
United States $ 294 $ 367
Asia 4,151 5,021
Europe - 3,850
Total net revenues $ 4,445 $ 9,238
International sales include products shipped to overseas operations of U.S.
companies. Sales to the U.S. region for all periods presented were not
significant. The decrease in sales to the Asia region in the three months ended
April 2, 2022 versus the three months ended April 3, 2021 , reflected lower spare
parts and service sales, offset in part by higher HDD upgrade sales. Sales to
the Asia region in both three month periods did not include any systems. Sales
to the Europe region in the three months ended April 3, 2021 included one MATRIX
PVD system for advanced semiconductor packaging.
Gross profit
Three Months Ended
April 2, April 3, Change over
2022 2021 prior period
(In thousands, except
percentages)
TFE gross profit $ 723 $ 2,134 $ (1,411 )
% of TFE net revenues 16.3 % 23.1 %
Cost of net revenues consists primarily of purchased materials, and also includes fabrication, assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties, provisions for inventory reserves and scrap.
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Gross margin was 16.3% in the three months endedApril 2, 2022 compared to 23.1% in the three months endedApril 3, 2021 . Lower gross margin during the three months endedApril 2, 2022 reflects$755,000 in charges for excess and obsolete inventory as part of the Company's realignment effort. Gross margin for the three months endedApril 3, 2021 reflects the lower margin on the first MATRIX PVD system for advanced semiconductor packaging. Gross margins will vary depending on a number of factors, including revenue levels, product mix, product cost, system configuration and pricing, factory utilization, and provisions for excess and obsolete inventory.
Research and development expense
Three Months Ended
April 2, April 3, Change over
2022 2021 prior period
(In thousands)
Research and development expense
R&D spending during the three months endedApril 2, 2022 increased compared to the three months endedApril 3, 2021 primarily due to$1.5 million in expenditures related to the disposal of certain lab equipment as part of the realignment effort, offset by lower spending on R&D programs.
Selling, general and administrative expense
Three Months Ended
April 2, April 3, Change over
2022 2021 prior period
(In thousands)
Selling, general and administrative expense
Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. Selling, general and administrative expense for the three months endedApril 2, 2022 decreased compared to the three months endedApril 3, 2021 as lower variable compensation expenses and lower stock compensation expenses were offset in-part by one-time severance charges associated with the realignment effort and higher legal and consulting fees. Selling, general and administrative expense for the three months endedApril 2, 2022 , is net of$776,000 inTSA fees earned since the Photonics divestiture. The agreed-upon charges for such services are generally intended to allow the service provider to recover all costs and expenses of providing such services.
Cost reduction plans
InMarch 2022 , the Company's management approved a restructuring plan to realign the Company's operational focus, scale the business and improve costs. The restructuring program includes (i) reducing the Company's headcount and (ii) eliminating several R&D programs and product offerings. As part of this re-alignment effort, the Company will no longer be pursuing several DCP projects including the coating of the backside covers of smartphones, solar ion implantation (also known asENERGi ® ), and advanced packaging for semiconductor manufacturing. We incurred restructuring costs of$1.2 million for estimated severance and the related modification of certain stock-based awards. Other costs incurred as part of the 2022 cost reduction plan include: (i) a benefit of$1.3 million related to the stock-based compensation forfeitures related to the employees affected by the reduction in workforce, (ii)$1.5 million for fixed asset disposals and (iii)$755,000 for write-offs of excess inventory. The 2022 Cost Reduction Plan reduced the workforce by 6 percent. The cost of implementing the 2022 Cost Reduction Plan was reported under cost of net revenues and operating expenses in the condensed consolidated statements of operations. Implementation of the 2022 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses by approximately$2.1 million on an annual basis and reduce depreciation expense by$720,000 on an annual basis. During the third quarter of fiscal 2021,Intevac substantially completed implementation of the 2021 cost reduction plan (the "2021 Cost Reduction Plan"), which was intended to reduce expenses and reduce its workforce by 5.2 percent. During the first quarter of 2021, the Company reported costs of$43,000 under the 2021 Cost Reduction Plan of which$9,000 was reported under cost of net revenues and$34,000 was reported under operating expenses. The total cost of implementing the 2021 Cost Reduction Plan was$319,000 , of which$224,000 was reported under cost of net revenues and$95,000 was reported under operating expenses during fiscal 2021. Substantially all cash outlays in connection with the 2021 Cost Reduction Plan were completed in the third quarter of fiscal 2021. Implementation of the 2021 Cost Reduction Plan is expected to reduce salary, wages and other employee-related expenses by approximately$2.0 million on an annual basis. 24
