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INTEVAC INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 to Intevac's shipments, projected revenue recognition, product costs, gross margin, operating expenses, interest income, income taxes, cash balances and financial results in 2013 and beyond; projected customer requirements for Intevac'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 and to develop and introduce commercial imaging products; the timing of delivery and/or acceptance of the systems and products that comprise Intevac'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 the Securities and Exchange Commission, including our Annual Report on Form 10-K filed on February 22, 2013, and our periodic Form 10-Q's and Form 8-K's. Overview Intevac provides process manufacturing equipment solutions to the hard disk drive industry and high-productivity process manufacturing equipment to the photovoltaic ("PV") industry. 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 drives and PV cells as well as the U.S. government and its agencies and contractors. Intevac reports two segments: Equipment and Intevac Photonics. During the first quarter of 2012, Intevac sold certain assets comprising its semiconductor mainframe technology. During the first quarter of 2013, Intevac sold certain assets comprising its Raman spectroscopy instruments product line, also known as DeltaNu. During the first quarter of 2013, Intevac announced a global cost reduction plan and reduced its workforce by 13 percent. Product development and manufacturing activities occur in North America and Asia. Intevac has field offices in Asia to support its equipment customers. Intevac's equipment and service products are highly technical and are sold primarily through Intevac's direct sales force. Intevac also sells its products through distributors in Japan and China. Intevac's results are driven by worldwide demand for hard disk drives, which in turn depends on the growth in digital data creation and storage, the rate of areal density improvements, the end-user demand for personal computers, enterprise data storage, including on-line, cloud storage and near-line applications, personal audio and video players and video game platforms that include such drives. Demand for Intevac's equipment is impacted by Intevac's customers' relative market share positions and production capacity needs. Intevac continues to execute its strategy of equipment diversification into new markets by introducing products for PV solar cell manufacturing. Intevac believes that expansion into this market, which is significantly larger than the hard disk drive deposition equipment market, will result in incremental equipment revenues for Intevac and decrease Intevac's dependence on the hard disk drive 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 hard disk drives and PV cells, as well as other factors such as global economic conditions and technological advances in fabrication processes. 22 -------------------------------------------------------------------------------- Table of Contents The following table presents certain significant measurements for the three months ended March 30, 2013 and March 31, 2012: Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands, except percentages and per share amounts) Net revenues $ 12,982 $ 17,315 $ (4,333 ) Gross profit $ 3,514 $ 6,824 $ (3,310 ) Gross margin percent 27.1 % 39.4 % (12.3)points Net loss $ (8,264 ) $ (3,161 ) $ (5,103 ) Loss per diluted share $ (0.35 ) $ (0.14 ) $ (0.21 ) Net revenues decreased during the first quarter of fiscal 2013 compared to the same period in the prior year primarily due to lower equipment sales to disk manufacturers and lower Intevac Photonics' product sales offset in part by higher Intevac Photonics' technology development contracts. Intevac Equipment did not recognize revenue on any 200 Lean systems or solar tools in the first quarter of either fiscal 2013 or fiscal 2012. In the first quarter of 2013, Intevac shipped its first production order for its solar implant ENERGi™ system, which Intevac expects to complete the installation and recognize revenue in the second half of fiscal 2013.The net loss for the first quarter of fiscal 2013 increased compared to the same period in the prior year due to lower revenues, lower gross margins, and recognition of a smaller income tax benefit, offset in part by lower operating expenses as a result of savings from the global cost reduction program implemented in the first quarter of 2013. Also in the first quarter of fiscal 2012, Intevac recognized a gain on the sale of semiconductor mainframe technology in the amount of $2.2 million which did not re-occur in the first quarter of fiscal 2013. The income tax benefit declined from $3.4 million in the prior year to $679,000 in the first quarter of fiscal 2013 primarily due to the fact that Intevac did not recognize a benefit on the U.S. net operating loss in the first quarter of fiscal 2013. In fiscal 2013, Intevac expects that the effect of macro-economic environment conditions on demand for personal computers from consumers and corporations, the continued proliferation of tablets and the increase in centralized storage will continue to negatively impact the hard drive equipment business. The