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 2023 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 16, 2023 , our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.
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. 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 approved and implemented a restructuring program 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 ceased its efforts to develop and market several of its manufacturing platforms for the DCP, PV and ASP industries and ceased offering certain legacy products within these industries. 22
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The following table presents certain significant measurements for the three
months ended
Three Months Ended
April 1, April 2, Change over
2023 2022 prior period
(Inthousands, except percentages and per share
amounts)
Net revenues $ 11,542 $ 4,445 $ 7,097
Gross profit $ 4,719 $ 723 $ 3,996
Gross margin percent 40.9 % 16.3 % 24.6 points
Loss from operations $ (4,454 ) $ (7,686 ) $ 3,232
Net loss from continuing operations $ (4,168 ) $ (7,720 ) $ 3,552
Net income (loss) from discontinued operations, net of taxes $ 277 $ (135 ) $ 412
Net loss $ (3,891 ) $ (7,855 ) $ 3,964
Net loss per diluted share $
(0.15 )
Net revenues increased during the first quarter of fiscal 2022 compared to the same period in the prior year primarily due to higher HDD upgrade sales. We did not recognize revenue on any system sales in the first quarter of either fiscal 2023 or fiscal 2022. Higher gross margin in the three months endedApril 1, 2023 , versus the three months endedApril 2, 2022 , reflected increased margin contribution from higher margin HDD upgrade sales. Gross margins in the first quarter of fiscal 2022 reflected the impact of$755,000 in charges for excess and obsolete inventory as part of the Company's realignment effort. 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 fiscal 2022 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$767,000 was reported as a reduction of selling, general and administrative expenses. The agreed-upon charges for such services were generally intended to allow the service provider to recover all costs and expenses of providing such services. TheTSA concluded inJune 2022 , and the Company did not receive anyTSA fees in the first quarter of fiscal 2023. The Company reported a smaller net loss for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 due to higher revenues and higher gross margins, offset in part by higher operating costs. We believe fiscal 2023 will continue to be a challenging year, andIntevac does not expect to be profitable in fiscal 2023.Intevac expects that 2023 HDD equipment sales will be similar to 2022 levels. We believe there will be improvements to our HDD equipment sales in the future as we expect a customer to start taking deliveries from the eleven systems in backlog starting in fiscal 2023. We expect to begin recognizing revenue from our TRIO platform in fiscal 2024. However, our results of operations and growth prospects could be impacted by macroeconomic conditions such as a global economic slowdown, global economic instability and political conflicts, wars, and public health crises. Rising inflation and interest rates may impact demand for our products and services and our cost to provide products and services. Further, the impacts of inflation and interest rate fluctuations on our business and the broader economy, which may continue to be exacerbated by the economic recovery from the COVID-19 pandemic, may impact our financial condition and results of operations. Our customers may delay or cancel orders due to reduced demand, supply chain disruptions, and/or travel restrictions and border closures. Results of Operations Net revenues Three Months Ended April 1, April 2, Change over 2023 2022 prior period (In thousands) Total net revenues$ 11,542 $ 4,445 $ 7,097 The increase in revenue in the three months endedApril 1, 2023 versus the three months endedApril 2, 2022 , was primarily driven by higher HDD upgrade sales and higher spare parts sales, offset in part by lower field service sales. 23
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Backlog
April 1, December 31, April 2,
2023 2022 2022
(In thousands)
Total backlog $ 120,658 $ 121,743 $ 87,162
Backlog at both April 1, 2023 and December 31, 2022 included eleven 200 Lean HDD
systems. Backlog at April 2, 2022 included nine 200 Lean HDD systems. From late
2021 through the first half of 2022, Intevac received orders for eleven 200 Lean
HDD systems, for an aggregate of approximately $70 million , intended to expand
our customers' media manufacturing capacity. With the slowing of HDD unit demand
that occurred beginning in mid-2022, our customers elected to accelerate
deployment of Heat Assisted Magnetic Recording system upgrades during this
period of lower capacity utilization, and at the same time elected to spread
their expected media capacity additions more ratably over the next two- to
four-year period. Our HDD revenues through 2023 are expected to consist
primarily of HDD upgrade sales, spare parts sales and field service sales. On
April 1, 2023 , we had $120.7 million of backlog and expect to recognize as
revenue: 38% in 2023, 21% in 2024, 0% in 2025 and 41% in 2026.
Revenue by geographic region
Three Months Ended
April 1, 2023 April 2, 2022
(In thousands)
United States $ 1,614 $ 294
Asia 9,928 4,151
Total net revenues $ 11,542 $ 4,445
International sales include products shipped to overseas operations of U.S.
companies. The increase in sales to the U.S. region in the three months ended
April 1, 2023 , versus the three months ended April 2, 2022 , reflected higher HDD
upgrade sales and higher field service sales, offset in part by lower spare
parts sales. The increase in sales to the Asia region in the three months ended
April 1, 2023 , versus the three months ended April 2, 2022 , reflected higher HDD
upgrade sales and higher spare parts sales, offset in part by lower field
service sales.
