INTEVAC, INC. This Quarterly Report on Form 10-Qcontains 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 2020 and beyond; projected customer requirements forIntevac's new and existing products, and when, and if,Intevac's customers will place orders for these products;Intevac's ability to proliferate its Photonics technology into major military programs; 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 12, 2020 , and our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. OverviewIntevac is a provider of vacuum deposition equipment for a wide variety of thin-film applications, and a leading provider of digital night-vision technologies and products to the defense industry. 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"), display cover panel ("DCP"), and photovoltaic ("PV") solar cell industries.Intevac also provides sensors, cameras and systems for government applications such as night vision.Intevac's customers include manufacturers of hard disk media, DCPs and solar cells as well as theU.S. government and its agencies, allies and contractors.Intevac reports two segments: Thin-film Equipment ("TFE") and Photonics. Product development and manufacturing activities occur inNorth America andAsia .Intevac has field offices inAsia to support its TFE customers.Intevac's products are highly technical and are sold primarily throughIntevac's direct sales force.Intevac also sells its products through distributors inJapan andChina .Intevac's results are driven by a number of factors including success in its equipment growth initiatives in the DCP and solar markets 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 equipment diversification into new markets by introducing new products, such as for a thin-film physical vapor deposition ("PVD") application for protective coating for DCP manufacturing and a thin-film PVD application for PV solar cell manufacturing.Intevac believes that expansion into these markets 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, cell phones, and PV cells, as well as other factors such as global economic conditions and technological advances in fabrication processes.
The following table presents certain significant measurements for the three
months ended
Three Months Ended
March 28, March 30, Change over
2020 2019 prior period
(In thousands, except percentages and per share
amounts)
Net revenues $ 18,840 $ 24,827 $ (5,987 )
Gross profit $ 8,156 $ 7,239 $ 917
Gross margin percent 43.3 % 29.2 % 14.1 points
Loss from operations $ (1,100 ) $ (1,999 ) $ 899
Net loss $ (1,224 ) $ (2,392 ) $ 1,168
Net loss per diluted share $ (0.05 ) $ (0.10 ) $ 0.05
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Net revenues decreased during the first quarter of fiscal 2020 compared to the
same period in the prior year primarily due to lower TFE sales, offset in part
by higher Photonics product sales and higher Photonics contract research and
development ("R&D") revenue. TFE did not recognize revenue on any systems sales
in the first quarter of fiscal 2020 compared to one 200 Lean® HDD system and
four ENERGi® solar ion implant systems in the first quarter of fiscal 2019. The
Company reported a smaller net loss for the first quarter of fiscal 2020
compared to the first quarter of fiscal 2019 due to higher gross margins and
lower spending on R&D materials, offset in part by increased selling, general
and administrative expense, resulting from higher variable compensation
expenses.
Intevac expects that HDD equipment sales will be down from 2019 levels as a HDD
manufacturer takes delivery of the two 200 Lean HDD systems in backlog. In 2020,
Intevac expects lower sales of new TFE products as we expect to: (i) convert at
least one of the two systems under evaluation at customer factories to revenue
and (ii) obtain follow-on production orders for our VERTEX coating system for
DCPs but expect a delay in a follow-on order for our solar ion implant ENERGi
system. The second evaluation system at a customer factory is expected to
convert to revenue in 2021. In 2020, we expect increased product revenue in
Photonics as we continue to deliver product shipments of the Apache camera and
the night-vision camera modules for the F35 Joint Strike Fighter ("JSF")
program. In 2020, we expect increased contract R&D revenue as development work
continues on the multi-year IVAS contract award for the development and
production of digital night-vision cameras to support the U.S. Army's IVAS
program. For fiscal 2020, Intevac expects that Photonics profits will be higher
than for fiscal 2019 as Photonics results will reflect higher revenue levels.
We are unable to accurately predict the possible future effect of the
COVID-19outbreak on the Company, which could be material to our 2020 results.
Our customers may delay or cancel orders due to reduced demand, supply chain
disruptions and/or travel restrictions and border closures. Our factories in
California remain open as both TFE and Photonics businesses are within the
critical infrastructure sectors. On April 27, 2020 , the Singapore government
directed us to suspend all on-site activities at our factory in Singapore and
remain closed until at least June 1, 2020 . The closure of our factory in
Singapore significantly curtails our ability to meet production demand and
shipments for our TFE HDD customers during this closure period. Although these
restrictions are currently scheduled to expire on June 1, 2020 , there can be no
assurance they will not be extended. While this business disruption is expected
to be temporary, the current circumstances are dynamic and the impacts of
COVID-19 on our business operations, including the duration to our operations,
cannot be reasonably estimated at this time. We have implemented work-from-home
protocols and all employees that can work remotely will continue to do so until
restrictions are lifted by the U.S. and Singapore governments.