Company therefore expects that capacity shipments of Intevac equipment to hard disk drive manufacturers will be approximately at the same levels as 2012. In 2013, Intevac expects increased sales of PV equipment as Intevac completes its production qualifications, which Intevac believes will lead to production orders and additional customers in the solar market. For fiscal 2013, Intevac expects that Intevac Photonics business levels will be relatively flat as compared to 2012 as the business completes its major contract with the U.S. Army to develop a pilot night vision system for the Apache helicopter in advance of the first large scale production shipments that will begin in late 2013. Intevac's trademarks, include the following: "200 Lean®," "AccuLuber™," "EBAPS ®," "ENERGi™," "I-Port™," "LEAN SOLAR™," "LithoPrime™," "LIVAR®," "MicroVista ®," "NanoVista™", "LEAN SOLAR NanoTexture™," "NightVista ®," and "Night Port™." 23 -------------------------------------------------------------------------------- Table of Contents Results of Operations Net revenues Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands) Equipment $ 5,368 $ 10,719 $ (5,351 ) Intevac Photonics Contract Research and Development ("R&D") 4,097 2,547 1,550 Products 3,517 4,049 (532 ) 7,614 6,596 1,018 Total net revenues $ 12,982 $ 17,315 $ (4,333 ) Equipment revenue for the three months ended March 30, 2013 included revenue recognized for two AccuLuberTM systems, disk equipment technology upgrades and spare parts. Equipment revenue for the three months ended March 31, 2012 included revenue recognized for four AccuLuber systems, disk equipment technology upgrades and spare parts. Equipment revenue for both the three months ended March 30, 2013 and March 31, 2012 did not include any sales of 200 Lean systems or solar tools. Intevac Photonics revenue for the three months ended March 30, 2013 increased over the same periods in the prior year as a result of increased contract R&D work offset in part by lower product sales. The increase in contract R&D revenue was the result of a higher volume of contracts related to two large U.S. government defense programs and due to the continued expansion of Intevac's low-light camera and sensor products in military applications. The decrease in product revenue was a result of lower sales levels of our low-light camera modules as well as lower sales of Raman spectroscopy products. On March 29, 2013, Intevac sold certain assets comprising its Raman spectroscopy instruments product line, also known as DeltaNu, and no longer offers Raman spectroscopy products. Intevac expects that volumes of low-light camera and sensor products will return to previous levels in mid 2013. Backlog March 30, December 31, March 31, 2013 2012 2012 (In thousands) Equipment $ 11,542 $ 8,902 $ 25,010 Intevac Photonics 23,575 26,282 16,243 Total backlog $ 35,117 $ 35,184 $ 41,253 Equipment backlog at March 30, 2013 included one ENERGi™ LEAN SOLAR system. Equipment backlog at March 30, 2013 and December 31, 2012 did not include any 200 Lean systems. Equipment backlog at March 31, 2012 included two 200 Lean systems and one LEAN SOLAR system. 24-------------------------------------------------------------------------------- Table of Contents Revenue by geographic region Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands) United States $ 7,333 $ 5,844 $ 1,489 Asia 4,485 9,843 (5,358 ) Europe 1,164 1,628 (464 ) Total net revenues $ 12,982 $ 17,315 $ (4,333 ) International sales include products shipped to overseas operations of U.S. companies. The decrease in international sales for the three months ended March 30, 2013 was primarily due to a decrease in net revenues from AccuLuber systems and Equipment technology upgrades and lower sales of Intevac Photonics' digital night-vision cameras to a NATO customer. The mix of domestic versus international sales will change from period to period depending on the location of Intevac's largest customers in each period. Gross profit Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands, except percentages) Equipment gross profit $ 1,203 $ 4,836 $ (3,633 ) % of Equipment net revenues 22.4 % 45.1 % Intevac Photonics gross profit $ 2,311 $ 1,988 $ 323 % of Intevac Photonics net revenues 30.4 % 30.1 % Total gross profit $ 3,514 $ 6,824 $ (3,310 ) % of net revenues 27.1 % 39.4 % 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. Equipment gross margin of 22.4% in the three months ended March 30, 2013 was lower compared to 45.1% reported in the three months ended March 31, 2012. The lower gross margin was due primarily to lower upgrade revenues and lower factory utilization. Gross margins in the Equipment 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. Intevac Photonics gross margin was 30.4% in the three months ended March 30, 2013 and increased slightly compared to 30.1% in the three months ended March 31, 2012. Research and development Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands) Research and development expense $ 6,358 $ 9,213 $ (2,855 ) Research and development spending decreased in Equipment and in Intevac Photonics during the three months ended March 30, 2013 as compared to the three months ended March 31, 2012. The decrease in Equipment spending was due primarily to decreased PV development. The