INTEVAC, INC. Management's Discussion and Analysis (MD&A) is intended to facilitate an understanding ofIntevac's business and results of operations. This MD&A should be read in conjunction withIntevac's Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this Form 10- K. The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of this Form 10-K. MD&A includes the following sections: • Overview: a summary ofIntevac's business, measurements and opportunities. • Results of Operations: a discussion of operating results. • Liquidity and Capital Resources:
an analysis of cash flows, sources and uses of cash, and financial position.
• Critical Accounting Policies:
a discussion of critical accounting policies that require the exercise of
judgments and estimates.
Overview
Intevac 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 HDD, DCP, and solar cell industries.Intevac also provides sensors, cameras and systems for government applications such as night vision and long-range target identification.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: 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, 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 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. Change Fiscal Year 2020 2019 2020 vs. 2019 (in thousands, except percentages and per share amounts) Net revenues $ 97,824$ 108,885 $ (11,061 ) Gross profit $ 40,545$ 40,868 $ (323 ) Gross margin percent 41.4 % 37.5 % 3.9 points Operating income $ 2,555$ 3,925 $ (1,370 ) Net income $ 1,056$ 1,148 $ (92 ) Net income per diluted share $ 0.04 $ 0.05 $ (0.01 ) Fiscal 2019 financial results reflected an improved environment as the Company resumed its growth trajectory.Intevac recognized revenue on four 200 Lean HDD systems. In 2019,Intevac recognized revenue on nine solar implant ENERG i systems. We also made significant progress in our TFE growth initiatives, placing evaluation tools with leading manufacturers in both the display cover glass market and the advanced semiconductor packaging market. In fiscal 2019, Photonics business levels were higher compared to the prior year due primarily to the$31.6 million U.S. Army IVAS contract award. Photonics continued to deliver production shipments of the night-vision camera modules for the F35 Joint Strike Fighter program in fiscal 2019 and resumed shipments of the Apache camera in the second half of 2019. Fiscal 2019 net income was the result of higher net revenues and higher gross margins. During 2019, the Company received an unfavorable decision on its appeal to a 23 -------------------------------------------------------------------------------- tax audit inSingapore and recorded a charge of$732,000 which was included in the provision for income taxes. During fiscal 2019, the Company did not recognize an income tax benefit on itsU.S. net operating loss. Fiscal 2020 financial results reflected a challenging environment, partially as a result of the COVID-19 pandemic. We continued to be profitable and grew cash, cash equivalents, restricted cash and investments in 2020 by$7.5 million to$50.4 million . Fiscal 2020 HDD equipment sales were lower than 2019 asIntevac recognized revenue on only two 200 Lean HDD systems, and there were no 200 Lean HDD systems in backlog at the end of 2020. Lower HDD systems revenue was offset in part by higher sales of upgrades, spare parts and service. In fiscal 2020, Photonics business levels were higher compared to the prior year due to higher product shipments as Photonics continued to deliver production shipments of the night-vision camera modules for the F35 Joint Strike Fighter program and the Apache camera and due to higher contract research and development ("R&D") primarily from the IVAS contract award. Lower fiscal 2020 net income resulted from lower net revenues and higher operating expenses, offset in part by higher contributions from gross margins. Higher selling general and administrative expenses resulted primarily from higher variable compensation expenses and incremental e-commerce costs to launch our Diamond Dog e-commerce website. During fiscal 2020, the Company received$567,000 in government assistance related to COVID-19 from the government ofSingapore of which$328,000 was reported as a reduction of cost of net revenues,$90,000 was reported as a reduction of R&D expenses and$149,000 was reported as a reduction of selling, general and administrative expenses. During fiscal 2020, the Company did not recognize an income tax benefit on itsU.S. net operating loss. We believe fiscal 2021 will be a challenging year andIntevac does not expect be profitable in fiscal 2021, unless new orders are received sooner than anticipated.Intevac expects that 2021 HDD equipment sales will be lower than 2020 levels as although we expect higher 200 Lean HDD systems revenue, upgrade revenue is expected to be lower. In 2021,Intevac expects higher sales of new TFE products as we expect to: (i) convert the two systems under evaluation at customer factories to revenue and (ii) obtain follow on production orders for our VERTEX coating system for DCPs. In 2021, we expect product revenue in Photonics to decline slightly as we continue to deliver product shipments of the night-vision camera modules for the F35 Joint Strike Fighter program. Shipments for the Apache