Gross profit
Three Months Ended
April 1, April 2, Change over
2023 2022 prior period
(In thousands, except percentages)
TFE gross profit $ 4,719 $ 723 $ 3,996
% of TFE net revenues 40.9 % 16.3 %
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, shipping and tariff costs, provisions for inventory reserves and scrap.
Gross margin was 40.9% in the three months endedApril 1, 2023 , compared to 16.3% in the three months endedApril 2, 2022 . Higher gross margin in the three months endedApril 1, 2023 , versus the three months endedApril 2, 2022 , reflected increased margin contribution from higher margin HDD upgrade sales. 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 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 1, April 2, Change over
2023 2022 prior period
(In thousands)
Research and development expense
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R&D spending during the three months endedApril 1, 2023 decreased compared to the same period in the prior year as R&D spending during the three months endedApril 2, 2022 included a$1.5 million charge related to the disposal of certain lab equipment as part of the realignment effort. R&D spending during the three months endedApril 1, 2023 included higher spending on the TRIO and HDD R&D programs compared to the same period in the prior year.
Selling, general and administrative expense
Three Months Ended
April 1, April 2, Change over
2023 2022 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 1, 2023 increased compared to the three months endedApril 2, 2022 as higher variable compensation expenses, higher stock compensation expenses, higher training expenses and higher travel expenses were offset in part by lower legal fees. Selling, general and administrative expense for the three months endedApril 2, 2022 included one-time severance charges associated with the 2022 Cost Reduction Plan. Selling, general and administrative expense for the three months endedApril 2, 2022 , is net of$776,000 inTSA fees earned associated with the Photonics divestiture. The agreed-upon charges for such services were 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 as ENERGi®), 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. Substantially all cash outlays in connection with the 2022 Cost Reduction Plan occurred in fiscal 2022.
Interest income and other income (expense), net
Three Months Ended
April 1, April 2, Change over
2023 2022 prior period
(In thousands)
Interest income and other income (expense), net
(8 ) $ 680
Interest income and other income (expense), net in the three months endedApril 1, 2023 included$710,000 of interest income on investments and other income of$40,000 , offset in part by$78,000 of foreign currency losses. 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$33,000 of foreign currency losses. The increase in interest income in the three months endedApril 1, 2023 compared to the same period in the prior year resulted from higher interest rates onIntevac's investments, offset in part by lower invested balances. Income tax provision Three Months Ended April 1, April 2, Change over 2023 2022 prior period (In thousands) Income tax provision$ 386 $ 26 $ 360 25
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Intevac recorded income tax provisions of$386,000 for the three months endedApril 1, 2023 and$26,000 for the three months endedApril 2, 2022 . 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 1, 2023 and for the three months endedApril 2, 2022 was largely the result of foreign withholding taxes and income taxes in foreign jurisdictions. For the three-month period endedApril 1, 2023 ,Intevac recorded an income tax provision of$224,000 on the income of our international subsidiaries and recorded$162,000 for withholding taxes on royalties paid tothe United States fromIntevac's Singapore subsidiary as a discrete item. For the three-month period endedApril 2, 2022 ,Intevac recorded a$26,000 income tax benefit on losses of our international subsidiaries and recorded$51,000 for withholding taxes on royalties paid tothe United States fromIntevac's Singapore subsidiary as a discrete item. For all periods presented,Intevac utilized net operating loss carry-forwards to offset the impact of global intangible low-taxed income.Intevac's tax rate differs from the applicable statutory rates due primarily to establishment of a valuation allowance, the utilization of deferred and current credits and the effect of permanent differences and adjustments of prior permanent differences.Intevac's future effective income tax rate depends on various factors, including the level ofIntevac's projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carry-forwards, availability of tax credits and the effectiveness ofIntevac's tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate. The income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business and foreign withholding taxes. We maintain a full valuation allowance for domestic deferred tax assets, including net operating loss carry-forwards and certain domestic tax credits.Intevac's effective tax rate differs from theU.S. statutory rate in both 2023 and 2022 primarily due to the Company not recognizing an income tax benefit on the domestic loss. Discontinued operations Three Months Ended April 1, April 2, Change over 2023 2022 prior period (In thousands) Income (loss) from discontinued operations, net of taxes$ 277 $
(135 ) $ 412
The income (loss) from discontinued operations consists primarily of the results of operations of the Photonics business which was sold to EOTECH onDecember 30, 2021 . Income from discontinued operations for the three months endedApril 1, 2023 is comprised primarily of a stock based compensation forfeiture benefit recognized upon the termination of certain mutual employees of both the Company and EOTECH that were terminated by the Company upon the completion of the assignment and novation of all government contracts to EOTECH in the first quarter of fiscal 2023. 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 EOTECH, severance for several employees that were not hired by EOTECH, 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.