decrease in Intevac Photonics research and development was due 25-------------------------------------------------------------------------------- Table of Contents to a higher volume of billable contract research and development efforts. Research and development expenses do not include costs of $3.2 million and $1.7 million for the three-month periods ended March 30, 2013 and March 31, 2012, respectively, which are related to customer-funded contract R&D programs at Intevac Photonics and therefore included in cost of net revenues. Selling, general and administrative Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands)Selling, general and administrative expense $ 5,971 $ 6,773 $ (802 ) Selling, general and administrative expense consists primarily of selling, marketing, customer support, financial and management costs. The decrease in selling, general and administrative spending in the three months ended March 30, 2013 was primarily the result of lower equity compensation expense and savings from the global cost reduction program offset in part by increased accruals for variable compensation programs and costs associated with the implementation of the global cost reduction program. Global cost reduction plan During the first quarter of fiscal 2013, Intevac announced a global cost reduction plan (the "Plan") to reduce the global workforce by 13 percent. Implementation of the Plan was substantially completed in the first quarter. The total cost of implementing the Plan was $502,000 of which $179,000 was reported under cost of products sold and $323,000 was reported under operating expenses. Substantially all cash outlays in connection with the Plan occurred in the first quarter of fiscal 2013. Implementation of the Plan is expected to reduce salary, wages and other employee-related expenses by approximately $4.5 million to $5.0 million on an annual basis. Gain (loss) on divestitures On March 29, 2013, the Company sold certain assets, including existing tangible and intangible assets, which comprised its Raman spectroscopy instruments product line, also known as DeltaNu, for consideration not to exceed $1.5 million, of which $500,000 was received in cash upon closing, and recorded a loss of $208,000. On January 6, 2012, the Company sold certain assets, including intellectual property and residual assets, which comprised its semiconductor mainframe technology for $3.0 million in cash and recorded a gain of $2.2 million. See Note 6 "Divestitures" in the notes to the condensed consolidated financial statements for additional information related to the gain (loss) on divestitures. Interest income and other, net Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands) Interest income and other, net $ 80 $ 372 $ (292 ) Interest income and other, net in the three months ended March 30, 2013 included $82,000 of interest income on investments and various other income of $11,000 partially offset by $13,000 of foreign currency losses. Interest income and other, net in the three months ended March 31, 2012 included $211,000 of interest income on investments, forfeiture of a customer deposit of $97,000 and various other income of $94,000 partially offset by $30,000 of foreign currency losses. The decrease in interest income in the three months ended March 30, 2013 resulted from lower invested balances and lower interest rates. 26-------------------------------------------------------------------------------- Table of Contents Income tax benefit Three months ended March 30, March 31, Change over 2013 2012 prior period (In thousands) Income tax benefit $ 679 $ 3,422 $ (2,743 ) Intevac recorded income tax benefits of $679,000 and $3.4 million for the three months ended March 30, 2013 and March 31, 2012, respectively. The income tax provision 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 which Intevac operates, except that certain discrete items are treated separately. At the end of 2012 Intevac established a valuation allowance against the majority of the U.S. deferred tax assets. As a result, Intevac did not recognize a benefit on the U.S. net operating loss for the three months ended March 30, 2013. The income tax benefit for the three months ended March 31, 2012 was reduced by a net $252,000 discrete income tax charge related to the gain on the sale of the mainframe technology, which was partially offset by the release of a valuation allowance related to certain deferred tax assets and tax refunds received from Singapore and California. Intevac's tax rate differs from the applicable statutory rates due primarily to establishment of valuation allowances, 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 of Intevac's projected earnings, the geographic composition of worldwide earnings, tax regulations governing each region, net operating loss carryforwards, availability of tax credits and the effectiveness of Intevac's tax planning strategies. Management carefully monitors these factors and timely adjusts the effective income tax rate accordingly. Intevac has benefitted from a tax holiday in Singapore which is scheduled to expire at the end of 2015. The tax holiday provides a lower income tax rate on certain classes of income so long as certain thresholds of business investment and employment levels are met in Singapore. We