camera under the current contract with theU.S. government concluded in the third quarter of 2020. In 2021, we expect decreased contract R&D revenue as development work on the multi-year IVAS contract award for the development and production of digital night-vision cameras to support theU.S. Army's IVAS program comes to a conclusion in early 2021. During fiscal 2021, the Company expects to receive$108,000 in government assistance related to COVID-19 from the government ofSingapore . The Impact of COVID-19 We are unable to accurately predict the possible future effect of the COVID-19 outbreak on the Company, which could be material to our 2021 results. Our customers may delay or cancel orders due to reduced demand, supply chain disruptions and/or travel restrictions and border closures. As the economic impact of the COVID-19 pandemic becomes clearer as the year progresses, we could see significant changes to our operations. Our factories inCalifornia andSingapore remain open as both TFE and Photonics businesses are within the critical infrastructure sectors. We have experienced pandemic-related delays in our TFE evaluation and development work. In response to COVID-19, we have implemented initiatives to safeguard our employees in this time of crisis. We have implemented work-from-home protocols and all employees that can do so are working remotely and will continue to do so until restrictions are lifted by the applicable authorities inthe United States ,Singapore andChina . The following discussion highlights how we are responding and the expected impacts of COVID-19 on our business. Essential Business The Company's priorities during the COVID-19 pandemic have been to protect the health and safety of employees while keeping its manufacturing facilities open due to the essential nature of our products. Our factories inCalifornia andSingapore remain open as both TFE and Photonics businesses are within critical infrastructure sectors that are exempt from government-mandated closures. OnMarch 16, 2020 , multiple counties in theSan Francisco bay area ofCalifornia issued a "shelter-in-place" order (the "State Order") requiring businesses to temporarily cease operations, effectiveMarch 17, 2020 . The State Order provides that Californians working within 16 identified critical infrastructure sectors may continue with their work because of the importance of these sectors to Californians' health and well-being. Among the identified critical infrastructure sectors listed are Communications and Information Technology ("IT") and the Defense Industrial Base ("DIB"). OnMarch 20, 2020 ,Intevac received a communication from theDepartment of Defense stating that the DIB is identified as a Critical Infrastructure Sector by theDepartment of Homeland Security , and that the Essential Critical Infrastructure Workforce for the DIB includes workers who support the essential products and services required to meet national security commitments to the Federal Government and theU.S. Military. 24 -------------------------------------------------------------------------------- Our factory inSingapore was given notice by theSingapore government to suspend all on-site activities onApril 27, 2020 . We appealed this notice and were provided an exemption onMay 14, 2020 . We were temporarily required to limit the number of employees on site at ourSingapore factory, but these restrictions were lifted onJune 2, 2020 . Employee Considerations Our goal has been to support our employees during the present uncertainty while remaining focused on meeting the needs of our customers and business continuity. Early in the crisis, we provided employees with information about best practices to prevent the spread of COVID-19 and other viruses and illnesses. We instituted practices including symptom checks and non-contact monitoring of body temperatures of those on site twice daily; requiring social distancing and face coverings; streamlining onsite personnel to only those required for production; strongly encouraging and, where mandated, requiring remote work for all those who can work from home; and increasing hygiene through disinfecting facilities. In addition, we have limited in-person meetings and non-employee visits to our locations, reduced room occupancies and eliminated non-essential business travel. Inthe United States , the Company has educated employees on COVID-19-related benefits (including leave benefits) under the Families First Coronavirus Response Act ("FFCRA") and the Coronavirus Aid, Relief, and Economic Security Act ("CARES"). To further protect the health and welfare of our employees, we have also required employees who potentially have been exposed to COVID-19 to self-quarantine for 14 days and have committed to paying these employees their normal wages during that quarantine period. To ease access to medical assistance, we are waiving co-payments for COVID-19 testing and telemedicine for those employees enrolled in our health insurance plans. Business Continuity Team We have robust pandemic and business continuity plans that include our business units and technology environments. When COVID-19 was declared a pandemic, we activated our business continuity plan (the "Continuity Plan"). As an element of the Continuity Plan, we activated our Business Continuity