Intevac's trademarks include the following: "200 Lean®," "DiamondCladTM,"
"DIAMONDDOGTM," "EBAPS®," "ENERGi®," "LIVAR®," "INTEVAC LSMA®," "INTEVAC
MATRIX®," "MicroVista®," "NightVista®," "oDLC®," "INTEVAC VERTEX®," "VERTEX
MarathonTM," and "VERTEX SPECTRATM."
Results of Operations
Net revenues
Three Months Ended
March 28, March 30, Change over
2020 2019 prior period
(In thousands)
TFE $ 7,962 $ 18,945 $ (10,983 )
Photonics
Products 5,874 2,692 3,182
Contract R&D 5,004 3,190 1,814
10,878 5,882 4,996
Total net revenues $ 18,840 $ 24,827 $ (5,987 )
TFE did not recognize revenue on any systems sales in the first quarter of
fiscal 2020. TFE revenue for the three months ended March 28, 2020 included
revenue recognized for disk equipment technology upgrades and spare parts. TFE
revenue for the three months ended March 30, 2019 included revenue recognized
for one 200 Lean HDD system, four ENERGi solar ion implant systems, disk
equipment technology upgrades and spare parts.
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Photonics revenue for the three months endedMarch 28, 2020 increased compared to the same period in the prior year resulting from higher product sales due to the resumption of shipments of the Apache camera and increased shipments of the F35 JSF night-vision camera modules and higher contract R&D work primarily related to the IVAS contract. Backlog March 28, December 28, March 30, 2020 2019 2019 (In thousands) TFE$ 22,386 $ 21,391 $ 59,346 Photonics 64,787 71,015 43,294 Total backlog$ 87,173 $ 92,406 $ 102,640
TFE backlog at both
Revenue by geographic region
Three Months Ended
March 28, 2020 March 30, 2019
(In thousands)
TFE Photonics Total TFE Photonics Total
United States $ 519 $ 10,856 $ 11,375 $ 161 $ 5,716 $ 5,877
Asia 7,443 - 7,443 18,784 - 18,784
Europe - 22 22 - 166 166
Total net revenues
International sales include products shipped to overseas operations ofU.S. companies. The increase in sales to theU.S. region in 2020 versus 2019, reflected higher Photonics product shipments and higher Photonics contract R&D work. Sales to theAsia region in 2020 did not include any systems versus one 200 Lean system and fourENERGi solar ion implant systems in 2019. Sales to theEurope region in 2020 and 2019 were not significant. Gross profit Three Months Ended March 28, March 30, Change over 2020 2019 prior period (In thousands, except percentages) TFE gross profit$ 3,500 $ 5,977 $ (2,477 ) % of TFE net revenues 44.0 % 31.5 % Photonics gross profit$ 4,656 $ 1,262 $ 3,394
% of Photonics net revenues 42.8 % 21.5 %
Total gross profit $ 8,156 $ 7,239 $ 917
% of net revenues 43.3 % 29.2 %
Cost of net revenues consists primarily of purchased materials and costs
attributable to contract R&D, and also includes fabrication, assembly, test and
installation labor and overhead, customer-specific engineering costs, warranty
costs, royalties, provisions for inventory reserves and scrap.
TFE gross margin was 44.0% in the three months ended March 28, 2020 compared to
31.5% in the three months ended March 30, 2019 . The increase in margins was due
to favorable product mix. Lower TFE margins in the three months ended
March 30, 2019 resulted from four lower margin ENERGi solar ion implant systems.
Gross margins in the TFE business 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.
Photonics gross margin was 42.8% in the three months ended March 28, 2020
compared to 21.5% in the three months ended March 30, 2019 . Higher Photonics
gross margins for the three months ended March 28, 2020 reflected higher revenue
levels and improved margins on both products and contract R&D work.
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Research and development expense
Three Months Ended
March 28, March 30, Change over
2020 2019 prior period
(In thousands)
Research and development expense $ 3,284 $ 3,986 $ (702 )
Research and development spending in TFE during the three months ended
March 28, 2020 decreased compared to the three months ended March 30, 2019 due
to lower spending on HDD, semiconductor Fan-out and PV development, offset in
part by increased spending on DCP development. Research and development spending
decreased in Photonics during the three months ended March 28, 2020 as compared
to the three months ended March 30, 2019 primarily related to lower spending on
the next generation of our low light level CMOS camera. Research and development
expenses do not include costs of $2.9 million and $2.5 million for the
three-month periods ended March 28, 2020 and March 30, 2019 , respectively, which
are related to customer-funded contract R&D programs in Photonics and therefore
included in cost of net revenues.
Selling, general and administrative expense
Three Months Ended
March 28, March 30, Change over
2020 2019 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 endedMarch 28, 2020 increased compared to the three months endedMarch 30, 2019 as a result of higher variable compensation expenses and incremental costs to launch our Diamond Dog e-commerce website.