Liquidity and Capital Resources
AtApril 1, 2023 ,Intevac had$84.8 million in cash, cash equivalents, restricted cash and investments compared to$112.8 million atDecember 31, 2022 . During the first three months of fiscal 2023, cash, cash equivalents, restricted cash and investments decreased by$28.0 million due primarily to cash used by operating activities, purchases of leasehold improvements and equipment, payment of contingent consideration 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. 26
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Cash, cash equivalents, restricted cash and investments consist of the
following:
April 1, December 31,
2023 2022
(In thousands)
Cash and cash equivalents $ 52,791 $ 68,904
Restricted cash 785 786
Short-term investments 15,283 25,541
Long-term investments 15,967 17,585
Total cash, cash equivalents, restricted cash and
investments $ 84,826 $ 112,816
Operating activities used cash of $23.6 million during the first three months of
fiscal 2023 compared to cash used of $4.1 million during the first three months
of fiscal 2022.
Accounts receivable increased to $21.9 million at April 1, 2023 compared to
$15.8 million at December 31, 2022 as a result of first quarter sales as well as
the impact of offering our customers in good standing extended payment terms on
a portion of the sales on selected products in the fourth quarter of 2022 and
the first quarter of 2023. Net inventories increased to $43.7 million at
April 1, 2023 compared to $30.0 million at December 31, 2022 due to increased
purchases of inventory for investments in TRIO inventory as well as to support
the build out of our HDD backlog. Accounts payable increased to $12.3 million at
April 1, 2023 from $11.6 million at December 31, 2022 . Accrued payroll and
related liabilities decreased to $3.0 million at April 1, 2023 compared to
$3.1 million at December 31, 2022 . Other accrued liabilities decreased to
$4.3 million at April 1, 2023 compared to $5.4 million at December 31, 2022
primarily due to the settlement of the PAGA lawsuit which was paid on
January 20, 2023 . Customer advances decreased from $24.7 million at December 31,
2022 to $23.5 million at April 1, 2023 primarily as a result of recognition of
revenue.
Investing activities generated cash of $8.2 million during the first three
months of fiscal 2023. Proceeds from sales and maturities of investments, net of
purchases totaled $12.1 million as the Company liquidated investments from its
investment portfolio to fund operating costs and inventory purchases. Capital
expenditures for the three months ended April 1, 2023 were $4.0 million .
Financing activities used cash of $689,000 in the first three months of fiscal
2023. Cash generated from the sale of Intevac common stock to Intevac's
employees through Intevac's employee benefit plans was $835,000 . Tax payments
related to the net share settlement of restricted stock units was $1.3 million .
In connection with the acquisition of Hia Inc. , Intevac agreed to make
contingent consideration to the selling shareholders upon achievement of certain
development and commercialization milestones, which consideration is estimated
to be up to $500,000 . The first milestone was achieved and contingent
consideration in the amount of $250,000 was paid on January 17, 2023 . The
Company is also obligated to pay a royalty of $1,500 for each magnetic bar sold
through December 31, 2030 . If at any time prior to December 31, 2030 , the
Company effects a change of control or a sale, license, transfer or other
disposition to a third party (other than an affiliate of Intevac ) of all or
substantially all of the assets or rights associated with the magnetic bars,
then, upon the closing of such transaction, a payment of $1.7 million (minus any
royalty payments previously paid) will immediately become due and payable, which
payment shall fulfill the Company's royalty obligations. As of April 1, 2023 , no
royalty payments have been earned or paid.
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 of April 1, 2023 , approximately $27.2 million of cash and cash equivalents
and $4.0 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 to the 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, contingent consideration payments, 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 2023
are projected to be approximately $2.0 million to $3.0 million related to
network infrastructure and security, and laboratory and test equipment to
support our R&D programs.
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Off-Balance Sheet Arrangements
Off-balance sheet firm commitments relating to outstanding letters of credit amounted to approximately$785,000 as ofApril 1, 2023 . These letters of credit and bank guarantees are collateralized by$785,000 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 endedDecember 31, 2022 , filed with theSEC onFebruary 16, 2023 . 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. BeginningJanuary 1, 2023 , we implemented ASC 326, Financial Instruments - Credit Losses. For a description of our critical accounting policies and estimates affecting accounting for credit losses, see Note 1. "Description of Business, Basis of Presentation and Significant Accounting Policy" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. With the exception of the changes to our credit loss recognition policies referenced above, there have been no material changes to our critical accounting policies during the three months endedApril 1, 2023 .
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