Team ("BCT"), a group of senior corporate managers who directed a series of activities to address the health and safety of our workforce, assist employees, sustain business operations, coordinate communication and address our management concerning other ongoing pandemic activities. The BCT monitors guidelines published by theCenters for Disease Control and Prevention ("CDC"), theNational Institutes of Health ("NIH"), theOccupational Safety and Health Administration ("OSHA"), theWorld Health Organization ("WHO") and other state and local authorities, makes assessments of these guidelines and implements the appropriate protocols. The BCT established a COVID-19 policy and continually updates this policy based on the latest guidance. All employees continuing to work on site and visitors were required to complete training on the Company's COVID-19 policy and any employees returning to work at our facilities are provided additional training prior to returning to work. The BCT also updated and revised policies related to visitors and travel to include COVID-19-related health and safety measures related to the pandemic and updated the Continuity Plan to include a pandemic response appendix. Productivity There has been a modest decline in productivity for certain departments as our people adjusted to this significant change in work environment. We currently believe our technology infrastructure is sufficient to maintain a remote-working environment for the vast majority of our workforce for the foreseeable future and that productivity improved as our people adjusted to this significant change in work environment. The productivity level and ability of our employees to continue working from home could change, however, as conditions surrounding COVID-19 evolve and infections increase, if there are interruptions in the internet infrastructure where our employees live or if internet service providers are otherwise adversely affected. Community We understand that the communities in which our employees live, work, and serve are also suffering distress as a result of COVID-19.Intevac is committed to help source supplies for local healthcare providers fighting COVID-19, and has donated all of its surplus N95 industrial masks and gloves to local hospitals and emergency responders. Economic Relief InSingapore ,Intevac receives 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$567,000 in JSS grants in fiscal 2020.Intevac expects to receive an additional$108,000 in JSS grants in fiscal 2021. As previously mentioned, 25 -------------------------------------------------------------------------------- under the CARES Act we have elected to defer the payment of the employer portion of payroll taxes and will receive tax benefits from the employee-retention-tax credit. During fiscal 2020, the Company's expenses included approximately$159,000 due to costs related to actions taken in response to COVID-19. Results of Operations Net revenues Change 2020 2019 2020 vs. 2019 (in thousands) TFE$ 52,128 $ 73,678 $ (21,550 ) Photonics Contract R&D 22,945 19,657 3,288 Products 22,751 15,550 7,201 45,696 35,207 10,489 Total net revenues$ 97,824 $ 108,885 $ (11,061 ) Net revenues consist primarily of sales of equipment used to manufacture thin-film disks, PV cells, DCPs and related equipment and system components; sales of low-light imaging products; and revenue from contract R&D related to the development of electro-optical sensors, cameras and systems. The decrease in TFE revenues in fiscal 2020 versus fiscal 2019 was due primarily to lower systems sales as TFE recognized revenue on two 200 Lean HDD systems, offset in part by increases in revenue recognized on technology upgrades, service and spare parts. In fiscal 2019, TFE revenue recognized four 200 Lean HDD systems and nine solar implant ENERG i systems, technology upgrades, service and spare parts. Photonics revenues increased by 30% to$45.7 million in fiscal 2020 versus fiscal 2019. Photonics product revenue reflected higher unit shipments for the Apache camera shipments and for the F35 Joint Strike Fighter program night-vision camera. Contract R&D revenue in fiscal 2020 increased as a result of development on the IVAS program. Backlog January 2, 2021 December 28, 2019 (in thousands) TFE $ 5,623 $ 21,391 Photonics 41,317 71,015 Total backlog $ 46,940 $ 92,406 TFE backlog atJanuary 2, 2021 did not include any 200 Lean HDD systems. TFE backlog atDecember 28, 2019 included two 200 Lean HDD systems. Significant portions ofIntevac's revenues in any particular period have been attributable to sales to a limited number of customers. The following customers accounted for at least 10 percent ofIntevac's consolidated net revenues in fiscal 2020 and 2019. 2020 2019 Seagate Technology 42 % 49 % U.S. Government 29 % 20 % Elbit Systems of America 12 % *
* Less than 10%
26--------------------------------------------------------------------------------
Revenue by geographic region
2020 2019
(in thousands)
TFE Photonics Total TFE Photonics Total
United States $ 6,450 $ 45,363 $ 51,813 $ 1,306 $ 34,664 $ 35,970
Asia 45,611 - 45,611 72,372 - 72,372
Europe 67 333 400 - 543 543
Total net revenues $ 52,128 $ 45,696 $ 97,824 $ 73,678 $ 35,207 $ 108,885
International sales include products shipped to overseas operations of U.S.