Interest income and other income (expense), net
Three Months Ended
March 28, March 30, Change over
2020 2019 prior period
(In thousands)
Interest income and other income (expense), net
160 $ (18 )
Interest income and other income (expense), net in the three months endedMarch 28, 2020 included$125,000 of interest income on investments and$25,000 of foreign currency gains, offset in part by various other expenses of$8,000 . Interest income and other income (expense), net in the three months endedMarch 30, 2019 included$148,000 of interest income on investments,$20,000 of earnout income from a divestiture and miscellaneous other income of$23,000 , offset in part by$32,000 of foreign currency losses. The decrease in interest income in the three months endedMarch 28, 2020 resulted from lower invested balances. Income tax provision Three Months Ended March 28, March 30, Change over 2020 2019 prior period (In thousands) Income tax provision$ 266 $ 553 $ (287 )Intevac recorded income tax provisions of$266,000 for the three months endedMarch 28, 2020 and$553,000 for the three months endedMarch 30, 2019 . 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. For the three-month period endedMarch 28, 2020 Intevac recorded a$165,000 income tax provision on earnings of our international subsidiaries and recorded$101,000 for withholding taxes on royalties paid tothe United States fromIntevac's Singapore subsidiary as a discrete item. For the three-month period endedMarch 30, 2019 Intevac recorded a$362,000 income tax provision on earnings of our international subsidiaries and recorded$191,000 for withholding taxes on royalties paid tothe United States fromIntevac's Singapore subsidiary as a discrete item. For all periods presentedIntevac utilized net operating loss carry-forwards to offset the impact of the GILTI.Intevac's 23
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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.
Liquidity and Capital Resources
AtMarch 28, 2020 ,Intevac had$43.2 million in cash, cash equivalents, restricted cash and investments compared to$42.8 million atDecember 28, 2019 . During the first three months of 2020, cash, cash equivalents, restricted cash and investments increased by$416,000 due primarily to cash generated by operating activities and cash received from the sale ofIntevac common stock toIntevac's employees throughIntevac's employee benefit plans, partially offset by purchases of fixed assets, tax payments on net share settlements and stock repurchases. Cash, cash equivalents, restricted cash and investments consist of the following: March 28, December 28, 2020 2019 (In thousands) Cash and cash equivalents$ 21,450 $ 19,767 Restricted cash 787 787 Short-term investments 16,441 16,720 Long-term investments 4,549 5,537
Total cash, cash equivalents, restricted cash and investments
Operating activities generated cash of
Accounts receivable totaled$23.0 million atMarch 28, 2020 compared to$28.6 million atDecember 28, 2019 . AtMarch 28, 2020 andDecember 28, 2019 , customer advances for products that had not been shipped to customers and included in accounts receivable were$805,000 and$210,000 , respectively. Net inventories totaled$27.2 million atMarch 28, 2020 compared to$24.9 million atDecember 28, 2019 . Net inventories at bothMarch 28, 2020 andDecember 28, 2019 included one VERTEX SPECTRA system for DCP under evaluation in a customer's factory and one MATRIX PVD system for advance semiconductor packaging under evaluation in a customer's factory. Accounts payable increased to$4.7 million atMarch 28, 2020 from$4.2 million atDecember 28, 2019 . Accrued payroll and related liabilities decreased to$4.0 million atMarch 28, 2020 compared to$6.5 million atDecember 28, 2019 due primarily to the settlement of 2019 bonuses. Other accrued liabilities decreased to$2.7 million atMarch 28, 2020 compared to$3.6 million atDecember 28, 2019 . Customer advances increased from$4.0 million atDecember 28, 2019 to$4.7 million atMarch 28, 2020 , primarily due to the recognition of new orders offset in part by the recognition of revenue. Investing activities generated cash of$143,000 during the first three months of 2020. Proceeds from sales of investments net of purchases totaled$1.3 million . Capital expenditures for the three months endedMarch 28, 2020 were$1.1 million . Financing activities generated cash of$521,000 in the first three months of 2020. The sale ofIntevac common stock toIntevac's employees throughIntevac's employee benefit plans generated cash of$950,000 . Tax payments related to the net share settlement of restricted stock units were$36,000 . Cash used to repurchase shares of common stock under the Company's stock repurchase program totaled$393,000 for the three months endedMarch 28, 2020 .Intevac's investment portfolio consists principally of investment grade money market mutual funds,U.S. Treasury and agency securities, certificates of deposit, 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 ofMarch 28, 2020 , approximately$15.6 million of cash and cash equivalents and$3.4 million of short term 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. 24
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Intevac believes that its existing cash, cash equivalents and investments will be sufficient to meet its cash requirements for the foreseeable future.Intevac intends to undertake approximately$5.0 million to$6.0 million in capital expenditures during the remainder of 2020.
Off-Balance Sheet Arrangements
Off-balance sheet firm commitments relating to outstanding letters of credit amounted to approximately$787,000 as ofMarch 28, 2020 . These letters of credit and bank guarantees are collateralized by$787,000 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.
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 filed onFebruary 12, 2020 . 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 operation. For a description of other critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year endedDecember 28, 2019 filed with theSEC onFebruary 12, 2020 . There have been no material changes to our critical accounting policies during the three months endedMarch 28, 2020 .
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