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Interest income and other income (expense), net
Three Months Ended
April 3, April 3, Change over
2021 2021 prior period
(In thousands)
Interest income and other income (expense), net
29 $ (37 )
Interest income and other income (expense), net in the three months endedApril 2, 2022 included$9,000 of interest income on investments and other income of$16,000 , offset in part by$33,000 of foreign currency losses. Interest income and other income (expense), net in the three months endedApril 3, 2021 included$17,000 of interest income on investments and other income of$19,000 , offset in part by$7,000 of foreign currency losses. The decrease in interest income in the three months endedApril 2, 2022 compared to the same period in the prior year resulted from lower interest rates, offset in part by higher invested balances. Income tax provision Three Months Ended April 2, April 3, Change over 2022 2021 prior period (In thousands) Income tax provision$ 26 $ 32 $ (6 )Intevac recorded income tax provisions of$26,000 for the three months endedApril 2, 2022 and$32,000 for the three months endedApril 3, 2021 . The income tax provisions for the three-month periods are based upon estimates of annual income (loss), annual permanent differences and statutory tax rates in the various jurisdictions in whichIntevac operates. The income tax expense for the three months endedApril 2, 2022 and for the three months endedApril 3, 2021 was largely the result of foreign withholding taxes and income taxes in foreign jurisdictions. For the three-month period endedApril 2, 2022 ,Intevac recorded a$26,000 income tax benefit on losses of our international subsidiaries and recorded$51,000 for withholding taxes on royalties paid tothe United States fromIntevac's Singapore subsidiary as a discrete item. For the three-month period endedApril 3, 2021 ,Intevac recorded a$19,000 income tax benefit on losses of our international subsidiaries and recorded$48,000 for withholding taxes on royalties paid tothe United States fromIntevac's Singapore subsidiary as a discrete item. For all periods presented,Intevac utilized net operating loss carry-forwards to offset the impact of global intangible low-taxed income.Intevac's tax rate differs from the applicable statutory rates due primarily to establishment of a valuation allowance, the utilization of deferred and current credits and the effect of permanent differences and adjustments of prior permanent differences.Intevac's future effective income tax rate depends on various factors, including the level ofIntevac's projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carry-forwards, availability of tax credits and the effectiveness ofIntevac's tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate. The income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business and foreign withholding taxes. We maintain a full valuation allowance for domestic deferred tax assets, including net operating loss carryforwards and certain domestic tax credits.Intevac's effective tax rate differs from theU.S. statutory rate in both 2022 and 2021 primarily due to the Company not recognizing an income tax benefit on the domestic loss. Discontinued operations Three Months Ended April 2, April 3, Change over 2022 2021 prior period (In thousands)
Loss from discontinued operations, net of taxes
936 $ (801 )
The loss from discontinued operations consists primarily of the results of operations of the Photonics business which was sold to EOTECH onDecember 30, 2021 . Loss from discontinued operations for the three months endedApril 2, 2022 includes salaries and wages and employee benefits up to and including January, 4, 2022, the date when employees were conveyed to the Buyer, severance for several employees that were not hired by the Buyer, stock-based compensation expense associated with the acceleration of stock awards and incremental legal expenses associated with the divestiture, offset in part by a stock based compensation divestiture-related forfeiture benefit. Loss from discontinued operations for the three months endedApril 3, 2021 represents the loss from the Photonics division, net of tax. 25
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Liquidity and Capital Resources
AtApril 2, 2022 ,Intevac had$117.2 million in cash, cash equivalents, restricted cash and investments compared to$121.2 million atJanuary 1, 2022 . During the first three months of fiscal 2022, cash, cash equivalents, restricted cash and investments decreased by$4.0 million due primarily to cash used by operating activities, purchases of fixed assets, and tax payments on net share settlements offset in part by cash received from the sale ofIntevac common stock toIntevac's employees throughIntevac's employee benefit plans. Cash, cash equivalents, restricted cash and investments consist of the following: April 2, January 2, 2022 2021 (In thousands) Cash and cash equivalents$ 98,034 $ 102,728 Restricted cash 786 786 Short-term investments 8,941 10,221 Long-term investments 9,407 7,427
Total cash, cash equivalents, restricted cash and investments