companies. The increase in sales to the U.S. region in 2020 versus 2019
reflected higher Photonics product sales, higher Photonics contract R&D work and
higher HDD upgrade sales to U.S. customers. There were no TFE systems sold to
factories in the U.S. in 2020 or 2019.
The decrease in sales to the Asia region in 2020 versus 2019 reflected lower
system sales, offset in part by higher technology upgrade, service and spare
parts sales. Sales to the Asia region in 2020 included two 200 Lean HDD systems.
Sales to the Asia region in 2019 included four 200 Lean HDD systems and nine
solar implant ENERG
i
systems.
Sales to the Europe region in 2020 and 2019 were not significant.
Gross margin
Fiscal Year Change
2020 2019 2020 vs. 2019
(in thousands, except percentages)
TFE gross profit $ 22,417 $ 27,377 $ (4,960 )
% of TFE net revenues 43.0 % 37.2 %
Photonics gross profit $ 18,128 $ 13,491 $ 4,637
% of Photonics net revenues 39.7 % 38.3 %
Total gross profit $ 40,545 $ 40,868 $ (323 )
% of net revenues 41.4 % 37.5 %
Cost of net revenues consists primarily of purchased materials and costs
attributable to contract R&D, and also includes assembly, test and installation
labor and overhead, customer-specific engineering costs, warranty costs,
royalties, provisions for inventory reserves and scrap.
TFE gross margin was 43.0% in fiscal 2020 compared to 37.2% in fiscal 2019.
Fiscal 2020 gross margins improved over fiscal 2019 as a result of higher
margins on upgrades. Fiscal 2019 gross margins reflected lower margins on the
sale of nine solar implant ENERG
i
systems. Gross margins in the TFE business vary depending on a number of
factors, including product mix, product cost, system configuration and pricing,
factory utilization, and provisions for excess and obsolete inventory.
Photonics gross margin was 39.7% in fiscal 2020 compared to 38.3% in
fiscal 2019. The improvement in gross margin for fiscal 2020 over fiscal 2019 is
due primarily to higher revenue levels and improved margins on product sales,
slightly offset by lower margins on contract R&D work. Manufacturing costs for
digital night-vision products decreased in fiscal 2020 and 2019 as a result of
cost reductions and yield improvements.
Research and development
Fiscal Year Change
2020 2019 2020 vs. 2019
(in thousands)
Research and development expense
Research and development expense consists primarily of salaries and related
costs of employees engaged in and prototype materials used in ongoing research,
design and development activities for PV cell manufacturing equipment, DCP
manufacturing equipment, HDD disk sputtering equipment, semiconductor
Fan-out
equipment and Photonics products.
27
--------------------------------------------------------------------------------
TFE research and development spending in fiscal 2020 was flat compared to
fiscal 2019 due to lower spending on semiconductor
Fan-out
and DCP development, offset by higher spending on HDD and PV development.
Research and development spending for Photonics decreased during 2020 as
compared to fiscal 2019 primarily due to lower spending on the development of
the next generation of our low light level CMOS camera. Research and development
expenses do not include costs of $15.0 million and $12.3 million in 2020 and
2019, respectively, which are related to customer-funded contract R&D programs
and therefore included in cost of net revenues.