are presently in discussion with the Singapore tax authority to terminate this tax holiday effective January 1, 2013 due to current conditions in the hard disk drive business, which will not allow Intevac to be able to meet the conditions required to continue benefitting from the tax holiday. We expect the Singapore tax authorities to issue the terms and conditions allowing us to terminate the tax holiday early during the second quarter of 2013. Liquidity and Capital Resources At March 30, 2013, Intevac had $93.6 million in cash, cash equivalents, and investments compared to $92.2 million at December 31, 2012. During the first three months of 2013, cash, cash-equivalents and investments increased by $1.4 million due primarily to cash generated by operating activities, cash received from the sale of Intevac common stock to Intevac's employees through Intevac's employee benefit plans, and cash received from the sale of the assets of DeltaNu, partially offset by purchases of fixed assets. Cash, cash-equivalents and investments consist of the following: March 30, December 31, 2013 2012 (In thousands) Cash and cash equivalents $ 24,842 $ 24,261 Short-term investments 42,630 40,591 Long-term investments 26,154 27,317 Total cash, cash equivalents and investments $ 93,626 $ 92,169 Operating activities generated cash of $377,000 during the first three months of 2013 and used cash of $5.9 million during the first three months of 2012. The increase in cash generated by operating activities was due primarily to changes in working capital during the first three months of 2013, which was mostly offset by a larger net loss. 27-------------------------------------------------------------------------------- Table of Contents Accounts receivable totaled $10.3 million at March 30, 2013, compared to $19.8 million at December 31, 2012. The decrease of $9.5 million in the receivable balance was due primarily to lower revenue levels and the collection of outstanding receivables from the U.S. government. Total net inventories decreased slightly to $25.9 million at March 30, 2013, compared to $26.2 million at December 31, 2012 as the Company continues to carry inventories to support its next generation PV products including systems currently under evaluation agreements at customers. Accounts payable decreased to $3.3 million at March 30, 2013 compared to $4.5 million at December 31, 2012 in line with business levels. Customer deposits decreased to $1.4 million at March 30, 2013 compared to $2.2 million at December 31, 2012. Investing activities in the first three months of 2013 used cash of $920,000. Purchases of investments net of proceeds from sales of investments totaled $1.1 million. On March 29, 2013, the Company sold certain assets which comprised its Raman spectroscopy instruments product line, also known as DeltaNu, and received $500,000 in cash upon closing. See Note 6 "Divestitures" in the notes to the condensed consolidated financial statements for additional information related the sale of the assets of DeltaNu. Capital expenditures for the three months ended March 30, 2013 were $301,000. Financing activities in the first three months of 2013 generated cash of $1.1 million from the sale of Intevac common stock to Intevac's employees through Intevac's employee benefit plans. Intevac's investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, commercial paper, municipal bonds, corporate bonds and VRDNs. 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 March 30, 2013, approximately $11.1 million of cash and cash equivalents and $4.7 million of investments were domiciled in foreign tax jurisdictions. Intevac expects a significant portion of these funds to remain off shore 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 where no United States income tax had been previously provided. 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 $5.5 million to $6.0 million in capital expenditures during the remainder of 2013. Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the 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 of Intevac's Annual Report on Form 10-K filed on February 22, 2013. 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 of Intevac's financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on Intevac'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 estimates Intevac could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Intevac'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 28-------------------------------------------------------------------------------- Table of Contents reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Intevac'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 of Intevac's accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Intevac's consolidated financial statements are fairly stated in accordance with US GAAP, and provide a meaningful presentation of Intevac's financial condition and results of operation. For further information about Intevac's other critical accounting policies, see the discussion of critical accounting policies in Intevac's 2012 Form 10-K. Management believes that there has been no significant change during the three months ended March 30, 2013 to the items identified as critical accounting policies in Intevac's 2012 Form 10-K. |