Operating activities used cash of$4.1 million during the first three months of fiscal 2022 compared to cash generated of$2.5 million during the first three months of fiscal 2021. Accounts receivable totaled$17.1 million atApril 2, 2022 compared to$14.3 million atJanuary 1, 2022 . Customer advances for products that had not been shipped to customers and included in accounts receivable were$10.6 million atApril 2, 2022 . Net inventories totaled$8.9 million atApril 2, 2022 compared to$5.8 million atJanuary 1, 2022 due to increased manufacturing activities. Accounts payable decreased to$3.9 million atApril 2, 2022 from$5.3 million atJanuary 1, 2022 . Accounts payable atJanuary 1, 2022 included a payable of$2.0 million as a commission to the investment banker for the Photonics sale. Accrued payroll and related liabilities decreased to$3.3 million atApril 2, 2022 compared to$5.5 million atJanuary 1, 2022 due primarily to the settlement of 2021 bonuses. Other accrued liabilities decreased to$3.0 million atApril 2, 2022 compared to$3.7 million atJanuary 1, 2022 primarily due to lower other tax liability balances. Customer advances increased from$2.1 million atJanuary 1, 2022 to$15.3 million atApril 2, 2022 primarily as a result of new orders. Investing activities used cash of$1.5 million during the first three months of fiscal 2022. Purchases of investments net of proceeds from sales totaled$891,000 . Capital expenditures for the three months endedApril 2, 2022 were$618,000 . Financing activities generated cash of$1.0 million in the first three months of fiscal 2022 from the sale ofIntevac common stock toIntevac's employees throughIntevac's employee benefit plans. Tax payments related to the net share settlement of restricted stock units were$135,000 .Intevac's investment portfolio consists principally of investment grade money market mutual funds,U.S. Treasury and agency securities, certificates of deposit, asset-backed securities, commercial paper, municipal bonds and corporate bonds.Intevac regularly monitors the credit risk in its investment portfolio and takes measures, which may include the sale of certain securities, to manage such risks in accordance with its investment policies. As ofApril 2, 2022 , approximately$30.9 million of cash and cash equivalents and$2.9 million of investments were domiciled in foreign tax jurisdictions.Intevac expects a significant portion of these funds to remain offshore in the short term. If the Company chose to repatriate these funds tothe United States , it would be required to accrue and pay additional taxes on any portion of the repatriation subject to foreign withholding taxes. We believe that our existing cash, cash equivalents and investments and cash flows from operating activities will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. Our significant funding requirements include procurement of manufacturing inventories, operating expenses, non-cancelable operating lease obligations, capital expenditures, settlement of the PAGA litigation and variable compensation. We have flexibility over some of these uses of cash, including capital expenditures and discretionary operating expenses, to preserve our liquidity position. Capital expenditures for the remainder of fiscal 2022 are projected to be approximately$4.0 million related to network infrastructure and security, and laboratory and test equipment to support our R&D programs. 26
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Table of Contents Off-Balance Sheet Arrangements Off-balance sheet firm commitments relating to outstanding letters of credit amounted to approximately$786,000 as ofApril 2, 2022 . These letters of credit and bank guarantees are collateralized by$786,000 of restricted cash. We do not maintain any other off-balance sheet arrangements, transactions, obligations, or other relationships that would be expected to have a material current or future effect on the consolidated financial statements.
Climate Change
We believe that neither climate change, nor governmental regulations related to climate change, have had any material effect on our business, financial condition or results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States of America ("US GAAP") requires management to make judgments, assumptions and estimates that affect the amounts reported.Intevac's significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 ofIntevac's Annual Report on Form 10-K for the year endedJanuary 1, 2022 , filed with theSEC onFebruary 17, 2022 . Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. A critical accounting policy is defined as one that is both material to the presentation ofIntevac's financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect onIntevac's financial conditions and results of operations. Specifically, critical accounting estimates have the following attributes: 1)Intevac is required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimatesIntevac could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect onIntevac's financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty.Intevac bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and asIntevac's operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they become known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. Many of these uncertainties are discussed in the section below entitled "Risk Factors." Based on a critical assessment ofIntevac's accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes thatIntevac's consolidated financial statements are fairly stated in accordance with US GAAP, and provide a meaningful presentation ofIntevac's financial condition and results of operations.
There have been no material changes to our critical accounting policies during
the three months ended
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