Selling, general and administrative
Fiscal Year Change
2020 2019 2020 vs. 2019
(in thousands)
Selling, general and administrative expense
1,263
Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. All domestic sales and the majority of international sales of HDD disk sputtering products inAsia are made throughIntevac's direct sales force.Intevac also sells its TFE products through distributors inJapan andChina .Intevac has offices inSingapore ,Malaysia andChina to supportIntevac's TFE customers inAsia . Selling, general and administrative expenses increased in 2020 over the amount spent in 2019 primarily due to higher variable compensation expenses, incremental e-commerce costs to launch our Diamond Dog e-commerce website and higher bid and proposal costs in our Photonics segment, offset in part due to lower spending to support a customer evaluation. Cost reduction plan During the third quarter of fiscal 2020,Intevac substantially completed implementation of the 2020 cost reduction plan (the "2020 Plan"), which reduced expenses and reduced its workforce by 1 percent. The total cost of implementing the 2020 Plan was$103,000 , of which$16,000 was reported under cost of net revenues and$87,000 was reported under operating expenses. Substantially all cash outlays in connection with the 2020 Plan were completed in fiscal 2020. Implementation of the 2020 Plan reduced salary, wages and other employee-related expenses by approximately$864,000 on an annual basis. Interest income and other income (expense), net Fiscal Year Change 2020 2019 2020 vs. 2019 (in thousands)
Interest income and other income (expense), net
(370 )
Interest income and other income (expense), net in fiscal 2020 included$284,000 of interest income on investments and$56,000 from the sale of scrap materials offset in part by$139,000 of foreign currency losses. Interest income and other income (expense), net in fiscal 2019 included$574,000 of interest income on investments and$20,000 in earnout income from a divestiture, offset in part by$85,000 of foreign currency losses. The decrease in interest income in 2020 over 2019 reflected lower interest rates onIntevac's investments and lower invested balances. Provision for income taxes Fiscal Year Change 2020 2019 2020 vs. 2019 (in thousands) Provision for income taxes$ 1,711 $ 3,359 $ (1,648 ) Intevac's effective tax rate was 61.8% for fiscal 2020 and 74.5% for fiscal 2019 and we recorded income tax expense of$1.7 million and$3.4 million in 2020 and 2019, respectively. 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 28 -------------------------------------------------------------------------------- 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 2020 and 2019 primarily due to the Company not recognizing an income tax benefit on the domestic loss. The income tax expense for 2020 was largely the result of foreign withholding taxes and income taxes in foreign jurisdictions. The income tax expense for 2019 was largely the result of foreign withholding taxes, income taxes in foreign jurisdictions, and fully reserving a contested tax deposit related to a tax audit inSingapore . During 2019 the Company received an unfavorable decision on its appeal to a tax audit inSingapore . Management determined that the Company could no longer support a more likely than not position. Accordingly, the Company recorded a charge of$732,000 in provision for income taxes. During 2020 the Company appealed the decision to theSingapore High Court , which was denied. Management decided not to pursue additional appeals and the matter is fully settled. Presently, there are no other active income tax examinations in the jurisdictions whereIntevac operates. We assess the likelihood that our deferred tax assets will be recovered based upon our consideration of many factors, including the current economic climate, our expectations of future taxable income, and our ability to project such income. We maintain a full valuation allowance for ourU.S. deferred tax assets due to uncertainty regarding their realization as ofJanuary 2, 2021 . Liquidity and Capital Resources AtJanuary 2, 2021 ,Intevac had$50.4 million in cash, cash equivalents, restricted cash and investments compared to$42.8 million atDecember 28, 2019 . During fiscal 2020, cash, cash equivalents, restricted cash and investments increased by$7.5 million 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, offset in part by cash used for repurchases of common stock, purchases of fixed assets and tax payments related to the net share settlement of restricted stock units. Cash, cash equivalents, restricted cash and investments consist of the following: January 2, 2021 December 28, 2019 (in thousands) Cash and cash equivalents $ 29,341 $ 19,767 Restricted cash 787 787 Short-term investments 14,839 16,720 Long-term investments 5,388 5,537 Total cash, cash-equivalents, restricted cash and investments $ 50,355 $ 42,811 Cash generated by operating activities totaled$8.9 million in 2020 compared to$4.9 million in 2019. Improved operating cash flow in 2020 was a result of net income and improved working capital management. Accounts receivable totaled$28.6 million at bothJanuary 2, 2021 andDecember 28, 2019 . Customer advances for products that had not been shipped to customers and included in accounts receivable were$201,000 atDecember 28, 2019 . The number of days outstanding for Intevac's accounts receivable was 90 atJanuary 2, 2021 compared to 72 atDecember 28, 2019 . Net inventories totaled$21.7 million atJanuary 2, 2021 compared to$24.9 million atDecember 28, 2019 . Net inventories atJanuary 2, 2021 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. Net inventories atJanuary 2, 2021 also included one VERTEX SPECTRA system for DCP atIntevac's factory. Inventory turns were 1.6 in fiscal 2020 and were 2.5 in fiscal 2019. Accounts payable increased to$4.3 million atJanuary 2, 2021 compared to$4.2 million atDecember 28, 2019 . Other accrued liabilities were$3.6 million at bothJanuary 2, 2021 andDecember 28, 2019 . Accrued payroll and related liabilities increased to$7.7 million atJanuary 2, 2021 compared to$6.5 million atDecember 28, 2019 as a result of higher variable compensation accruals and the deferral of payroll tax liabilities under the CARES Act. Customer advances decreased from$4.0 million atDecember 28, 2019 to$33,000 atJanuary 2, 2021 as a result of recognition of revenue. Other long term liabilities increased to$457,000 atJanuary 2, 2021 compared to$186,000 atDecember 28, 2019 as a result of the deferral of payroll tax liabilities under the CARES Act. 29 -------------------------------------------------------------------------------- Investing activities used cash of$599,000 in 2020 and$5.8 million in 2019. Proceeds from sales and maturities of investments net of purchases of investments, totaled$2.0 million in 2020. Purchases of investments net of proceeds from sales and maturities of investments, totaled$1.7 million in 2019. Capital expenditures were$2.6 million in 2020 and$4.1 million in 2019. Financing activities generated cash of$1.1 million in 2020 and$1.5 million in 2019. The sale ofIntevac common stock toIntevac's employees throughIntevac's employee benefit plans provided$1.9 million in 2020 and$2.3 million in 2019. Tax payments related to the net share settlement of restricted stock units were$402,000 in 2020 and$404,000 in 2019. InNovember 2013 ,Intevac's Board of Directors approved a stock repurchase program authorizing up to$30 million in repurchases. OnAugust 15, 2018 ,Intevac's Board of Directors approved a$10.0 million increase to the original stock repurchase program authorizing up to$40.0 million in repurchases. Cash used to repurchase common stock totaled$393,000 in 2020 and$111,000 in 2019. In connection with the acquisition of SIT,Intevac agreed to pay to the selling shareholders in cash a revenue earnout onIntevac's net revenue from commercial sales of certain solar implant products over a specified period up to an aggregate of$9.0 million . The earnout period terminated onJune 30, 2019 . Payments made associated with the revenue earnout obligation were$230,000 in 2019.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 ofJanuary 2, 2021 , approximately$19.3 million of cash and cash equivalents and$3.4 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.Intevac believes that its existing cash, cash equivalents and investments will be sufficient to meetIntevac's cash requirements for the next 12 months.Intevac intends to undertake between approximately$6.0 million to$8.0 million in capital expenditures during the next 12 months. Off-Balance Sheet Arrangements Off-balance sheet firm commitments relating to outstanding letters of credit amounted to approximately$787,000 as ofJanuary 2, 2021 . 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 The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that is both material to the presentation ofIntevac's consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect onIntevac's financial condition or results of operations. Specifically, these policies 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 30 -------------------------------------------------------------------------------- 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 became 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. These uncertainties are discussed in the section above entitled "Risk Factors." Based on a critical assessment of its 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 accounting principles generally accepted inthe United States of America , and provide a meaningful presentation ofIntevac's financial condition and results of operations. Management believes that the following are critical accounting policies: Revenue Recognition In our TFE segment, a majority of our equipment sales revenue, which includes systems, technology upgrades, service and spare parts is recognized when products are shipped from our manufacturing facilities. In our TFE segment, we recognize revenue for equipment sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts.Intevac recognizes revenue in certain circumstances before delivery has occurred (commonly referred to as bill and hold transactions). In such circumstances, among other things, risk of ownership has passed to the customer, the customer has made a written fixed commitment to purchase the finished goods, the customer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations exist byIntevac . For these transactions, the finished goods are segregated from inventory and normal billing and credit terms granted. Our contracts with customers may include multiple performance obligations. Under the revenue standard we allocate revenue for such arrangements to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or by using expected cost plus margin. Under the revenue standard, the expected costs associated with our base warranties continue to be recognized as expense when the equipment is sold. In our Photonics segment, we recognize revenue for cost plus fixed fee ("CPFF") and firm fixed price ("FFP") government contracts over time under the cost-to-cost method for the majority of our government contracts, which is consistent with our historical revenue recognition model. Revenue on the majority of our government contracts is recognized over time because of the continuous transfer of control to the customer. ForU.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date to deliver products or services that do not have an alternative use to the Company. Under the revenue standard, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which occurs as we incur costs. The majority of our contracts in our Photonics segment have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development and production). For contracts with multiple performance obligations, we allocate the contract's transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. In our Photonics segment, we recognize revenue for homogenous manufactured military products sold to theU.S. government and its contractors over time under the units-of-delivery method because of the continuous transfer of control to the customer.Intevac believes that the units-of-delivery method is an appropriate measure for measuring progress for the manufactured units as an equal amount of value is individually transferred to the customer upon delivery. The Company previously recognized revenue for substantially all manufactured military products sold to theU.S. government and its contractors when the customers took delivery of the products, which was generally upon shipment. The nature of our contracts in our Photonics segment gives rise to several types of variable consideration including tiered pricing. Allocation of contract revenues among Photonics military products, and the timing of the recognition of those revenues, 31 -------------------------------------------------------------------------------- is impacted by agreements with tiered pricing or variable rate structures. We include variable consideration in the estimated transaction price when there is a basis to reasonably estimate the amount of the consideration. These estimates are based on historical experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations. Accounting for CPFF and FFP contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For these contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified. Inventories Inventories are valued using average actual costs and are stated at the lower of cost or net realizable value. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the net realizable value based upon assumptions about future demand.Intevac evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory might be required, which could have a material adverse effect onIntevac's business, financial condition and results of operations. WarrantyIntevac estimates the costs that may be incurred under the warranty it provides and records a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs.Intevac's warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. AsIntevac's customer service engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required. Income Taxes Intevac accounts for income taxes by recognizing deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards. Deferred tax assets are also reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that its future taxable income will not be sufficient to realize its entire deferred tax assets. In determining whether to establish or maintain a valuation allowance against a deferred tax asset, the Company reviews available evidence to determine whether it is more likely than not that all or a portion of the Company's net deferred tax assets will be realized in future periods. Consideration is given to various positive and negative factors that could affect the realization of the net deferred tax assets. In making such a determination, the Company considers, among other things, future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, historical financial performance, the length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their 32
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net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, non-tax deductible expenses and availability of tax credits. Management carefully monitors the changes in many factors and adjusts the effective income tax rate as required. If actual results differ from these estimates,Intevac could be required to record additional valuation allowances on deferred tax assets or adjust its effective income tax rate, which could have a material adverse effect onIntevac's business, financial condition and results of operations. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent withIntevac's expectations could have a material impact onIntevac's results of operations and financial condition. Valuation of Acquisition-Related Contingent Consideration Contingent consideration related to a business combination is recorded at the acquisition date at the estimated fair value of the contingent payments. The acquisition date fair value is measured based on the consideration expected to be transferred (probability-weighted), discounted back to present value. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods. The fair value of the acquisition-related contingent consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense in the consolidated statements of income. Equity-Based CompensationIntevac records compensation expense for equity-based awards using the Black-Scholes option pricing model. This model requiresIntevac to estimate the expected volatility of the price ofIntevac's common stock and the expected life of the equity-based awards. Estimating volatility and expected life requires significant judgment and an analysis of historical data. Intevac accounts for forfeitures as they occur rather than estimating expected forfeitures.Intevac may have to increase or decrease compensation expense for equity-based awards if actual results differ significantly fromIntevac's estimates.
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